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Regulation D Programs

Guest post by: Ken Hollowell

Article Overview: Which Regulation D Series do I use?

Regulation D Programs

There are three primary SEC Regulation D Programs that offer support for; the Regulation D 504 Offering, Regulation D 506 Offering, and the Small Corporate Offering Registration ("SCOR") Offering. Determining which program best suits your company is based primarily on transaction size. We normally recommend the standard 504 or 506 offering programs (not SCOR) for most companies.

Regulation D 504 Offerings are typically used for transactions under $1,000,000 in size.

Regulation D 506 Offerings are used for deals over $1,000,000.

504 Program

Regulation D 504 Offering: allows companies to raise up to a maximum of $1,000,000 in a 12 month period - the exemption is renewable meaning the company can use the 504 program again 6 months from their last securities sale under 504.

The 504 is the least restrictive of the Regulation D programs regarding structure, financials, disclosure, and investor suitability. A 504 offering allows a company to sell securities to an unlimited number of purchasers without regard to their sophistication or experience - although some States may limit the company to 35 non-accredited investors while still allowing an unlimited number of accredited investors.

The 504 is the most popular and widely used of the Regulation D programs. Many companies use 504 for an initial round and then float a 506 for a larger second round - both offerings can be done in a 1 year period because they are separate exemption programs.

The 504 program is available for private corporations only. Public reporting companies cannot use the 504 program.

The 504 program is regulated at the Federal level and State level (the State the investor resides). Companies using the 504 program must file a Form D notification filing with the SEC (included in our service) and may be subject to informational filings at the State level depending on the residency of the investor. We have streamlined the State filing process - most companies only need to file in 1-5 States to sell out a 504 offering.

506 Program

Regulation D 506 Offering: allows companies to raise capital through the sale of securities with no principal amount cap per 12 months. The 506 program provides an exemption for limited offers and sales of securities without regard to the dollar amount of the offering. Most companies use the 506 program to raise amounts from $1,000,000 up to $50,000,000 - although there is no cap on how much capital can be raised via a 506.

506 offerings have basic disclosure requirements regarding transaction and company details - our PPM documents exceed the Federal minimum disclosure level. Only financial statements for the most recent fiscal year need to be certified by an independent public accountant. If an issuer cannot obtain audited financial statements without unreasonable effort or expense, or if the company is a start-up with no operating history, only the issuer's balance sheet (to be dated within 120 days of the start of the offering) must be audited. An issuer can forgo providing audited financial information if the offering is made solely to accredited investors or if the information on the balance sheet is not material to the investment decision.

A 506 offering allows up to 35 non-accredited investors and an unlimited number of accredited investors. 506's are exempt from State securities laws - the Federal regulations supersedes the State rules, however most States will want a copy of the Form D submitted if you are selling securities to investors that reside in their State. As with the 504 program a company must file Form D in conjunction with a 506 offering to notify the SEC of the offering.

SCOR Program

Small Corporate Offering Registration ("SCOR") Offering: The SCOR is a more complex version of the 504 offering. The SCOR offering provides a standardized disclosure format that is accepted by 43 States and allows increased freedom of solicitation and advertising over the standard Regulation D 504 exempt program. The standardized disclosure format (the U-7 form) also allows the company to comply with a large number of individual States securities laws utilizing one regional review instead of filing the offering with each individual State the company sells securities in.

The SCOR does require audited financial statements for the past 2 fiscal years for offerings exceeding $500,000 and has a maximum 12 month cap of $1,000,000. You must also have 10% equity relative to the amount of capital you are raising through the offering. We typically recommend the standard 504 over SCOR due to its lack of restrictions, its ease of implementation, and its use of the more sophisticated and professional PPM disclosure document. The SCOR U-7 disclosure document is a question and answer document that we do not feel is very professional in its appearance to investors.

If you have any questions about whether a SCOR or 504 would be best for your transaction please feel free to call us directly to discuss specifics.

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Article Tags: funding your company, ppm, private placement offering, sing capital



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