When it comes to raising capital, companies have a variety of options to choose from. Two popular exemptions to securities registration are Regulation A (Reg A) and Regulation D (Reg D). Understanding the key differences between these two exemptions can help companies make informed decisions when it comes to syndication.
Comparison of Reg A and Reg D
Reg A and Reg D are both exemptions to the registration requirements of the Securities Act of 1933. They allow companies to raise money from investors without registering the securities with the Securities and Exchange Commission (SEC). However, there are significant differences in terms of the amount of money that can be raised, the types of investors that can participate, and the level of disclosure and reporting required.
Even though Regulation A+ (sometimes called Mini-IPO or IPO) is considered an ‘exemption’ to registration, it isn’t a full exemption. It is an abbreviated filing, much less comprehensive than preparing and registering a full security, but the SEC still reviews the information provided and, if it is deemed to be complete and accurate, will issue an order allowing the securities to be offered and sold to the public. This process is intended to protect investors by ensuring that they have access to accurate and complete information about the securities they are considering purchasing. It also helps to ensure that companies are in compliance with various securities laws and regulations, such as those related to accounting, reporting, and disclosure.
Differences between Reg A and Reg D in terms of the amount of money that can be raised
Reg A allows companies to raise up to $50 million in a 12-month period from any type of investor, without registering the securities with the SEC. This is a relatively high limit, and it can be especially beneficial for early-stage companies that are looking to raise significant amounts of capital or for companies that are looking for a way to increase liquidity for the issuer’s securities.
Reg D, on the other hand, allows companies to raise an unlimited amount of money from accredited investors and non-accredited investors, without registering the securities with the SEC. This is a relatively low limit, and it can be especially beneficial for companies that are looking to raise money from a smaller number of investors, such as family and friends, or for companies that are looking for a less restrictive way to raise capital.
Differences between Reg A and Reg D in terms of the types of investors that can participate
Reg A offerings are expensive to put together because of the extensive documentation, discussions with the SEC, and certifications required. It is very unlikely that a Reg D offering can be put together for less that $60,000 and in less than 6 months (often 9 months or more).
Reg D offerings cost often less than half than a Reg D and in much less time (Moschetti Syndication Law Group has a 2 week turnaround).
Differences between Reg A and Reg D in terms of the types of investors that can participate
Reg A allows companies to raise funds from any type of investor, regardless of their accreditation status. This means that both accredited and non-accredited investors can participate in the offering. This can be beneficial for companies that are looking to raise money from a wide range of investors, including retail investors.
Reg D, on the other hand, differentiates between accredited and non-accredited investors. Accredited investors are defined as individuals with a net worth of over $1 million, or an annual income of over $200,000 for the past two years. Non-accredited investors are defined as individuals with a net worth or annual income less than the threshold set by the SEC. Reg D allows companies to raise an unlimited amount of money from accredited investors and non-accredited investors, without registering the securities with the SEC.
Differences between Reg A and Reg D in terms of the level of disclosure and reporting required
Reg A requires companies to file a Form 1-A offering statement with the SEC, which includes detailed information about the company, its management, and the securities being offered, such as a prospectus. The SEC reviews the information provided and, if it is deemed to be complete and accurate, will issue an order allowing the securities to be offered and sold to the public. Additionally, companies that rely on Reg A are subject to ongoing reporting requirements including annual, semi-annual and current reports.
Reg D, on the other hand, does not require companies to file a registration statement with the SEC. However, companies are still required to file a Form D notice with the SEC and any applicable state securities regulators within 15 days after the first sale of securities. This notice includes basic information about the offering, such as the names and addresses of the company and its management, the type and amount of securities offered, and the names of the investors. Additionally, companies that rely on Reg D are not subject to ongoing reporting requirements.
Differences between Reg A and Reg D in terms of the ongoing obligations of the issuer
There are significant differences in terms of the ongoing obligations of the issuer.
Reg A requires companies to file ongoing reports with the SEC and provide periodic updates to investors. This includes filing annual, semi-annual, and current reports on Form 1-K, Form 1-SA, and Form 1-U, respectively. These reports include financial statements, management’s discussion and analysis, and other information about the company’s operations and performance. The SEC may also conduct periodic reviews of the company’s ongoing compliance with securities laws.
Reg D, on the other hand, has less stringent ongoing reporting requirements. Companies are not required to file ongoing reports with the SEC, but they are still required to file a Form D notice with the SEC and any applicable state securities regulators within 15 days after the first sale of securities. This notice includes basic information about the offering such as the names and addresses of the company and its management, the type and amount of securities offered, and the names of the investors. However, the issuer still must comply with anti-fraud provisions of federal securities laws.
Advantages of Reg A
Here are some advantages of Reg A:
- Ability to raise a larger amount of money: Reg A allows companies to raise up to $50 million in a 12-month period from any type of investor, without registering the securities with the SEC. This is a relatively high limit, and it can be especially beneficial for early-stage companies that are looking to raise significant amounts of capital or for companies that are looking for a way to increase liquidity for the issuer’s securities.
- Ability to attract a wider range of investors: Reg A allows companies to fundraise from any type of investor, regardless of their accreditation status. This means that both accredited and non-accredited investors can participate in the offering. This can be beneficial for companies that are looking to raise capital from a wide range of investors, including retail investors. This is similar to Reg CF offerings, but without Reg CF’s requirement that all transactions go through a registered portal.
- Less restrictive rules on advertising and general solicitation: Reg A allows for more flexibility in advertising and general solicitation than Reg D, which can be beneficial for companies that want to reach a larger audience of potential investors.
- Potential to increase liquidity for the issuer’s securities: Reg A allows for the securities to be traded on an exchange, which can increase liquidity for the issuer’s securities and may also increase the value of the securities.
It’s important to note that while Reg A has these advantages, it also comes with more stringent ongoing reporting requirements, and more time and cost for compliance. Therefore, companies should consider their specific needs and resources before choosing to use Reg A for their fundraising efforts.
Advantages of Reg D
Here are some advantages of Reg D:
- Ability to raise an unlimited amount of money: Reg D allows companies to raise an unlimited amount of money from accredited investors and non-accredited investors (under Rule 506b), without registering the securities with the SEC. Reg D offerings can also be combined with Reg S offerings opening the possible investor-base to the whole world. This can be beneficial for companies that are looking to raise money from a smaller number of investors, such as family and friends, or for companies that are looking for a less restrictive way to raise capital.
- Less restrictive rules on advertising and general solicitation (if 506c): Reg D offers an option of 506c which allows for general solicitation and advertising, this can be beneficial for companies that want to reach a larger audience of potential investors.
- Less ongoing reporting and compliance requirements: Reg D has less stringent ongoing reporting requirements than Reg A, and companies are not required to file ongoing reports with the SEC.
- Up to 35 non-accredited investors (if 506b): Reg D offers an option of 506b, which allows companies to raise an unlimited amount of funds, including from non-accredited investors, without registering the securities with the SEC. However, there cannot be a general solicitation (aka no advertising).
Choosing between Reg A and Reg D
When choosing between Reg A and Reg D, it’s important to consider a variety of factors, including the amount of money that needs to be raised, the types of investors that will be targeted, and the level of ongoing compliance and reporting that the company is willing to take on. Companies may also want to consult with legal and financial professionals who can provide additional guidance.
In conclusion, Reg A and Reg D are both exemptions to securities registration that can be used for fundraising. Both have their own advantages and disadvantages and it’s important for companies to understand the key differences between them before deciding which one to use. Additional resources can be found on the SEC’s website and by consulting legal and financial professionals who can provide guidance.
Tilden Moschetti, Esq., is a highly sought-after syndication attorney with nearly two decades of experience. His clientele ranges from real estate developers and startups to established businesses and private equity funds. Tilden’s expertise in syndication law comes not only from his knowledge of syndication and securities law but from real, hands-on experience as an active syndicator himself in every real estate product type and nearly all markets in the US. His knowledge and experience set him apart and established him as the Reg D legal services leader.
