Regulation D Securities: Private Placements

Generally speaking, when companies raise money from the public through a securities offering they must register the securities with the SEC. This is a lengthy and costly process that is undertaken for large offerings, such as an IPO for a well-known technology company. However, this process doesn’t always make sense for every offering, especially if the raise is small and must be done in a short timeline. This is often the situation in the real estate industry, where developers seek to raise $5MM – $15MM of equity to build an apartment community. In this situation, it might make more sense for the developer to raise capital through what’s called a Regulation D Securities Offering. Reg D Securities are securities that claim an “Exemption” from the timely and costly SEC registration process. There are three types of Reg D Securities:

• Rule 504: This type of offering can be used for capital raises under $10 million. There are no restrictions on who can purchase these securities (they can be sold to both accredited and non-accredited investors).

• Rule 506 (b): This type of offering has no limit to the amount of capital that can be raised but it does limit the number of non-accredited investors that can purchase securities in the offering. There can be no more than 35 non-accredited investors in the offering, and they must be sophisticated or have a qualified representative. All other investors in the offering must be accredited. No advertising of the securities is allowed under a 506 (b) offering.

Rule 506 (c): This type of offering also has no limit to the amount of capital that can be raised but only allows investment from accredited investors. Since it is not available to non-accredited investors it can be advertised to the public.

Companies that raise capital through a Regulation D or “Reg D” offering must still notify the SEC of the planned offering.  The bulk of real estate transactions rely on a 506 (b) or 506 (c) exemption.