An overview of Reg D (Regulation D) and Private Placement Memorandums


Regulation D (popularly known as Reg D) was implemented in 1982. Regulation D allows companies to raise equity or debt securities (investment capital) but bypass the typical need to file a registration statement with the SEC (Securities and Exchange Commission). This allows a company to sell stocks or bonds to investors. A Private Placement Offering (PPO) refers to the offering of securities to a number of private accredited investors A PMM (Private Placement Memorandum) is required to be generated by the company in order to secure these funds. This is a confidential document that discloses all significant information to investors about the firm, proposed operations, transaction structure (equity ownership or debt financing), terms of the investment, potential risks, management details, etc. Thorough knowledge of Reg D is critical in order to draft a legally binding PPM. .


Reg D has six rules: Rules 501, 502, 503: Terms and conditions that apply in Reg D are defined in these three rules.

Rule 504: Pertains to transactions where securities under the amount of $1,000,000 are sold in any consecutive twelve-month period. This rule allows companies to sell securities that are not restricted by specific guidelines. In addition it allows for the payment of commissions, and imposes no specific limit on the number of investors.

Rule 505: Pertains to transactions, over a 12-month period, where the value of securities transacted is less than $5,000,000 of securities. Sales to thirty-five "non-accredited" investors and to an unlimited number of accredited investors are allowed. It's not permitted to have General Advertising and/or General Solicitation.

Rule 506: There is no dollar limit under this rule. It is open to all issuers for offerings sold to not more than thirty-five "non-accredited purchasers" and an unlimited number of accredited investors. General solicitation or general advertising is not permitted.


There are 2 Primary Types of Regulation D Offerings:

Equity: In this situation, the firm sells partial ownership in the company (through the sale of stock or membership units) to raise capital. The company and the investors futures are more tightly linked in this scenario. The investors do not want guaranteed cash flow, but instead "want a piece of the action".

Debt: A debt offering is structured in a similar fashion as a business loan, however instead of a financial institution providing the loan, it is a group of investors lending capital to the company. Debt financing typically has a set annual rate of return and a maturity date that clearly outlines when the capital will be repaid in full.


PPM (Private Placement Memorandum)

In order to successfully raise funds from an accredited investor, a company should have a sound business plan and needs to have a well-written Private Placement Memorandum (PPM) that discloses the full facts of the investment and business venture. A PPM is a detailed document. The PPM almost certainly has to be written by a professional specializing in PPMs.