JOBS Act: TylerCap TopAUM on Regulation D Basics


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JOBS Act: TylerCap TopAUM on Regulation D Basics

JOBS Act, Hedge Fund,,, capital raising, investor relations, JOBS Act Rules, Hedge Fund Launch, on Regulation D Basics

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JOBS Act: TylerCap TopAUM on Regulation D Basics

  1. 1. TYLER CAPITAL GROUP: Regulation D Basics    TylerCap’s on Regulation D BasicsRegulation D Basics"Regulation D" is a United States Federal program created under the Securities Act of 1933, indoctrinated in1982, that allows companies the ability to raise capital through the sale of equity or debt securities (privateor public stock shares). Specifically, this allows small businesses to raise capital from private investors,without going through the red-tape and financial burden of securities registration.There are 3 basic "Rules" which are relied upon to raise capital. These rules allow for different amounts ofcapital, different types of investors and different methods for conducting an offering. Before determiningwhich PPM template you need you will need to read these rules and figure out which rule works best foryour particular offering.The Reg D programs were designed to provide an exemption to sell securities in a private capital raisewithout registering the securities (any business transaction involving investors), and also to provide theappropriate documentation for properly accepting and using the capital.There are 2 basic types of Regulation D Offerings(which can also be combined):An "equity" offering is where the company sells partial (or a majority) ownership in the company (via asecurity, stock or LLC membership units) to raise capital. Equity offerings are preferred by early stagecompanies because there is no structured repayment schedule or debt payments, the investors receive areturn when the company profits and those profits are shared.A "debt" offering is where the company raises debt financing by selling a promissory note to investors witha set annual rate of return, and a maturity date for when funds will be paid back to investors. A debtoffering is much like a business loan, but instead of a bank providing the financing, a group of investorslends funds to the company.Preparing a Regulation D Offering involves seven steps:1. A Great Idea.2. A Solid Business Plan.3. Disclosure Documents, Pre-Offering Framework. Most entrepreneurs are not experts inraising capital, thus typically have poorly structured transactions. An improper transaction structure willportray an unprofessional image to potential investors. The very first step in an offering is properlydeveloping the structure (in equity transactions, company stock share structure). Structuring usuallyincludes: setting stock price or note amounts, determining how much of the company to sell (in equitytransactions), which Reg D program to use, setting the maturity date and rate of return for promissory notes(in debt situations), share allocations to principals (so they maintain a set amount of control in the company),minimum and maximum offering amounts which set the effective range of the offering, minimum amount ofinvestment per investor, etc. All Rights Reserved 2012
  2. 2. TYLER CAPITAL GROUP: Regulation D Basics     4. Document Creation: Preparing an offering involves the creation of the Regulation D Offering documents. These documents include: • Private Placement Memorandum: The Private Placement Memorandum, or "PPM", is the document that discloses all required information to the investors about the company, proposed operations, the transaction structure (whether you are selling equity ownership or raising debt financing from the investors), the terms of the investment (share price, note amounts, maturity dates, etc.), risks involved, etc.Note: This document typically contains much of the information found in a business plan and also includes an extensive "return oninvestment" structure, along with an investment contract or "Subscription Agreement" (see next bullet point). • Subscription Agreement: The Subscription Agreement explains the terms and conditions of the offering. It is the "investment contract" for purchasing the securities. Typically an investor will complete this document, a questionnaire, and then attach a check for the investment. • Promissory Note: In debt offerings you need to have a Promissory Note outlining the terms of the loan arrangement with the investors. The note is the actual "loan document" between the company and the investor. 5. Form D SEC Filing. The Form D is the form filing that is sent to the SEC in Washington, DC. It notifies the SEC that you are using the Regulation D program and provides them basic information on the company and the offering. (See our section on "Filing Form D.") Note: It is not an approval document or registration, rather it is a filing that notifies the SEC that you have a Regulation D Offering in place. 6. Marketing and Capital Acceptance: The offering is now ready for marketing to investors. The JOBS Act of 2012 has reversed a 80 year old rule whereby solicitation or advertising to investors was strictly prohibited. The JOBS Act was signed on April 5th, 2012 giving the SEC 90 days from that date to structure new rules regarding the solicitation of investors. 7. State Form Filing. Also called "Blue Sky" Filings, most states require a specific form to be filed along with a copy of the SEC Form D and some require a copy of the PPM. Nearly all states charge a fee ranging from $50 to $495. In most states the form does not need to be filed until capital has been received from an investor in that state. After receiving the capital you typically have 15 days to file the appropriate documentation. (See our section on "Blue Sky Compliance.") The Regulation D Programs can be used by domestic as well as foreign corporations. While the programs can be used by any corporation type - the preferred structure is a "C" Corporation or Limited Liability Corporation "LLC". The Regulation D Programs can be used by domestic as well as foreign corporations. While the programs can beused by any corporation type - the preferred structure is a "C" Corporation or Limited Liability Corporation "LLC". All Rights Reserved 2012