For issuers of securities, launching a successful Regulation D offering can be time-consuming and expensive. The cost of this endeavor will vary depending on the offering itself. Some of the factors that play into the cost include regulatory compliance at the state and federal level, offering administration and subscription, and legal fees.
Legal Costs
Law firms offer multiple important services for private capital issuers, including the development of private placement memoranda (PPM), operating agreements, subscription agreements, required regulatory filings, and advice on the offering structure.
Offering Administration and Subscription
A Regulation D raise requires you to acquire certain information from investors, obtain their signatures on the required documentation, and collect payment. This can be a burdensome series of tasks if you are working with a high volume of investors, or are attempting to achieve these tasks without the use of the right technology. Once your offering has been funded, communication with your investors does not come to an end. It is necessary to maintain frequent correspondence with your investors, sending them financials, K-1s, distribution notices, and more.
Compliance With Federal Regulations
Issuers of Reg D offerings are required to maintain specific compliance with federal securities laws. Among these requirements is complying with anti-fraud provisions of the Securities and Exchange Act, which includes maintaining proper communication with investors, verifying investor accreditations, and maintaining records and books. It is also necessary to maintain necessary communication with investors.
Compliance With State Blue Sky Laws
Beyond the federal securities laws, issuers are required to comply with state securities laws in the particular state in which the securities are sold. The state securities laws are referred to as Blue Sky Laws. You can take advantage of the Regulation D exemption to avoid having to complete full registration in each state. However, regulators in each state do maintain authority to hold issuers accountable for any fraudulent activity carried out in their state.
It is important to have good familiarity with the Blue Sky Laws (or have legal counsel who is familiar with those laws) in the State in which you intend to sell securities. If you fail to file on time, or at all, state regulators may take enforcement action, such as requiring you to return the funds you did raise or apply sanctions that prevent you from raising funds in the future.
