Navigating the regulatory landscape for crowdfunding can be daunting, but Regulation D (Reg D) offers a valuable pathway for businesses seeking to raise private capital without the full registration requirements of the Securities and Exchange Commission (SEC). Reg D allows companies to raise funds from accredited investors by following specific exemptions, making it a popular choice for private offerings. In this guide, we’ll break down the five critical steps to ensuring a successful, compliant Reg D crowdfunding campaign. If you’re looking for legal support to streamline your campaign’s compliance, check out Crowdfunding Lawyers’ Services.
Step 1: Understand Reg D Exemptions
Regulation D includes several exemptions, each with unique requirements and benefits. Understanding these options can help you choose the best exemption for your business’s goals and target investors.
- Rule 504: Ideal for companies looking to raise up to $10 million in a 12-month period, this exemption allows greater flexibility, though it is subject to registration requirements at a state level. For this reason, few offerings fall under Rule 504 as the state level cost of compliance may far exceed other Reg D exemptions that remove state registration requirement.
- Rule 506(b): A popular choice, Rule 506(b) allows companies to raise unlimited capital from accredited investors but you can accept up to 35 sophisticated non-accredited investors every 90 days (or 35 per offering). This rull restricts general solicitation and advertising to the general public.
- Rule 506(c): This exemption allows for general solicitation, meaning you can publicly advertise your offering. However, you must verify that all participating investors are accredited investors, making it critical to follow strict verification procedures.
Step 2: Prepare Thorough Documentation
Thorough documentation is essential for a compliant Reg D campaign. These documents not only satisfy legal requirements but also help establish transparency and build trust with potential investors.
- Offering Documents: These must outline the terms of the offering, risks, financials, and other critical information. It’s essential to provide a clear picture of the opportunity and potential risks.
- Subscription Agreements: These agreements are legally binding documents where investors confirm their commitment and understanding of the terms.
- Investor Qualification Documents: These confirm the accredited status of investors (for Rule 506(b) and Rule 506(c)), an important step in adhering to Reg D requirements.
To ensure you have all necessary documentation in place, please schedule your no-cost consultation for expert guidance on compliance.
Step 3: Verify Accredited Investor Status
For offerings under Rule 506(c), companies are required to verify that all investors meet accredited investor criteria. Even if you’re not using Rule 506(c), accredited investor verification is still recommended to maintain compliance and protect your offering’s integrity.
- Verification Methods: Common verification methods include reviewing income documentation, net worth statements, and third-party verification services.
- Best Practices: Have a structured process for verifying investors’ status to avoid compliance issues. Documenting these verification steps can be valuable for your records and investor relations.
For the required verification process, there are companies online that specialize in this service such as VerifyInvestor.com. However, 90%+ of all verifications occur through professional opinions from an investor’s CPA, attorney, or investment broker-dealer.
For a sample usable template of a professional opinion for verification, you can download a free copy of a Professional Opinion Template See email regarding funnel for this for an example verification that is regularly used for Rule 506(c) offerings.
Our Accredited Investor Verification Services can provide additional guidance to ensure your verification process meets SEC standards.
Step 4: Follow Advertising and Solicitation Regulations
Each Reg D exemption has specific guidelines regarding advertising and solicitation. Knowing and adhering to these restrictions is crucial to avoid regulatory penalties.
- Rule 506(b): Prohibits general solicitation, meaning you cannot advertise the offering to the public. Communication should be directed only toward pre-existing relationships with accredited investors.
- Rule 506(c): Allows general solicitation, which means you can promote your offering through various channels, including social media, email, and other marketing methods. However, it also requires strict verification of accredited investors.
For insights on crafting compliant advertising and solicitation strategies, check out our Youtube Channel, which outline best practices and provide guidance on permissible promotional methods.
Step 5: File Form D with the SEC and State Regulators
The final step to launching a compliant Reg D campaign is filing Form D with the SEC within 15 days of the first sale of securities. This filing includes information about your company, the offering, and the exemption you’re claiming.
- Federal Filing: Form D must be filed electronically with the SEC. Missing this step could result in penalties and delay your offering.
- State-Level Compliance: In addition to the SEC filing, most states require a notice filing for Reg D offerings. These filings vary by state, so it’s essential to confirm specific requirements in the states where you plan to raise capital. Each state generally requires a fee between $100 to $600 per state where you have any investors.
At Crowdfunding Lawyers, we handle the filing process for all investment offerings that we represent through our fixed-fee offering services. If you already have your Reg D offering, Crowdfunding Lawyers will provide support on a filing-by-filing basis.
Conclusion
Successfully launching a Reg D crowdfunding campaign requires attention to detail and adherence to complex regulations. By following these five compliance steps, you can confidently approach your campaign and build trust with investors. For personalized guidance on any aspect of your campaign, book a consultation with Crowdfunding Lawyers and let our experts support you in achieving your fundraising goals.