Reg D vs Reg S

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Reg D vs Reg S

Navigating Private Placement Capital: Understanding Reg D and Reg S

Start-up enterprises aiming to raise capital through private placements often face confusion regarding the best approach to comply with SEC regulations. Issuers are frequently advised by legal counsel to consider SEC Regulation D (Reg D) and Regulation S (Reg S). Here’s a simplified explanation to clarify the distinctions between Reg D and Reg S.

Overview of Regulation D and Reg S

In general, companies issuing securities in the U.S. must register them with the Securities and Exchange Commission (SEC). However, certain regulations, such as Regulation D, provide exemptions from this registration requirement. Reg D allows companies to issue securities without SEC registration, provided they adhere to specific conditions. The key aspect of Reg D is that it mandates the offering be private; securities cannot be offered publicly, and there can be no advertising or marketing, particularly under Rule 506(b).

Regulation D Breakdown

• Reg D Rule 506(b): This rule permits issuers to raise capital without registering with the SEC, provided the offering is private. Securities cannot be advertised or solicited publicly, either domestically or internationally. Potential investors can be located anywhere, but outreach must remain private.
• Reg D Rule 506(c): In contrast, Rule 506(c) allows issuers to publicly solicit and advertise their securities through various media, such as TV, radio, the internet, and print. However, all investors approached must be accredited. This rule requires thorough verification of investors before any securities are sold, and the process must be completed prior to the sale to ensure compliance with Reg D.

Verification of Accredited Investors

For Rule 506(c), issuers must verify that all investors are accredited before selling securities. This verification process cannot be deferred and must be completed before any transactions occur to ensure compliance with Reg D. Issuers can use independent services for this verification to maintain compliance.

Regulation S Overview

Regulation S offers an exemption from SEC registration for securities offerings aimed exclusively at international investors. Unlike Reg D, which applies to both domestic and international investors, Reg S is designed specifically for sales to non-U.S. residents. Under Reg S, there can be no solicitation or advertising within the U.S. to ensure that the offering remains exclusively for international investors.

Combining Reg D and Reg S

Securities law firms often structure offerings to utilize both Reg S and Reg D exemptions, particularly for international investors. This dual approach provides a safety net if one exemption does not apply. However, careful management is crucial, as public advertising under Reg D Rule 506(c) is not permitted under Reg S, which prohibits U.S. advertising.

Challenges with Dual Exemption Strategies

Managing both Reg D and Reg S can be complex. For example, if using Rule 506(c) for public advertising, you must still avoid any U.S.-based advertising under Reg S. Ensuring compliance with these regulations requires careful planning to prevent any inadvertent violations, which could jeopardize both exemptions and lead to significant SEC complications.

Strategic Considerations

Issuers targeting international investors with Reg S may also consider a companion offering under Reg D for U.S. investors. This strategy allows the sale of the same securities while complying with Reg D requirements for domestic investors. By separating the approaches, issuers can effectively manage compliance and maximize their capital-raising potential.

For further guidance on structuring private placement offerings under Reg D and Reg S, or to discuss specific strategies for your business, contact us today. Our expertise can help navigate these complex regulations and optimize your capital-raising efforts.