Regulation D (Reg D) is a Securities and Exchange Commission (SEC) regulation governing private placement exemptions. It should not be confused with Federal Reserve Board Regulation D, which limits withdrawals from savings accounts. Reg D offerings are advantageous to private companies or entrepreneurs that meet the requirements because funding can be obtained faster and at a lower cost than with a public offering. It is usually used by smaller companies. The regulation allows capital to be raised through the sale of equity or debt securities without the need to register those securities with the SEC. However, many other state and federal regulatory requirements still apply.
Understanding SEC Regulation D (Reg D)
Raising capital through a Reg D investment involves meeting significantly less onerous requirements than a public offering. That allows companies to save time and sells securities that they might not otherwise be able to issue in some cases. While Regulation D makes raising funds easier, buyers of these securities still enjoy the same legal protections as other investors. It is not necessary to keep Regulation D transactions a secret, even though they are private offerings. There are directives within the regulation that, depending on which rules are applied, may allow offerings to be openly solicited to prospective investors in a company’s network.
Requirements of SEC Regulation D
Even if the Reg D transaction involves just one or two investors, the company or entrepreneur must still provide the proper framework and disclosure documentation. A document known as Form D must be filed electronically with the SEC after the first securities are sold. Form D, however, contains far less information than the exhaustive documentation required for a public offering. The form requires the names and addresses of the company’s executives and directors. It also requires some essential details regarding the offering. The issuer of a security offered under Reg D must also provide written disclosures of any prior “bad actor” events, such as criminal convictions, within a reasonable time frame before the sale. Without this requirement, the company might be free to claim it was unaware of the checkered past of its employees. In that case, it would be less accountable for any further “bad acts” they might commit in association with the Reg D offering. According to rules published in the Federal Register, transactions that fall under Reg D are not exempt from antifraud, civil liability, or other provisions of federal securities laws. Reg D also does not eliminate the need for compliance with applicable state laws relating to the offer and sale of securities. State regulations, where Reg D has been adopted, may include disclosure of any notices of sale to be filed. They may require the names of individuals who receive compensation in connection with the sale of securities.
Limitations of SEC Regulation D (Reg D)
The benefits of Reg D are only available to the issuer of the securities, not to affiliates of the issuer or to any other individual who might later resell them. What is more, the regulatory exemptions offered under Reg D only apply to the transactions, not to the securities themselves. Rule 506 of Regulation D provides two distinct exemptions from registration for companies when they offer and sell securities. Companies relying on the Rule 506 exemptions can raise an unlimited amount of money. Under Rule 506(b), a “safe harbor” under Section 4(a)(2) of the Securities Act, a company can be assured it is within the Section 4(a)(2) exemption by satisfying certain requirements, including the following:
• The company cannot use general solicitation or advertising to market the securities.
• The company may sell its securities to an unlimited number of “accredited investors” and up to 35 other purchasers. All non-accredited investors, either alone or with a purchaser representative, must be sophisticated—that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.
• Companies must decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. This means that any information a company provides to investors must be free from false or misleading statements. Similarly, a company should not exclude any information if the omission makes what is provided to investors false or misleading. Companies must give non-accredited investors disclosure documents that are generally the same as those used in Regulation A or registered offerings, including financial statements, which in some cases may need to be certified or audited by an accountant. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well.
• The company must be available to answer questions by prospective purchasers.
Under Rule 506(c), a company can broadly solicit and generally advertise the offering and still be deemed to be in compliance with the exemption’s requirements if:
• The investors in the offering are all accredited investors; and
• The company takes reasonable steps to verify that the investors are accredited investors, which could include reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, credit reports and the like.
Private placements – Rule 506(b)
Section 4(a)(2) of the Securities Act exempts from registration transactions by an issuer not involving any public offering.
Rule 506(b) of Regulation D is considered a “safe harbor” under Section 4(a)(2). It provides objective standards that a company can rely on to meet the requirements of the Section 4(a)(2) exemption. Companies conducting an offering under Rule 506(b) can raise an unlimited amount of money and can sell securities to an unlimited number of accredited investors. An offering under Rule 506(b), however, is subject to the following requirements:
• no general solicitation or advertising to market the securities
• securities may not be sold to more than 35 non-accredited investors (all non-accredited investors, either alone or with a purchaser representative, must meet the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment)
If non-accredited investors are participating in the offering, the company conducting the offering:
• must give any non-accredited investors disclosure documents that generally contain the same type of information as provided in registered offerings (the company is not required to provide specified disclosure documents to accredited investors, but, if it does provide information to accredited investors, it must also make this information available to the non-accredited investors as well)
• must give any non-accredited investors financial statement information specified in Rule 506 and
• should be available to answer questions from prospective purchasers who are non-accredited investors
Rule 506 of Regulation D Requirements
To offer and sell securities in the United States, an issuer must comply with the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), or must offer and sell the securities pursuant to an exemption from the registration statement requirements. A commonly used private offering exemption is Rule 506 of Regulation D. Rule 506 is a non-exclusive “safe harbor” for the statutory exemption provided by Section 4(2) of the Securities Act. The Rule 506 exemption is often used by issuers who engage in go public direct transactions and conduct underwritten and direct public offerings. The legal and compliance costs of Rule 506 offerings are less than those of offerings registered with the Securities and Exchange Commission (“SEC”). An issuer may sell its securities to an unlimited number of accredited investors and up to 35 non-accredited investors that the issuer reasonably believes to be, either alone or with their purchaser representative to have sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of an investment in the issuer’s securities.
The Most Common Exemption–Regulation D Rule 506
Regulation D contains safe harbors that provide exemptions from federal registration. These include exemptions under Rules 504, Rule 505, and Rule 506. Rule 506 is the most commonly relied upon exemption in private offerings (accounting for more than 90% of offerings, according to SEC statistics).
Rule 506 Exemption
Rule 506 is governed by Section 4(a)(2) of the Securities Act of 1933 (the “Securities Act”). It permits a company to offer securities to an unlimited number of accredited investors and up to 35 non-accredited investors. Rule 506 offers many advantages to the other Regulation D exemptions.
Federal Preemption Over State Law
Rule 506 is unique among the Regulation D exemptions, in that with a properly prepared Regulation D offering, there is no need to register at the state level or find any state exemption. Congress has specifically preempted states’ authority to review securities exempted under Rule 506 or impose additional requirements through the National Securities Markets Improvement Act of 1996 (“NSMIA”). The NSMIA effectively took from the states their power to review an offering under Rule 506. States may only require that issuers submit a notice filing with the state and impose filing fees, typically between $200 – $700 per state.
Reduced Risk Of Losing The Exemption
Additionally, if an offering made under Rule 506 is made to only accredited investors, the company making the offering will not lose its exemption from failure to make any prescribed disclosures. A private placement memorandum should be drafted carefully to protect the company from violations of the “anti-fraud” provisions under the Securities Act and the Exchange Act as well as state securities laws.
In 2013 the SEC adopted final rules lifting the ban on general solicitation and advertising under Rule 506 for offerings in which the issuers took reasonable steps to verify that all purchasers of its securities qualified as accredited investors. This is now known as Rule 506(c), while non-advertised offerings are designated as Rule 506(b) offerings. Allowing advertisement in exempt private offerings is a major shift in the regulatory system, and presents opportunities to issuers never before available. However, the new regulations (as well as additional proposed regulations) will require additional burdens on issuers, which should be carefully considered. See our article: SEC Adopts JOBS Act Lifting Ban on Advertising for Private Placements for additional information. In addition to Regulation D Rule 506, there are a number of less commonly used federal exemptions, including Regulation D Rule 504 and Rule 505, the SCOR offering and the Rule 147 Intrastate Offering Exemption. These offerings are used when an issuer has unique needs not met by Rule 506 (such as insufficient access to accredited investors).
In addition to the federal exemptions, state securities laws, also known as blue sky laws, require issuers to either register their securities or find an applicable exemption. States may not impose additional registration requirements with respect to an offering relying on Rule 506 for federal and state exemption (other than to require a Form D filing). Some states have additional available exemptions that issuers can utilize.
The federal rule, also known as Reg D, comes from the Federal Reserve Board and puts a limit of six transactions per month on certain transfers and withdrawals from your savings or money market account. Regulation D is the federal government’s way of ensuring that banks have the proper amount of reserves on hand and encouraging people to use savings accounts as they are intended: to save money.
Which transactions are limited under Reg D?
These kinds of transactions in savings or money market accounts fall under the rule:
• Online transfers from those accounts to a different account either at the same institution or a different one
• Transfers processed over the phone
• Automatic or preauthorized transfers, such as bill payments or any other recurring transfers
• Overdraft transfers from your savings account to your checking account. (Find out how to avoid overdraft fees.)
• Transfers made by check or debit card
Overdraft/Reg D Fees
There may be fees associated with transfers from an interest bearing account to your Checking Account or to a third party. RTP Federal Credit Union (RTP FCU) allows two free transfers per interest bearing account each calendar month. After the first two transfers, you will be charged an Overdraft/Reg D fee of $13.00 per transfer.
The following transactions are subject to Reg D limitations:
• Transfers/withdrawals from an interest bearing account using Home/Internet Banking
• Transfers/withdrawals from an interest bearing account using TouchTone Teller
• Overdraft transfers (made automatically to cover nonsufficient funds in other accounts)
• Transfers/withdrawals from an interest bearing account requested through our Call Center via telephone, e-mail, or fax
• Pre-authorized, automatic, scheduled, or recurring transfers/withdrawals from an interest bearing account
What transactions are NOT affected by Regulation D?
There are no limits or fees associated with the following types of transactions:
• Transfers/withdrawals from an interest bearing account made at an ATM
• Transfers/withdrawals from an interest bearing account to make a loan payment
• Transfers/withdrawals from an interest bearing account made in person at a branch
• Transfers/withdrawals from an interest bearing account sent in by mail with an original signature
• Transfers from your Checking Account to an interest bearing account
How can I Avoid Reg D Fees and Limitations?
• Send your direct deposit to your Checking Account – not your Savings or Money Fund. You can transfer money from your Checking Account to your Savings Account without limits or fees because Checking Accounts are not subject to Reg D.
• If you think that you will need to transfer money from your Savings or Money Fund account to cover Checking Account transactions, plan ahead and make one large transfer instead of several small transfers.
• You should not authorize merchants to draft money from your Savings Account. Use your Checking Account for these transfers. Automatic transfers from merchants should come out of your Checking Account instead of your Savings Account since Checking Accounts (non-interest bearing) are not subject to Reg D limitations.
When you need legal help with Securities Law in Utah, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506