Going Public by Way of Regulation D (504) Offering...


 Going Public by Way of Regulation D (504) Offering...

An increasingly popular alternative to going public is the Regulation D (504) offering. In this blog post, we'll explore the differences between these two types of public offerings and why a Regulation D (504) offering might be a good choice for your company.

What's the Difference Between an IPO and a Regulation D (504) Offering?
Going public is not for everyone and can be expensive, time-consuming, and intimidating. An IPO requires that you hire an investment bank to act as your underwriter. Once you agree on a price with the bank, they go out in search of investors willing to purchase shares in your company at that set price per share.

Once the demand for your shares is confirmed, the underwriter helps you create a prospectus, which is essentially a long advertisement for your company. All of this takes time and money. The real cost is that you have to give up about 10-15% of your company's value to the investors who purchase shares in your IPO.

An IPO can also be expensive. You will be expected to pay fees and underwriting costs that can total several million dollars. Regulation D (504) offerings don't require underwriters and won't force investors to buy any particular number of shares at a set price per share.

Regulation D (504) offerings are fairly easy to set up and require little time or money. The most significant cost may be the fees charged by your lawyer and accountant when they are drafting the documents you need to file with the SEC. Depending on what state your attorney is licensed in, they can end up costing anywhere from $10,000 to $50,000 per lawyer. The total cost is usually around $20,000-$30,000 for an offering of just a few million dollars.

The biggest drawback of using a Regulation D (504) offering is that it does not provide access to the general public. You must sell your shares to accredited investors first. The public will not be able to buy shares in your offering until the underwriters have sold their shares.

If you're considering a Regulation D (504) offering, keep in mind that some of the costs involved can be substantial. If you are planning on raising small amounts of capital, we recommend doing so by means of a private placement or angel fundraising round rather than an IPO or Regulation D (504) offering.

How Does a Regulation D (504) Offerring Work?
The process for granting an underwriter an exclusive right to sell qualified securities can be broken down into three stages: eligibility, qualification, and authorization.

Eligibility Eligibility refers to the underwriter's qualification as an eligible issuer. The SEC, with the assistance of FINRA, will make sure your company is eligible to sell securities "using general solicitation and advertising" in compliance with Regulation D (504).

Qualification Once a company has been deemed eligible, there are two ways that securities can be sold: either private placement to accredited investors or public offering that allows the sale of unaccredited state residents. A private placement is typically a sale of securities to a small group of sophisticated investors. This type of sale is not made using general solicitation using advertising, which is the requirement for a Regulation D (504) offering.

Authorization Once shares have been sold to accredited investors and are moved to the company's "restricted" account, the company can be authorized by the SEC on behalf of FINRA. After this has happened, sales made to unaccredited investors will be legal.

The Process for Getting Your Company Authorized Using Regulation D (504) After your accountant has filed all of your paperwork with the SEC and FINRA, you will receive an authorization letter from FINRA showing that your company has obtained registration in compliance with Rule 506(c).

The SEC will then mail you a confirmation letter showing that FINRA has registered your company under Rule 506(c) and that your company is authorized to sell securities to unaccredited investors.

Then, you are free to issue shares in the state of your choice.

How Much Does a Regulation D (504) Offering Cost?
Although it's hard to give an exact dollar figure for the cost of your offering, we can give you a general idea based on past results. We have seen some companies raise anywhere from $100,000 to $1,000,000 using Regulation D (504) offerings.

Like any other type of fundraising process, the cost can vary significantly depending on how big the company is and how many investors are involved in the offering. It's important that you choose an attorney and accountant who specialize in Regulation D (504) offerings and have a significant amount of experience working with this type of investor.

Individuals who invest in private placements must be accredited investors and come from a group of wealthy and sophisticated individuals. In order to qualify as an accredited investor, you must have a net worth of more than $1,000,000 individually or $2,000,000 with your spouse. Alternatively, you can qualify if your annual income is at least $200,000 individually or $300,000 with your spouse for each of two years prior to the investment.

Accredited investors generally expect to receive returns greater than any other type of investor. For this reason it's important that you present them with a high-quality offering that clearly outlines the risks and rewards involved in investing in your company.

To make sure you are using Regulation D (504) correctly, it's a good idea to have an attorney and accountant who have experience working with Regulation D (504) offerings. If you don't already have one, we recommend reaching out to someone like William Fulk at WFLLaw.com

WALKER FOERSTER LLP Attorneys at Law 110 Montgomery Street, Suite 2400 San Francisco CA 94104 Phone: 415-875-1700 Fax: 415-362-5304 Website: www.wfllaw.com/ http://www.marketwired.com/press-release/walker-foerster-llp-announces-expertise-regulation-d-504-offering--1012798.htm?et=b1rjf_21w

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These two chapters are intended to serve as a primer to get you started. As the world becomes increasingly complex, so must the lawyers who practice law. You may be aware of other legal structures that could help you raise money and achieve your business goals. Feel free to contact us with questions, comments or ideas for new insights.

If you have any comments regarding this content or questions about raising capital in these differing structures, please email me at: michael@michaelterrell.com and I will do my best to help you understand the concepts and vocabulary necessary to talk intelligently about raising capital in different ways.


Appendix: Forms on www. MichaelTerrellLawFirm.

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