Regulatory - SEC Exemptions
Can You Raise Money Without Registering With The SEC?
Jan 09, 2023
YES! You can raise money without “registering” with the SEC. Here’s how.
Under federal securities law, any time you offer or sell a security then that offer or sale must either be registered with the SEC or meet some kind or exemption. For the sake of clarity, the SEC considers raising money for a start-up, getting investment money for a fund (hedge fund, private equity fund, etc.) or real estate syndication, an offer or sale of a security.
Also, convertible notes, SAFE agreements, and subscription agreements all typically involve the sale of a security. Bottom line, all of these activities need to either be registered with the SEC or meet some kind of exemption.
The key here is meeting an exemption. Under Regulation D a fund or company can raise money or take on investors without having to fully register with the SEC.
There are many exemptions to the registration requirement and several ways to raise money using an exemption but under Regulation D the two most common exemptions used are the 506(b) and 506(c) exemptions. Under these two exemptions, most private businesses and investment funds (including hedge funds, private equity funds, real estate investor groups, etc.) have raised money and complied with federal securities law.
Raise Money Under Exemption Rule 506(c)
Under Private Placement Rule 506(c) companies or funds can raise an unlimited amount of money from accredited investors only. Unlike 506(b), this exemption allows you to generally solicit to the public but it also required you to take reasonable steps to verify and confirm the accredited status of the investors. This could include having the investors sign an attestation, reviewing tax or income documents, etc.
Under 506(c) you will also have to file a FORM D and comply with any state Blue-Sky laws for notifying the states your investors reside in of your fundraising activities. For either rule, the FORM D’s must be filed within 15 days after the first sale of a security.
Raise Money Under Regulation Crowdfunding
Regulation Crowdfunding (also known as Regulation CF or Reg CF) was first signed into law in April 2012 as one part of the Jumpstart Our Business Startups Act, or JOBS Act. The JOBS Act was enacted to facilitate access to capital for startups and small businesses, give a broader spectrum of people the ability to invest in startups and small businesses and to stimulate economic growth.
Regulation CF is an exemption to the registration requirements under the Securities Act of 1933 which means that a full registration of the security offering is not required. Although a registration and review of the offering by the securities regulators is not required, an issuer of securities under the Reg CF exemption must meet certain disclosure requirements and must comply with regulations regarding, among others, the marketing of the securities and investor limitations.
Some of the key components of the exemption are:
- Any type of U.S. entity can utilize Regulation CF
- Raise amount limited to $5M in a 12-month period
- Entities may sell securities in all 50 states
- An online intermediary must be used to market and sell the securities
- Specific financial information must be disclosed and, depending on your raise amount, your financial statements may need to be reviewed or audited by an accountant and;
- Both accredited and non-accredited persons can invest, although investors are limited to investing a certain dollar amount based on their income or net worth
Regulations now permit issuers to “test the waters” or solicit indications of interest prior to choosing which exempt strategy, such as Reg CF, Rule 506 or Reg A, to use.
Raise Money Under Regulation A
Another product of the JOBS Act, the amended version of Regulation A is sometimes referred to as a “mini public offering.” Companies may sell securities to investors under two tiers, each of which has different requirements.
Under either tier, the company must file with the SEC an offering statement on Form 1-A, which must be qualified by the SEC before the company may take any funds from investors.
Before the SEC qualifies the offering, the SEC will review and provide comments to the company’s Form 1-A, and the company will have to amend the Form 1-A based on the SEC’s comments to the SEC’s satisfaction.
Tier 1
A company can raise up to $20 million in a 12-month period.
The company must include in its disclosure documents financial statements that have been reviewed by an independent accounting firm.
There is no individual investment limit.
The company must file a Form 1-Z exit report.
Tier 2
A company can raise up to $75 million in a 12-month period.
The company must include in its disclosure documents financial statements that have been audited by an independent accounting firm.
Investors in a Tier 2 Regulation A+ offering that are not accredited investors are subject to an investment limit equal to 10 percent of the greater of the investor’s annual income or net worth if the investor is a natural person or 10 percent of the greater of the investor’s annual revenue or net assets if the investor is not a natural person.
The company is required to file with the SEC annual reports on Form 1-K, with audited financial statements, semiannual reports on Form 1-SA, current reports on Form 1-U, and an exit report on Form 1-Z.
A company selling securities under Regulation A+ may use general solicitation, though any general solicitation before the Form 1-A has been filed must comply with the requirements for “test the waters” communications.
An offering conducted under Tier 1 is subject to state blue sky laws, but an offering under Tier 2 is not. Securities sold in reliance on Regulation A+ are not restricted securities, meaning they generally can be freely resold, subject to applicable state blue sky laws. As mentioned above, complying with state blue sky laws is time-consuming and costly.
We have helped dozens of funds and small businesses raise money the right way using exempt private offerings and specifically exemption 506(c) under Regulation D.
About Capital Engine®
Capital Engine® facilitates the creation of efficient, trusted and scalable online private capital and alternative investment marketplaces for traditional and digital assets, through our tiered business technology ecosystem: private label platforms, strategic partnerships and inhouse marketplace for private placements.
Our clients include broker dealers, family offices, wealth managers, incubators, accelerators, social impact and real estate funds, in providing customized SaaS solutions to power private capital and alternative investment platforms, with a strong focus on investor management services.
Capital Engine® provides a comprehensive, integrated suite of digital investment tools, back office technology and distribution platform to connect private capital with HNW individuals and family office capital.
Our software helps leverage the opportunity to better originate and showcase a diverse selection of private investment deals and offer these to investors i.e. a deal’s potential viability can be better assessed, market appetite determined and transaction promptly closed.
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