There is a reason why 4.6 times more private exempt securities offerings are put under Regulation D than Regulation CF. Let’s go through what those differences are so that you can make your own decision on what’s best for your security offering when you’re choosing an exemption between Regulation D and Regulation CF.
When it comes to exemptions from registration under the Securities Act, the big showdown is between Regulation D and Regulation CF, the two major opponents. Now, there is another opponent out there, and we’ll asterisk it here: Regulation A does exist. Regulation A, though, is a little bit different because you still make a filing, and it’s reviewed and approved by the SEC. So it’s not like a true “file a form and you’re automatically exempt.” It’s a different kind of opponent. But the two big opponents are Regulation D and Regulation CF.
Let’s talk about the stats and the differences. In one corner, we’ve got Regulation D, the heavyweight champion of the world, with 4.6 times more knockouts than Regulation CF. Why 4.6? Well, first, Regulation D breaks up into two different rules. One of those rules is the one that you’ll pick if you go with Regulation D.
On one hand, you’ve got Rule 506b. 506b is great. It’s also called “friends and family” because you can take non-accredited investors up to 35 in a 90-day period, and an unlimited number of accredited investors. You can also raise an unlimited amount of money; you’re not stopped at 5 million, 1 million, anything. You can raise $1 trillion if you can. If you can, give me a call, definitely we need to partner up because $1 trillion is a lot of money. And if you can raise that much, well, I want you on my team.
Regulation D Rule 506c, the other fist, is a great regulation. We can raise an unlimited amount of money from an unlimited number of accredited investors, and the knockout punch for it: you can advertise. You can put a billboard on Main Street, you can plaster the internet with ads, just to get your name out there and get your investment out there. The big trouble with 506c, the one where it gets hit, is that we can’t take any non-accredited investors. In fact, we actually have to make sure that each one is accredited by having third-party verification.
But having the ability to raise an unlimited amount of money and getting to choose between whether we have non-accredited or accredited investors is a pretty major win. Doesn’t it sound like 4.6 times more knockouts?
But that’s not to say that there’s not a lot to be said for the other opponent, Regulation CF. Now, Regulation CF doesn’t break out into different rules like that; it’s just one rule. Regulation CF lets you raise money from both accredited and non-accredited investors. It lets you advertise.
Now, what’s the problem with Regulation CF? Why isn’t it getting more than Regulation D? Two reasons. Number one, it’s got a cap of $5 million in any 12-month period, kind of a negative. The other big problem with Regulation CF, and to me, this is the biggest problem: you still have to do a filing, this time it’s on a Form C versus Regulation D’s Form D. You still have to do that filing, but you’ve got to have all of your marketing and all of your transactions go through a registered portal.
What is a registered portal? A registered portal is a third party who puts your name and puts your investment out there and takes some of your profit. How much of your profit? I’ve heard as much as 10 to 12%, which is a huge chunk. Now maybe there are some that charge less, but you have to ask yourself: if you’re not able to actually put it out there yourself, you’re still going to be responsible for marketing it to drive all your traffic to this third-party portal that’s not even you. You don’t even get to control that traffic.
So you have to be driving your own traffic to this third-party portal, where they also have all of your competitors’ investments as well. And they charge you 10 to 12% for the privilege, and the preparation of all the documents needed for Form C and to comply with Reg CF costs just as much as that in Regulation D.
That’s why when it comes to the ultimate battle, to me, I think the clear winner has always been Regulation D, and the stats show it: 4.6 times more. A lot of people come to me after trying to do a Regulation CF; it just didn’t work out, it was expensive, and a complete flop. With Regulation D, we can craft a marketing plan with you to make sure that your offering is successful. And the cap on the number of accredited investors or non-accredited investors isn’t that much if you’ve got the right network. If you don’t have the right network, then you can only market to your accredited investors. But if you’ve got the right pitch and you’ve got the right story, your Regulation D offering is going to be successful.
So now it’s time for you to make your own decision on what works best for your offering. To me, it’s always Regulation D. So if you give me a call, wanting to talk about what the two differences are, I’m always going to say Regulation D. I’m happy to have a conversation comparing and contrasting the two, but just know I’m always going to be on the side of Regulation D. It’s the heavyweight champ, and you don’t go against the champ.
But I’m always happy to have that conversation. Regulation CF is a fine choice. I may be in favor of Regulation D, but it’s still a very, very good choice. Regulation CF, though, has those negatives. A plan can be worked out around those in order to solve it through Regulation D. Or if Regulation CF is the right choice for you, that’s great too.
Now, if we can help you either make that choice or if you need help with your Regulation D offering, give us a call and let’s see if I can help you.