Funding a startup business requires considerable planning to achieve success, including planning on how you are going to raise the necessary funds to achieve business development goals. Below we go over the topic of issuing securities (shares in your company) to raise the capital your burgeoning business requires. It turns out that the Securities and Exchange Commission’s (SEC’s) Regulation D is a vital tool many startups use to raise funds.

Negatives of Registering With the SEC
Acquiring capital from investors is commonly done through the sales of securities. Sponsors must register with the SEC to do so. The process of registration is time-consuming and costly. It also opens up the startup to public evaluation and criticism. Many small companies are not able to pay the costs of registration. Also, many small businesses getting started prefer to remain private for the time being.

Regulation D, mentioned above, allows these companies to skip registration if certain requirements are met.

Enter Regulation D
Usually, selling securities to investors requires registering with the SEC. Through Regulation D, however, a startup may raise funds through the issuance of bonds and stocks while completing a minimal amount of documentation, provided it follows certain rules.

When to File Through Regulation D
You may use Regulation D to raise funds and skip SEC registration if:

  • You operate a new, small-sized business rather than a well-established, large company.
  • You need a fast, flexible solution to raise seed money for your startup.

Who Can Purchase Your Securities Under Regulation D?
As an issuer, you may offer securities to accredited and non-accredited investors alike. However, the particular exemption you choose may limit the number of non-accredited investors who may buy these securities.

Regulation D Exemptions
The exemptions you should be aware of if you intended to file Registration D are:

  • Rule 506(b) – covers private capital raising.
  • Rule 506(c) – covers public capital raising.
  • Rule 504 – covers securities offerings of less than $5 million.

The exemption you choose will correspond to your specific circumstance and goals. Before making your decision, get any necessary guidance you need from an attorney and other financial professionals.

On the other hand, if you are ready to make a public offering, you will need to start filing form S-1 instead of depending on Regulation D.

Although you can bypass many standard SEC rules through Regulation D, you are still required to comply with applicable state laws governing the sale of securities in the state in which you operate.