Raising Capital—Private Offerings, Reg D Exemptions, and Use of a “Form D”

The following is a guest post by Bill Daly at Shuttleworth & Ingersoll in Cedar Rapids. Since Bill's an attorney, here's a disclaimer: This blog post provides general information only and should not be construed as legal advice. You should not act in reliance upon the information contained in this post without consulting an attorney about your specific situation. 


Raising capital for a new or growing company can be a challenging process, not only because it involves convincing people and investors that the company is worth investing money into and its growth potential, but also because it can involve a myriad of complicated legal issues. Most capital raises involve the use of an attorney, ideally one that is knowledgeable in the area of the private offering of securities and understands the complexities of private offerings at the federal and state levels. This blog post will spend a few paragraphs setting the background for private offerings and the “exemptions” used and then go to describing the Form D that is filed with the Regulation D exemptions and what info, if any, parties interested in obtaining information on “deals” in Iowa can take from those Form Ds that are filed with the Securities and Exchange Commission (“SEC”).

The sale and issuance of equity or convertible debt in a capital raising transaction is the sale of a “security”. The Securities Act of 1933 (the “Act”) requires that all transactions involving the sale of securities must be registered with the SEC except those that meet an exemption from registration. The two most common forms of federal exemptions (which are in this blog post) Private Placement Exemption under Section 4(a)(2) of the Securities Act and the Regulation D (Reg D) Exemptions (Rules 504, 505, and 506). 

The Private Placement Exemption is an exemption at the federal level that exempts securities from registration if the transaction is not a “public offering”. The determination of whether the transaction is a “public offering” requires the analysis of factors that have been provided by the SEC and relevant case law. Because the determination of whether the offering is exempt requires a factual based inquiry and also because it requires the issuing company to find an exemption each state that the company sells securities in, the use of this exemption is potentially more risky and more than likely advised against by the company’s legal counsel, especially as the investment amounts increase.

Often attorneys will advise their clients issuing securities to use the Reg D safe harbor exemptions and use 4(a)(2) exemption as a “back-up”. The Reg D safe harbors involve Rule 504, 505, and 506 (which includes both Rule 506(b) and 506(c)) exemptions that have specific requirements to be met, which include that a Form D to be filed with the SEC within 15 days of the first sale of the security (however, failure to file with the SEC within 15 days is itself not reason enough to lose the exemption). The additional advantage for Rule 506 offerings is the advantages it holds at the individual state level in that issuing companies do not have to find applicable exemptions in each state that a security is sold. Rather, offerings relying on Rule 506 (in the vast majority of states) are able to simply file a copy of the Form D as a notice filing of the sale of securities in those states and pay a minimal fee. It is my experience that any issuing company, if they are attempting to remove as much risk as possible from the sale, will often use a Reg D exemption and often, in a significant majority of the time, the exemption used is Rule 506, and historically has been private offerings under Rule 506(b). 

With all of this “legalese” as a lead in, let’s turn to what a Form D actually is. First off, the information requested on a Form D can be found here. The Form D will ask for general information about the issuing company, including “Related Persons”, which as a general matter would be the officers, directors, and promoters of the company. It will also ask other general information about what industry the company is in, the type of securities being sold, the exemption being claimed, any sales compensation paid to brokers, the minimum investment (if any), the total number of investors, and the total offering amount as well as the total amount currently sold. As noted above, the Form D gets filed with the SEC as well as the applicable state securities agencies (in most cases).

Because the Form D is filed publicly and can be accessed online via different avenues, it could be used as a tool to determine how much investment an individual company has raised privately, but there are a couple limitations to this. First, a company may determine to rely on the 4(a)(2) exemption described above and if that company uses that exemption from registration no Form D would be filed. Secondly, the Form D asks for the (i) Total Offering Amount, (ii) Total Amount Sold, and (iii) Total Remaining to be sold and because the Form D has to be filed within 15 days of the first sale of the security, an outside person looking at a filed Form D may not know if the Company completed its entire offering. As an example, assume a company was raising $5,000,000 and its first investor was investing $500,000 and the company wanted to close on that initial investment. Therefore, the company could file the Form D showing $500,000 invested and that there is another $4,500,000 remaining to be sold. Unless the company is required to file an amended Form D (as generally described here), the general public looking at the Form D would not know whether the entire offering of $5,000,000 was sold unless the company makes a public announcement.

Long story short, because private companies may not even disclose the closing of a private round of investment or if they do, may not provide many details, looking at Form D’s may provide some general information about the offering. However, with that being said, those looking at the filed Form Ds need to proceed with caution understanding the caveats noted above.