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Regulation D Exemptions: Financial Advisor Guide


Before companies can go public and list their shares for trade on an exchange, there are some regulatory hoops they need to jump through first. Federal securities laws require any offer or sale of a security to be registered with the Securities and Exchange Commission (SEC). Regulation D, however, offers a work-around to the registration process, which can be time-consuming and expensive. Specifically, it allows certain companies to offer and sell securities in order to raise capital without meeting the regular SEC registration requirements. Regulation D can also come into play for hedge fund strategies.

A financial advisor can help you navigate the array of federal regulations that govern securities trading.

SEC Regulation D, Explained

The Securities Act of 1933 outlines the registration requirements for private companies that wish to go public in order to raise capital. This includes guidelines for filing with the SEC and making certain information about the company’s structure and finances available to the public. The registration process can take months to complete and cost the registering company thousands of dollars.

Regulation D, however, allows companies to offer securities for sale without having to meet the standard registration requirements. Essentially, this is the equivalent of a private offering in that the company doesn’t have to go public to raise capital. This may be attractive for companies that need capital but don’t want to go through the full registration process, either because of time or monetary concerns.

One thing to know is that SEC Regulation D is not the same as Federal Reserve Board Regulation D. The former governs registration requirements for companies while the latter is related to monthly withdrawal rules for deposit accounts.

How a Regulation D Filing Works

If a company chooses to pursue a Regulation D exemption, they’re required to complete and submit Form D-Notice of Exempt Offering of Securities. This form requires companies to share specific information with the SEC, including:

  • Issuer’s identity and entity type
  • Principal place of business
  • Industry group
  • Issuer size
  • Federal exemptions and exclusions claimed
  • Type of filing
  • Duration of the offering
  • Type of securities offered (i.e. equity, debt, option, stock warrant)
  • Minimum investment
  • Sales compensation
  • Offering and sales amount
  • Investors
  • Sales commissions and finder’s fee expenses
  • Use of proceeds

Companies can choose federal exemptions and exclusions under Rule 504 or Rule 506 of Regulation D, Securities Act Section 4(a)(5) or the Investment Company Act Section 3(c). Rule 504 of Regulation D allows for an exemption for companies when they offer and sell up to $5 million of their securities in any 12-month period.

Under Rule 506 of Regulation D, there are two exemptions from registration. Rule 506(b) allows companies to qualify for a safe harbor exemption if:

  • They’re not using general solicitation or advertising to market their offering
  • They’re selling securities to an unlimited number of accredited investors and up to 35 other purchases, including sophisticated non-accredited investors
  • They’re giving appropriate information to accredited investors that is not false or misleading in any way
  • They’re readily available to answer investor questions

Rule 506(c) allows investors to qualify for an exemption if:

  • All investors in the offering are accredited
  • The company verifies investors’ accreditation status

Companies can raise unlimited capital through Rule 506 exemptions, which is an advantage over Rule 504. Securities issued through a Rule 506 exemption are restricted, however. Any investors who purchase securities through a Rule 506 offering are required to hold onto them for at least six months to a year before attempting to sell them.

Compared to the regular SEC registration requirements, complying with Regulation D is less complicated. That could make it appealing to companies that need capital for expansion or other purposes but don’t necessarily want to go public just yet.

Regulation D transactions still have to follow securities laws as well as state laws regarding securities registration. There may be additional documents that need to be filed to register under Regulation D rules at the state level. So while the traditional registration requirements don’t apply, companies do still have to be in compliance with federal and state guidelines.

Regulation D and Hedge Fund Strategies

"Hedge fund" written on a piece of paper and highlighted

A hedge fund is a pooled investment that typically takes a more aggressive approach compared to a run-of-the-mill mutual or exchange-traded fund. Hedge funds use different strategies in their attempt to generate above-average returns and may have a higher risk profile as a result. When hedge funds need to raise capital, it’s usually done using Regulation D exemptions. This allows them to circumvent the regular SEC registration rules. A Regulation D hedge fund can include equity offerings, debt offerings or a combination of the two.

If you’d like to invest in Regulation D offerings, a hedge fund is one way to do it. But there’s a wrinkle, in that these funds are limited to accredited investors. For SEC purposes, that means:

  • Having an annual income of $200,000 or more ($300,000 for couples); OR
  • Having a net worth of $1 million (excluding your primary residence)

If you don’t meet those requirements then you won’t be able to invest in a hedge fund. But you can invest in hedge fund exchange-traded funds (ETFs). Hedge fund ETFs aim to mimic the investing strategies and performance of traditional hedge funds. Since ETFs can offer greater liquidity and increased tax efficiency, they may be worth exploring if you’re interested in Regulation D investments.

The Bottom Line

Hedge fund entry in a dictionaryRegulation D filings allow companies to meet their capital needs with less stringent requirements compared to a standard SEC registration. They also lie at the heart of how hedge funds typically operate. These regulations tend to offer more benefits to issuers rather than investors, but it’s still helpful to understand how they work and when they’re used.

Tips for Financial Planning

  • Consider talking to a financial advisor about Regulation D offerings and what they could mean for your investment portfolio. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors online. You can get personalized recommendations for advisors in your local area just by answering a few simple questions. If you’re ready, get started now.
  • There is a great benefit in using a free calculator to determine an ideal asset allocation and then engaging in passive investing strategies. That’s because long-term investing is much safer, as it features ordinary, but consistent returns.
  • If a company does decide to go public rather than pursuing a Regulation D offering, they can issue an initial public offering instead. IPOs allow investors access to shares in these private companies as they go public for the first time. More online brokerages are making IPOs available as an investment option. If you don’t have a brokerage account yet, you may consider opening one to take advantage of IPO investing. When choosing a brokerage, consider the range of investments available. Also, look at the fee schedule and minimum investment requirements. While more brokerages charge zero fees to trade stocks and ETFs, a different set of fees may apply to IPO investments.

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