Over the past couple of years, the Securities and Exchange Commission (“SEC”) has evolved how companies can raise capital, while simultaneously maintaining adequate protection for investors. For example, starting in May of 2016, companies were provided the option of raising capital through the newly created Regulation Crowdfunding, but the SEC was not finished modernizing the laws for exempt securities issuance. On October 26, 2016, the SEC finalized rules amending Regulation D, which contains exemptions from securities registration.
Many non-public companies, at all stages, rely on Regulation D for capital raises. Depending upon the unique circumstances of the company, the company may have utilized registration exemptions under rule 504, 505, or 506 of Regulation D. However, exemption under rule 505 became disfavored compared to rule 504 and 506 because of the additional, and oftentimes onerous, regulatory requirements. Recognizing this trend, the SEC finalized rules that increased the amount a company can raise under rule 504 to $5,000,000 dollars, up from $1,000,000, in a 12-month period. This means that the same amount of capital can be raised under rule 504 as was possible under rule 505, allowing the SEC to repeal rule 505.
For most companies relying on Regulation D to raise capital, the factors used before the rule change will likely continue to be the predominate factors when determining whether to use rule 504, often referred to as the “seed capital” exemption, or rule 506 exemption. For example, an entrepreneur in the first few years of business that requires additional capital to get a product, currently in research and development, to the market, will likely look to rule 504, which limits the total money raised, but is more navigable for new companies. Moving forward, as the SEC undergoes a change of leadership, starting when SEC Chairwoman Mary Jo White steps down in early 2017, these rules may continue to evolve and any company looking to utilize a Regulation D exemption should consult with legal counsel. For more information on the current changes under SEC Regulation D, please visit the following SEC website: https://www.sec.gov/news/pressrelease/2016-226.html
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