Regulation D (Reg D) crowdfunding refers to a specific exemption under the U.S. Securities and Exchange Commission (SEC) regulations that allows companies to raise capital through the sale of securities without having to register those securities with the SEC. The regulation is part of the broader set of rules governing private placements.
Regulation D provides three different rules (Rule 501, Rule 502, and Rule 503) that companies can use to conduct private placements, and one of these rules, Rule 506, is commonly associated with crowdfunding activities. Rule 506 has two variations: Rule 506(b) and Rule 506(c).
1. Rule 506(b): This is the traditional form of private placement under Regulation D. It allows companies to raise an unlimited amount of capital from an unlimited number of accredited investors (typically high-net-worth individuals and institutions) and up to 35 non-accredited investors who meet certain sophistication requirements. The company, however, cannot engage in general solicitation or advertising to attract investors.
2. Rule 506(c): This variation allows companies to engage in general solicitation and advertising to attract investors, but all investors must be accredited, meaning they meet specific income or net worth criteria. This rule provides greater flexibility in marketing and reaching potential investors.
It's important to note that crowdfunding under Regulation D is distinct from crowdfunding under Regulation Crowdfunding (Reg CF), which is a separate SEC regulation that allows companies to raise smaller amounts of capital from a larger number of both accredited and non-accredited investors through registered crowdfunding platforms.
In summary, Reg D crowdfunding allows companies to raise capital through the sale of securities without a full SEC registration process, primarily targeting accredited investors. The specific rules and requirements depend on whether the company chooses Rule 506(b) or Rule 506(c).
Yes, the JOBS Act (Jumpstart Our Business Startups Act), which was signed into law in 2012, had a significant impact on Rule 506(c) offerings. The JOBS Act aimed to facilitate capital formation for small businesses and startups by easing certain securities regulations. Title II of the JOBS Act, in particular, addressed changes to Regulation D, including Rule 506(c).
Before the JOBS Act, Rule 506 offerings were subject to restrictions on general solicitation and advertising. Companies conducting private placements under Rule 506 could not openly advertise or publicly solicit investments. The JOBS Act Title II, however, introduced changes that lifted this restriction for certain offerings conducted under Rule 506(c).
Key provisions of the JOBS Act Title II affecting Rule 506(c) offerings include:
1. General Solicitation and Advertising: Under Rule 506(c), issuers are now allowed to engage in general solicitation and advertising to attract investors. This means they can use various media channels to promote their securities offerings.
2. Accredited Investor Verification: Since the offering is open to accredited investors only, the JOBS Act emphasized the importance of reasonable steps to verify the accredited status of investors. Issuers must take measures to ensure that investors meet the specified income or net worth criteria.
These changes were aimed at making it easier for companies to reach a broader audience of potential investors and attract capital more efficiently.
The JOBS Act (Jumpstart Our Business Startups Act), signed into law in 2012, consists of several titles, each addressing different aspects of securities regulations and capital formation. Here are the titles of the JOBS Act:
1. Title I - Reopening American Capital Markets to Emerging Growth Companies (EGCs): Title I focuses on creating a new category of issuers called Emerging Growth Companies (EGCs). EGCs are granted certain exemptions and relief from regulatory requirements to encourage initial public offerings (IPOs) and facilitate access to capital markets for smaller companies.
2. Title II - Access to Capital for Job Creators: Title II addresses the lifting of the ban on general solicitation and advertising for certain private securities offerings conducted under Rule 506(c) of Regulation D. This change allows companies to publicly advertise their offerings, provided that they sell securities only to accredited investors.
3. Title III - Crowdfunding: Title III introduces Regulation Crowdfunding (Reg CF), which allows small businesses and startups to raise capital from a broad range of investors, including non-accredited investors, through crowdfunding platforms registered with the SEC.
4. Title IV - Small Company Capital Formation: Title IV consists of two parts: Regulation A+ and Regulation D, Rule 506(b) and Rule 506(c). Regulation A+ provides an exemption for smaller public offerings, while the amendments to Rule 506 aim to enhance the ability of small businesses to access capital through private placements.
5. Title V - Private Company Flexibility and Growth: Title V increases the shareholder registration threshold for companies before they are required to register with the SEC. It also enhances exemptions for certain offerings and reporting requirements for small issuers.
6. Title VI - Capital Expansion: Title VI directs the SEC to study and report on ways to improve the access of smaller issuers to capital and reduce regulatory burdens.
7. Title VII - Outreach on Changes to the Law: Title VII focuses on outreach and education efforts to inform small and medium-sized businesses about the changes in securities laws and regulations.
Each title of the JOBS Act addresses specific challenges faced by businesses in raising capital and aims to promote capital formation, particularly for smaller companies and startups.