It’s no secret that it is difficult to start (and maintain) a business. One of the most important factors of getting a start-up running is initial and ongoing capital. While some entrepreneurs have adequately planned for and are able to produce the type of capital injection necessary for the inception of the company, many entrepreneurs seek outside investors to provide those sums of capital in exchange for a non-managerial equity stake in the company.
The only problem is that a lot of entrepreneurs break the law in securing these investments.
The Securities Act of 1933 made it a requirement that any offer to sell securities either be registered with the SEC or meet an exemption. These exemptions from registration requirements can be found in Regulation D (Reg D) – Rules 504, 505, and 506. This allows many companies, most importantly entrepreneurs and small business owners, to offer and sell their securities without having to register those securities with the SEC.
However, there is a requirement that if you do issue securities under one of the exemptions you must file a notice with the SEC, claiming that exemption. This is the step that many entrepreneurs and small business owners overlook.
Forgetting to file is not something that is automatically detrimental to your business… but it does have consequences.
The following covers the 5 W’s of the Regulation D Requirements.
Who Must File
Any company attempting to raise capital by way of offering and selling their company’s securities to a non-active, outside investor. A “security” in this instance usually takes the form of common stock (in a corporation) and ownership interest (in a limited liability company – LLC). A non-active, outside investor means any investor that does not play an active role in the day-to-day operations of the company. For example, If you have an LLC and you offer to sell someone securities but they also become an active member in the company, then you do not have to file the exemption. On the other hand, if they will not play an active part in the operations of the company and are solely investing for the purposes of receiving passive investment income, then you must file the notice.
What Do You File
The notice for exemption under Regulation D is submitted on a Form D filing. This is a relatively quick notice that does not have a cost to file.
When Do You File
You must file this notice within 15 days of the first issuance of securities for any Reg D offering. If your Reg D offering includes multiple investors, you must submit the filing no later than 15 days after the first investor receives his/her/its securities.
There may also be state filing requirements that must be met. This usually means that you must submit a similar filing no later than 15 days after an investor in that state receives his/her/its securities.
Under the newer JOBS Act (Jumpstart Our Business Start-ups), there have been proposals by the SEC to require advanced filing of this notice. This exemption was codified as rule 506(c) and allows for companies to offer securities through general solicitation (as long as certain guidelines are met). The new proposal to this rule would require that anyone planning on issuing securities under this exemption file a Form D notice at least 15 calendar days prior to engaging in general solicitation.
Where Do You File
This notice must be filed online with the SEC and any applicable states that require the filing of such notice – Illinois is one of those states with a notice requirement.
This is for the protection of investors. Filing a Form D notice requires the business to compile basic information about the company and the offering. These filings are placed on the SEC’s EDGAR database. This database is searchable by the general public.
Failing to file a Form D notice does not prohibit you from claiming the Reg D exemptions. However, one of the potential consequences of failing to file this form is being prohibited from using any of the Reg D exemptions in the future. Another, peripheral, consequence is that if you get sued by an investor they can claim that you violated federal registration requirements of the Securities Act.
Offering securities, in any form or fashion, should be done with the counsel of a knowledgeable attorney. This will better ensure that you are complying with the applicable laws and are able to continue to raise capital in a similar manner in the future.
Jamal Jackson, JD/MBA is a corporate attorney licensed in the State of Illinois. He is the CEO & Managing Attorney of Jackson Corporate Law Offices (www.JacksonCounsel.com), Co-Founder of Initiative Consulting Group, LLC (www.initiativecg.com) and a Public/Motivational Speaker engaging audiences in the topic areas of Business, Leadership, and Legacy (www.JamalEJackson.com).