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What is SEC Reg D Compliance? The Syndication Lawyer Answers…

By: Tilden Moschetti, Esq.

What is SEC Compliance?

SEC compliance is simply following the rules and regulations that the Securities and Exchange Commission (a US Federal Regulatory Agency) makes and enforces.

As a response to the stock market crash of 1929 (Great Depression), the US Securities Act of 1933 and the Securities and Exchange Act of 1934 brought about an agency meant to bring civil actions against lawbreakers (and work with the Justice Department on related criminal cases). The Securities and Exchange Commission, or SEC for short, is an independent federal government regulatory agency that is tasked with protecting investors and regulating the securities markets. As a government oversight agency, it facilitates capital formation and maintains fair and orderly functioning of the securities markets.

In general, issues of securities offered in interstate commerce (through mail or the Internet) must be registered with the SEC before being sold to investors. The commission, for example, is responsible for approving any formal bitcoin exchange. Financial services firms, such as asset managers, broker-dealers, advisory firms, and professional representatives must likewise register with the SEC to conduct business.

To know more about these things, it is best to consult with experienced syndication attorneys at Moschetti Law.

Common Questions about SEC Securities Compliance

What is Regulation D?

A very common question is ‘what is Regulation D?‘ In short, Regulation D is a set of rules from the SEC which allows for the offering of securities without registration.

What are the exemptions under Regulation D for offerings?

As with any federal set of rules, it isn’t straightforward based on how they are laid out. Unregistered securities offerings typically fall under three different regulations:

Rule 504 – This exemption allows your business to sell securities for your syndication for a total value of up to $1 million to accredited investors only. The securities are restricted, and you must comply with Blue Sky Laws that require you to report financial details of your offerings and sellers and the investors involved in the transactions.

Rule 506b and 506c – This is the most applicable to most syndicators, whether they are syndicating real estate, private equity, raising capital for their business, etc. In 2013, after the JOBS Act, Rule 506 expanded from one exemption to two. This new exemption allows private companies to “generally solicit” (advertise) as long as they only accept accredited investors’ investments in the end. This has become a very popular exemption because Blue Sky Laws do not restrict businesses under this exemption. The following are the two subsections of Rule 506 of Regulation D:

Syndication Under Rule 506(b)

  • No public advertisement or “general solicitation”
  • 35 non-accredited investor limit
  • Investors must receive a private placement memorandum which describes the syndication
  • Must not be sponsored by a bad actor as defined by Rule 506d

Syndication Under Rule 506(c)

  • Advertisement is allowed
  • Only accredited investors may invest and should have 3rd party verification
  • Investors are not technically required to receive a private placement memorandum, but it is highly recommended as it gives the investors the details about the syndication
  • Must not be sponsored by a bad actor as defined by Rule 506d

Click here for more information about the SEC’s rules under Reg D.

What industries use Regulation D?

Almost every industry can use Regulation D for raising capital. From real estate to crypto, it is an effective way to get equity to spend on big projects.

What is an accredited investor?

Rule 501 of Regulation D details the difference between these investors. In short, it explains that accredited investors like banks, businesses, insurance companies, etc. must have $5 million in assets or more, and individual investors must earn at least $200,000 annually, or $300,000 if they are a married couple, or have a net worth above $1 million.

Any investor that does not meet the above criteria is considered non-accredited according to the SEC.

Regulation D requires that the majority of the investors in a syndication be accredited. Depending on the Rule under which your offerings fall, you must comply with the limit on the number of non-accredited investors you allow to purchase your securities. An attorney experienced in real estate and securities law can help you find the most appropriate exemption for your business and build a strategy for effective fundraising.

A strong marketing plan and a thorough procedure for selling your securities will ensure your real estate venture’s smooth undertaking. This involves the process of qualifying investors and soliciting (advertising) effectively under applicable securities regulations and marketing to inform your investors regarding the offering.

What is Form D for syndication?

No matter the type or number of investors, your business must disclose specific information on the offering by completing SEC Form D. This form must be completed and submitted within 15 days of your first sale. Hence, it’s imperative to know what elements need to be included and how to submit your filing to the SEC.

What is a Private Placement Memorandum for a Syndication?

Rule 506 requires that you provide a Regulation D Private Placement Memorandum to non-accredited investors so they can understand the syndication or funds. In it, you will detail your company’s financial information and risk analysis of the investment offered. This is a legal document that must be drafted with care and precision to avoid misrepresentations or omissions that could spell trouble with the SEC and state regulatory agencies. The attorneys at Moschetti Law Group can help you draft a complete and compliant Private Placement Memorandum that will protect you and your interests.

What are Regulation A and Regulation A+?

Regulation A allows private companies to fundraise up to $50 million by selling securities under less-stringent legal regulations.

Like Rule 506 of Regulation D, Regulation A also shifted after the JOBS Act passed in 2012 to become more like an Initial Public Offering (IPO) in that businesses must be qualified with the SEC or meet exemption qualifications. But since that time, it has become more reasonable for companies to take this exemption because of the increased cap on the dollar amount that can be raised. The new Regulation A+ offers two tiers, both of which now allow accredited and non-accredited investors:

Tier 1: raise up to $20 million per year

Tier 2: raise up to $50 million per year (investment amounts per investor in this tier are limited)

In Tier 1, companies must register their offering in the state or states where they are selling their securities. In some instances, a multi-state review program makes it possible to file the offering in multiple states.

In Tier 2, companies may advertise their offering generally before registering their offering with the SEC. Once the company begins to sell those securities, they must file an offering statement from their investors for qualification. Investors may include accredited and non-accredited funders and the securities are not restricted.

Freetrading Securities – since the securities sold in Tier 2 of Regulation A+ are not restricted, companies that sell enough securities to create a market, which is at least 100 shares held by at least 30 shareholders, may be able to file a Form 211 Application under the Exchange Act. Under the Financial Industry Regulatory Authority (FINRA), this application allows the securities to be quoted on the Pink Over-the-Counter (OTC) marketplace. It enables the company to engage an OTC sponsor. Benefits of listing on the OTC marketplace include more direct trade with fewer regulations.

Reporting requirements for Tier 2 Offerings are minimal compared to requirements for public companies. They include only:

  • Annual or semi-annual reports
  • Current event reports

What is Regulation CF?

The JOBS Act also created a crowdfunding regulation (Regulation CF, or Reg CF) that allows private companies to raise money online by selling securities and makes more allowances for general solicitation or marketing.

The Moschetti Law Group is well-versed in the JOBS Act and Regulation Crowdfunding. We advise our clients on the best crowdfunding, marketing, and overall financial strategy for their individualized success.

In Regulation Crowdfunding, the fundraising allowance is capped at $1 million per year, but it may be raised from both accredited and non-accredited investors. The stipulation is that all crowdfunding investors must invest through a registered broker-dealer or funding portal, and there are limits on what each investor may contribute.

The real estate crowdfunding lawyers at Moschetti Law Group can advise you on the best securities structure and the most appropriate exemptions. The choice of securities and structuring options is broad, and having the guidance of an expert real estate attorney can enhance your confidence in reaching your funding goals and your success.

Securities options include:

  • Common stock
  • Convertible notes
  • KISS
  • Preferred stock
  • SAFEs
  • Series Seed

What opportunities are there for companies using Regulation CF?

Opportunities for companies using Regulation CF include:

  • Use social media for advertising an offering
  • Use events for fundraising
  • Use a funding portal for networking and marketing
  • Sell securities to accredited and non-accredited investors

SEC Regulations and Compliance

The Securities and Exchange Commission promotes full public disclosure, monitors corporate takeover actions in the United States, protects investors against fraudulent and manipulative practices in the market, registers statements for bookrunners among underwriting firms. Given the nature of these roles, SEC regulations are strict, thorough, and highly demanding. Trying to comply with new regulations and rules, financial statement requirements, procedural and technical filing conditions, and published guidance and unofficial interpretations can be quite challenging. As such, our hands-on syndication lawyers can help.

In simple terms, SEC compliance is adherence to the rules and regulations that the Securities and Exchange Commission makes and enforces. The government agency carefully monitors the actions of various professionals at the civil, criminal, federal, state, regulatory, and self-regulatory levels. They cover those who work or operate in the securities industry, which includes brokers, mutual funds, municipal advisers, investment advisers and companies, and the members or participants of Systems Compliance and Integrity entities.

The rigidness associated with the SEC is not surprising, however, since it was meant to facilitate the formation of capital required to support economic growth, protect investors from fraud, and ensure that the securities markets remain efficient, orderly, and fair. 

The Office of Compliance Inspections and Examinations (OCIE)

Through the OCIE examinations, the SEC can identify and monitor risks, improve industry practices, inform rule-making initiatives and pursue misconduct. The National Examination Program (NEP) makes use of modern quantitative techniques to collect and analyze data about all registrants, which helps select registrants for on-site examination. 

The NEP is primarily conducted to utilize risk-based strategies that ensure market integrity, support the responsible formation of capital, and protect investors. It encourages compliance with securities laws and regulations through examinations, publications, outreach programs, or referrals to the Division of Enforcement. These examination programs under the NEP include: 

Clearance and Settlement

This is responsible for the examination of clearing agencies and the coordination of transfer agents.

Market Oversight

This is meant to conduct risk-based examinations of SROs and securities exchanges to ensure that they and their participants comply with securities and SRO requirements.

Broker-Dealer

This examines broker-dealers to ensure that they comply with relevant securities laws. Additionally, it coordinates with the NASDAQ Stock Market, New York Stock Exchange, and other SROs on regulatory issues involving broker-dealers.

Investment Adviser-Investment Company

This is meant to ensure compliance of investment advisers and companies with securities laws, particularly the Investment Advisers Act and Investment Company Act.

SEC Divisions

The SEC consists of five divisions and 24 offices. Part of their mandate is to interpret and take enforcement actions on securities laws, provide oversight of securities institutions, issue new rules, and coordinate regulation among different levels of government. The respective roles of the five divisions include the following:

Division of Trading and Markets

Establishes and maintains standards for fair, orderly, and efficient markets

Division of Economic and Risk Analysis

Integrates economics and data analytics into the core mission of the SEC

Division of Investment Management

Regulates investment companies, variable insurance products, and federally registered investment advisors

Division of Enforcement

Enforces SEC regulations by investigating cases and prosecuting civil suits and administrative proceedings

Division of Corporate Finance

Ensures investors are provided with material information (relevant to a company’s financial prospects or stock price) to make informed investment decisions

Behind the various laws and regulations that the SEC approves and enforces is the idea that all investors should have access to basic facts about the investments that they make before they buy. Under these rules, public companies must disclose meaningful financial and other details to the public, which provides common knowledge that all investors can use to decide for themselves whether or not to buy, hold or sell certain bonds, futures, stocks, or other securities.

Make informed decisions about your syndication.

Contact our syndication and private placement memorandum law firm today!