Raising Money From Investors Part 4: Regulation D "Safe Harbor" ProvisionsThis week we continue our series on raising money from investors. In Part 1, we covered why this complex area of law matters, even if you’re just raising money from friends and family. Complying with securities laws requires that you register at both the federal and state level or comply with an exemption (again, at both levels). In Part 2, we explained the common exemptions to registration at the state level. In Part 3, we looked at the common exemptions at the federal level. As we explained there, some of the federal exemptions leave quite a bit of room for interpretation, causing some businesses to rely instead on certain “safe harbor” provisions.
Just what are the "safe harbor" provisions? Can you ever advertise that you're seeking investors? And is an offering document really necessary?What is Regulation D?Regulation D is an SEC regulation that sets forth more detailed guidance for private placements. To comply with the Regulation D “Safe Harbor” provisions, you will have to file a notice filing known as Form D with the SEC within 15 days after the first sale of securities. Form D puts the SEC on notice of the amount and nature of the securities being offering and what exemption(s) from registration is being relied upon. The good news is that there is no filing fee associated with Form D, but it does require the creation of an EDGAR account. And as we discuss below, Form D must also be filed with the Ohio Division of Securities, which does charge a filing fee. Rule 506(b)Rule 506(b) is probably the most common of the Regulation D “Safe Harbor” provisions. Put simply, this rule provides specific requirements that, if followed, firmly establish that the transaction falls within the private placement exemption. To qualify for this safe harbor, your business must:
Not use general solicitation or advertising to seek out investors;
Not sell securities to more than 35 non-accredited investors (and any non-accredited investors must have sufficient knowledge and experience in business matters to be capable of evaluating the merits and risks of the prospective investment);
Give non-accredited investors specified disclosure documents;
Be available to answer questions from prospective investors who are non-accredited investors; and
Provide certain financial statements to investors. (The specific requirements vary depending on the amount of the offering, but generally, you should plan on providing two years’ of financial statements and recent quarterly updates, including an audited balance sheet.)
Unlike other exemptions, Rule 506 does not place any limits on the amount of money that you can raise for your business.
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