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Private Placement Memorandums
By Susan Mackasey
Regulation D (Reg D) and Private Placement Memorandums - An Overview
Regulation D (popularly known as Reg D) was implemented in 1982. Reg D allows companies to raise investment capital by selling equity or debt securities without having to file a registration statement with the Securities and Exchange Commission (SEC). 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 Private Placement Memorandum (PPM) is required to secure funds. This is a confidential document about the firm including, but not limited to, transaction structure such as equity ownership or debt financing, plus the terms of the investment. It also includes potential risks, management details, and any other significant information for investors. In order to develop the Private Placement Memorandum, it is important to understand the details of Regulation D. ..
Regulation D consists of six rules: Rules 501-503: Defines the terms and conditions that apply throughout the Regulation.
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: This applies to transactions where less than $5,000,000 of securities is sold in any consecutive twelve-month period. Sales to accredited investors are not limited, but "non-accredited" investors category is limited to 35 people. It's not permitted to have General Advertising and/or General Solicitation.
Rule 506: There are no dollar constraints under Rule 506. Similar to Rule 505, this rule is open to an unlimited number of accredited investors, but cannot be sold to more than 35 "non-accredited" purchasers. General solicitation or general advertising is not permitted.
The Two Primary Types of Reg D Offerings Are:
Equity: The firm sells partial ownership in the company to raise capital. This is through the sale of membership units or stock. The company and the investor's 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 group of investors lends capital to the company. This is structured as a typical business loan from a bank (or other financial institution). The annual rate of return and the maturity date are clearly laid out in advance.
PPM - Private Placement Memorandum
To be successful in raising capital, a company should have (a) a sound business plan and (b) a Private Placement Memorandum that discloses the full facts of the business venture and the desired investment and terms. This Private Placement Memorandum should be developed by qualified professionals in order to ensure that all aspects are covered properly.
About the Author
The founder member of Par Excellence Business Services, Inc. She along with other experts work closely with entrepreneurs, executives, and companies virtually at every stage of development, offering specialized support in today's increasingly competitive market.
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