How To Raise Capital For Your Company Without Going To Your Bank

When you hear your bank say no to routineoffering their securities to have those securities
requests for commercial financing, it is important forexempted from the registration requirements of the
small businesses to realize that you are not alone.federal securities laws. To qualify for this exemption,
Due to poor underwriting guidelines, decline in reala company:
estate values and increased unemployment, bank 
regulators are pressing banks to tighten guidelines1) Can only offer and sell up to $5 million of its
and free up capital. Banks are supposed to be in thesecurities in any 12-month period;
"risk management" business, right? 
Well, there is an alternative to raising capital for your2) May sell to an unlimited number of "accredited
business venture without going in to debt. It's calledinvestors" and up to 35 other persons who do not
Regulation D. Regulation D (Reg D)is a governmentneed to satisfy the sophistication or wealth standards
program created under the Securities Act of 1933,associated with other exemptions;
instituted in 1982, that allows companies the ability to 
raise capital though the sale of equity or debt3) Must inform purchasers that they receive
securities. The programs were designed to provide"restricted" securities, meaning that the securities
two main things - an exemption to sell securities in acannot be sold for six months or longer without
private transaction without registering the securitiesregistering them; and
and the appropriate structure and documentation for 
doing so properly. Regulations D Offerings are the4) Cannot use general solicitation or advertising to sell
practical method companies use to raise capital fromthe securities. Rule 505 allows companies to decide
individual investors.what information to give to accredited investors, so
The Regulation D Offering program is the mostlong as it does not violate the antifraud prohibitions
widely used program the SEC offers and providesof the federal securities laws. But companies must
the proper exemption needed to raise capital fromgive non-accredited investors disclosure documents
investors. Not raising capital properly can providethat generally are equivalent to those used in
investors with a "right of rescission" in the future -registered offerings. If a company provides
meaning they have the right to have theirinformation to accredited investors, it must make this
investment returned to them regardless of theinformation available to non-accredited investors as
circumstances. You could also face fines and otherwell. The company must also be available to answer
penalties resulting from an improper sale of securitiesquestions by prospective purchasers.
to investors. 
If your transaction will only involve one or twoHere are some specifics about the financial statement
investors - you will still need to provide the properrequirements applicable to this type of offering:
transaction structure, disclosure documentation and 
investment agreements necessary for raising capital.1) Financial statements need to be certified by an
Raising capital from investors in the form of equity inindependent public accountant;
your new company, of any amount requires very 
specific documentation in addition to what is already2) If a company other than a limited partnership
disclosed in your business plan. It is imperative that acannot obtain audited financial statements without
company seeking capital from investors have in placeunreasonable effort or expense, only the company's
a Private Placement Memorandum and a Subscriptionbalance sheet (to be dated within 120 days of the
Agreement. Raising capital without these documentsstart of the offering) must be audited; and
is nearly impossible - they are a necessity. 
Offerings exempt under Regulation D rules 504,5053) Limited partnerships unable to obtain required
and 506 have become the most common cost andfinancial statements without unreasonable effort or
time saving methods for small and growingexpense may furnish audited financial statements
businesses to raise capital from private investors.prepared under the federal income tax laws.
Rule 504 
 While companies using the Rule 505 exemption do
Rule 504 of Regulation D provides an exemptionnot have to register their securities and usually do
from the registration requirements of the federalnot have to file reports with the SEC, they must file
securities laws for some companies when they offerwhat is known as a "Form D" after they first sell
and sell up to $1,000,000 of their securities in anytheir securities. Form D is a brief notice that includes
12-month period.the names and addresses of the company's owners
 and stock promoters, but contains little other
A company can use this exemption so long as it isinformation about the company.
not a blank check company and does not have to file 
reports under the Securities Exchange Act of 1934.Rule 506
Also, the exemption generally does not allow 
companies to solicit or advertise their securities toRule 506 of Regulation D is considered a "safe
the public, and purchasers receive "restricted"harbor" for the private offering exemption of Section
securities, meaning that they may not sell the4(2) of the Securities Act. Companies using the Rule
securities without registration or an applicable506 exemption can raise an unlimited amount of
exemption.money. A company can be assured it is within the
 Section 4(2) exemption by satisfying the following
Rule 504 does allow companies to sell securities thatstandards:
are not restricted, if one of the following 
circumstances is met:1) The company cannot use general solicitation or
 advertising to market the securities;
1) The company registers the offering exclusively in 
one or more states that require a publicly filed2) The company may sell its securities to an unlimited
registration statement and delivery of a substantivenumber of "accredited investors" and up to 35 other
disclosure document to investors;purchases. Unlike Rule 505, all non-accredited
 investors, either alone or with a purchaser
2) A company registers and sells the offering in arepresentative, must be sophisticated that is, they
state that requires registration and disclosure deliverymust have sufficient knowledge and experience in
and also sells in a state without those requirements,financial and business matters to make them capable
so long as the company delivers the disclosureof evaluating the merits and risks of the prospective
documents required by the state where theinvestment;
company registered the offering to all purchasers 
(including those in the state that has no such3) Companies must decide what information to give
requirements); orto accredited investors, so long as it does not violate
 the antifraud prohibitions of the federal securities
3) The company sells exclusively according to statelaws. But companies must give non-accredited
law exemptions that permit general solicitation andinvestors disclosure documents that are generally the
advertising, so long as the company sells only tosame as those used in registered offerings. If a
"accredited investors."company provides information to accredited
 investors, it must make this information available to
Even if a company makes a private sale where therenon-accredited investors as well;
are no specific disclosure delivery requirements, a 
company should take care to provide sufficient4) The company must be available to answer
information to investors to avoid violating thequestions by prospective purchasers;
antifraud provisions of the securities laws. This means 
that any information a company provides to5) Financial statement requirements are the same as
investors must be free from false or misleadingfor Rule 505; and
statements. Similarly, a company should not exclude 
any information if the omission makes what is6) Purchasers receive "restricted" securities, meaning
provided to investors false or misleading.that the securities cannot be sold for at least a year
 without registering them.
While companies using the Rule 504 exemption do 
not have to register their securities and usually doWhile companies using the Rule 506 exemption do
not have to file reports with the SEC, they must filenot have to register their securities and usually do
what is known as a "Form D" after they first sellnot have to file reports with the SEC, they must file
their securities. Form D is a brief notice that includeswhat is known as a "Form D" after they first sell
the names and addresses of the company's ownerstheir securities. Form D is a brief notice that includes
and stock promoters, but contains little otherthe names and addresses of the company's owners
information about the company.and stock promoters, but contains little other
 information about the company.
Rule 505So, next time your bank says no, remember there is
 another cost effective option to raise capital for your
Rule 505 of Regulation D allows some companiesbusiness venture – it's called Reg D.