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1.
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Definition
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Regulation D, also known as "Reg D," exempts certain offerings of
equity from many of the regulatory requirements that impose costs
upon standard public offerings. A Reg D offering is intended to make
access to the capital markets possible for small companies that
could not otherwise bear those costs.
Other Resources:
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Going Global:
Provision under the 1933 US Securities act for exempting some
private companies under certain conditions from the filing
requirements of the Act.
More…
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The Peak Agents Network of
Canada:
The regulation of the Securities and Exchange Commission (SEC),
which established the requirements to obtain an exemption to
avoid a private offering.
More…
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VC Experts:
Regulation D, is the rule (Reg. D is a "regulation" comprising a
series of "rules") that allow for the issuance and sale of
securities to purchasers if they qualify as accredited
investors.
More…
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2.
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Examples, Types, or
Variations
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Regulation D establishes three exemptions from Securities Act
registration. Let's address each one separately.
Rule 504
Rule 504 provides an exemption for the offer and sale of up to
$1,000,000 of securities in a 12-month period. Your company may use
this exemption so long as it is not a blank check company and is not
subject to Exchange Act reporting requirements. Like the other
Regulation D exemptions, in general you may not use public
solicitation or advertising to market the securities and purchasers
receive "restricted" securities, meaning that they may not sell the
securities without registration or an applicable exemption. However,
you can use this exemption for a public offering of your securities
and investors will receive freely tradable securities under the
following circumstances:
You register the offering exclusively in one or more states that
require a publicly filed registration statement and delivery of a
substantive disclosure document to investors; You register and sell
in a state that requires registration and disclosure delivery and
also sell in a state without those requirements, so long as you
deliver the disclosure documents mandated by the state in which you
registered to all purchasers; or, You sell exclusively according to
state law exemptions that permit general solicitation and
advertising, so long as you sell only to "accredited investors," a
term we describe in more detail below in connection with Rule 505
and Rule 506 offerings. Even if you make a private sale where there
are no specific disclosure delivery requirements, you should take
care to provide sufficient information to investors to avoid
violating the antifraud provisions of the securities laws. This
means that any information you provide to investors must be free
from false or misleading statements. Similarly, you should not
exclude any information if the omission makes what you do provide
investors false or misleading.
Rule 505
Rule 505 provides an exemption for offers and sales of securities
totaling up to $5 million in any 12-month period. Under this
exemption, you may sell to an unlimited number of "accredited
investors" and up to 35 other persons who do not need to satisfy the
sophistication or wealth standards associated with other exemptions.
Purchasers must buy for investment only, and not for resale. The
issued securities are "restricted." Consequently, you must inform
investors that they may not sell for at least a year without
registering the transaction. You may not use general solicitation or
advertising to sell the securities.
An "accredited investor" is:
a bank, insurance company, registered investment company, business
development company, or small business investment company; an
employee benefit plan, within the meaning of the Employee Retirement
Income Security Act, if a bank, insurance company, or registered
investment adviser makes the investment decisions, or if the plan
has total assets in excess of $5 million; a charitable organization,
corporation or partnership with assets exceeding $5 million; a
director, executive officer, or general partner of the company
selling the securities; a business in which all the equity owners
are accredited investors; a natural person with a net worth of at
least $1 million; a natural person with income exceeding $200,000 in
each of the two most recent years or joint income with a spouse
exceeding $300,000 for those years and a reasonable expectation of
the same income level in the current year; or a trust with assets of
at least $5 million, not formed to acquire the securities offered,
and whose purchases are directed by a sophisticated person. It is up
to you to decide what information you give to accredited investors,
so long as it does not violate the antifraud prohibitions. But you
must give non-accredited investors disclosure documents that
generally are the same as those used in registered offerings. If you
provide information to accredited investors, you must make this
information available to the non-accredited investors as well. You
must also be available to answer questions by prospective
purchasers.
Here are some specifics about the financial statement requirements
applicable to this type of offering:
Financial statements need to be certified by an independent public
accountant; If a company other than a limited partnership cannot
obtain audited financial statements without unreasonable effort or
expense, only the company's balance sheet, to be dated within 120
days of the start of the offering, must be audited; and Limited
partnerships unable to obtain required financial statements without
unreasonable effort or expense may furnish audited financial
statements prepared under the federal income tax laws.
Rule 506
As we discussed earlier, Rule 506 is a "safe harbor" for the private
offering exemption. If your company satisfies the following
standards, you can be assured that you are within the Section 4(2)
exemption:
You can raise an unlimited amount of capital; You cannot use general
solicitation or advertising to market the securities; You can sell
securities to an unlimited number of accredited investors (the same
group we identified in the Rule 505 discussion) and up to 35 other
purchasers. Unlike Rule 505, 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; It is up to you
to decide what information you give to accredited investors, so long
as it does not violate the antifraud prohibitions. But you must give
non-accredited investors disclosure documents that generally are the
same as those used in registered offerings. If you provide
information to accredited investors, you must make this information
available to the non-accredited investors as well; You must be
available to answer questions by prospective purchasers; Financial
statement requirements are the same as for Rule 505; and Purchasers
receive "restricted" securities. Consequently, purchasers may not
freely trade the securities in the secondary market after the
offering.
E. Accredited Investor Exemption - Section 4(6) of the Securities
Act exempts from registration offers and sales of securities to
accredited investors when the total offering price is less than $5
million.
The definition of accredited investors is the same as that used in
Regulation D. Like the exemptions in Rule 505 and 506, this
exemption does not permit any form of advertising or public
solicitation. There are no document delivery requirements. Of
course, all transactions are subject to the antifraud provisions of
the securities laws.
The two basic types of Regulation D offerings are:
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Equity Offerings: A company sells
part ownership of their company to acquire capital.
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Debt Offerings: A company sells note
instruments to investors with a maturity date and annual rate of
return – much like a business loan.
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3.
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Formula
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Other Resources:
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SWLearning.com:
Under the 1933 Securities Act, an SEC regulation that includes
Rules 504, 505, and 506.
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4.
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Related Terms
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Subchapter M
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SEC
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Initial Public Offering (IPO)
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Rule
504
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Rule
505
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Rule
506
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Regulation FD
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Regulation T
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Regulation U
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5.
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As
Used in the Hedge Fund World
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Regulation D is a regulation of the U.S. Securities and Exchange
Commission, and is also a term for an investment strategy, mostly
associated with hedge funds, based upon that regulation.
As a hedge-fund strategy, Reg. D refers to investment in micro- and
small-capitalization public companies that are raising money in
private capital markets. Often these securities are hedged by way of
a look-back provision or a convertibility option with an exercise
price that floats.
Other Resources:
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Regulation D Resources:
"Regulation D" is a government program created under the
Securities Act of 1933, instituted in 1982, that allows
companies the ability to raise capital though the sale of equity
or debt securities.
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6.
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Applications
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Other Resources:
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7.
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Misused
& Abused
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Other Resources:
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'Lectric Law Library:
There are also "bad boy" provisions which prevent the offering
of the company's securities if the issuer, directors, officers,
or 10% of the stockholders have been convicted within the past
five years of securities related violations or felonies.
More…
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8.
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Additional Sources of Information
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Books
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News
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Scholarly Papers
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Back to Terms
| HEDGE FUND RISK AND OTHER
DISCLOSURES |
Hedge funds, including fund of funds (“Hedge
Funds”), are unregistered private investment partnerships, funds or
pools that may invest and trade in many different markets,
strategies and instruments (including securities, non-securities and
derivatives) and are NOT subject to the same regulatory requirements
as mutual funds, including mutual fund requirements to provide
certain periodic and standardized pricing and valuation information
to investors. There are substantial risks in investing in Hedge
Funds. Persons interested in investing in Hedge Funds should
carefully note the following:
- Hedge Funds represent speculative investments and involve a
high degree of risk. An investor could lose all or a substantial
portion of his/her investment. Investors must have the financial
ability, sophistication/experience and willingness to bear the
risks of an investment in a Hedge Fund.
- An investment in a Hedge Fund should be discretionary capital
set aside strictly for speculative purposes.
- An investment in a Hedge Fund is not suitable or desirable for
all investors. Only qualified eligible investors may invest in
Hedge Funds.
- Hedge Fund offering documents are not reviewed or approved by
federal or state regulators
- Hedge Funds may be leveraged (including highly leveraged) and
a Hedge Fund’s performance may be volatile
- An investment in a Hedge Fund may be illiquid and there may be
significant restrictions on transferring interests in a Hedge
Fund. There is no secondary market for an investor’s investment in
a Hedge Fund and none is expected to develop.
- A Hedge Fund may have little or no operating history or
performance and may use hypothetical or pro forma performance
which may not reflect actual trading done by the manager or
advisor and should be reviewed carefully. Investors should not
place undue reliance on hypothetical or pro forma performance.
- A Hedge Fund’s manager or advisor has total trading authority
over the Hedge Fund.
- A Hedge Fund may use a single advisor or employ a single
strategy, which could mean a lack of diversification and higher
risk.
- A Hedge Fund (for example, a fund of funds) and its managers
or advisors may rely on the trading expertise and experience of
third-party managers or advisors, the identity of which may not be
disclosed to investors
- A Hedge Fund may involve a complex tax structure, which should
be reviewed carefully.
- A Hedge Fund may involve structures or strategies that may
cause delays in important tax information being sent to investors.
- A Hedge Fund may provide no transparency regarding its
underlying investments (including sub-funds in a fund of funds
structure) to investors. If this is the case, there will be no way
for an investor to monitor the specific investments made by the
Hedge Fund or, in a fund of funds structure, to know whether the
sub-fund investments are consistent with the Hedge Fund’s
investment strategy or risk levels.
- A Hedge Fund may execute a substantial portion of trades on
foreign exchanges or over-the-counter markets, which could mean
higher risk.
- A Hedge Fund’s fees and expenses-which may be substantial
regardless of any positive return- will offset the Hedge Fund’s
trading profits. In a fund of funds or similar structure, fees are
generally charged at the fund as well as the sub-fund levels;
therefore fees charged investors will be higher that those charged
if the investor invested directly in the sub-fund(s).
- Hedge Funds are not required to provide periodic pricing or
valuation information to investors.
- Hedge Funds and their managers/advisors may be subject to
various conflicts of interest.
The above general
summary is not a complete list of the risks and other important
disclosures involved in investing in Hedge Funds and, with respect
to any particular Hedge Fund, is subject to the more complete and
specific disclosures contained in such Hedge Fund’s respective
offering documents. Before making any investment, an investor should
thoroughly review a Hedge Fund’s offering documents with the
investor’s financial, legal and tax advisor to determine whether an
investment in the Hedge Fund is suitable for the investor in light
of the investor’s investment objectives, financial circumstances and
tax situation.
All performance information is believed
to be net of applicable fees unless otherwise specifically noted. No
representation is made that any fund will or is likely to achieve
its objectives or that any investor will or is likely to achieve
results comparable to those shown or will make any profit at all or
will be able to avoid incurring substantial losses. Past performance
is not necessarily indicative, and is no guarantee, of future
results.
The information on the Site is intended for
informational, educational and research purposes only. Nothing on
this Site is intended to be, nor should it be construed or used as,
financial, legal, tax or investment advice, be an opinion of the
appropriateness or suitability of an investment, or intended to be
an offer, or the solicitation of any offer, to buy or sell any
security or an endorsement or inducement to invest with any fund or
fund manager. No such offer or solicitation may be made prior to the
delivery of appropriate offering documents to qualified investors.
Before making any investment, you should thoroughly review the
particular fund’s confidential offering documents with your
financial, legal and tax advisor and conduct such due diligence as
you (and they) deem appropriate. We do not provide investment advice
and no information or material on the Site is to be relied upon for
the purpose of making investment or other decisions. Accordingly, we
assume no responsibility or liability for a ny investment decisions
or advice, treatment, or services rendered by any investor or any
person or entity mentioned, featured on or linked to the Site.
The information on this Site is as of the date(s) indicated,
is not a complete description of any fund, and is subject to the
more complete disclosures and terms and conditions contained in a
particular fund's offering documents, which may be obtained directly
from the fund. Certain of the information, including investment
returns, valuations, fund targets and strategies, has been supplied
by the funds or their agents, and other third parties, and although
believed to be reliable, has not been independently verified and its
completeness and accuracy cannot be guaranteed. No warranty, express
or implied, representation or guarantee is made as to the accuracy,
validity, timeliness, completeness or suitability of this
information.
Any indices and other financial benchmarks
shown are provided for illustrative purposes only, are unmanaged,
reflect reinvestment of income and dividends and do not reflect the
impact of advisory fees. Investors cannot invest directly in an
index. Comparisons to indexes have limitations because indexes have
volatility and other material characteristics that may differ from a
particular hedge fund. For example, a hedge fund may typically hold
substantially fewer securities than are contained in an index.
Indices also may contain securities or types of securities that are
not comparable to those traded by a hedge fund. Therefore, a hedge
fund’s performance may differ substantially from the performance of
an index. Because of these differences, indexes should not be relied
upon as an accurate measure of comparison.
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