Regulation D Private Placement

Small and midsize companies are increasingly using private placements as fund-raising vehicles, thanks to a 1982 streamlining of the rules known as Regulation D. In a private placement, stocks or bonds are sold directly to an institutional investor or a small group of institutional investors. Regulation D is specifically directed toward opening up the huge private placement market. In several ways, the regulation can help a small business raise capital through a private placement. First, Regulation D increases the amount of capital that can be raised under various categories. Under the smallest classification (Rule 504), you can raise $500,000 in 12 months versus $100,000 under the former rule.

A middle category, dubbed Rule 505, allows you to raise $5 million in 12 months compared with a previous limit of $2 million in six months. In addition, there is an un-limited category dubbed Rule 506.
Second, paperwork has been cut drastically. There are no specific disclosure requirements under Rule 504. You need to comply only with antifraud provisions. This essentially means that you must give investors an accurate picture of your company with no material omissions in your offering memorandum.

Third, under Rule 504 you can choose from an unlimited number of investors. Previous regulations placed a limit of 100 investors per offering.
Finally, to stimulate activity, Regulation D allows broker-dealers to charge a commission for helping arrange private placements. Even with the commission ruling, expenses for Regulation D offerings in the past have run from 1 percent to 5 percent. That’s well below the 13 percent commonly associated with public stock offerings.

How much help will you need for private placements? If you’re considering private placement, talk to your lawyer first. He can bring you up to date on your state’s filing requirements, which may or may not be as liberal as the SEC’s rules. If you have access to capital sources in your area, you can probably arrange your private placement without engaging the services of a broker-dealer. By all indications, a large portion of Rule 504 offerings are completed without the services of a broker.

In most cases, the offering company’s lawyer or accountant acts as an intermediary. If you’re considering raising funds in the private placement market, insurers are an excel¬lent source of capital. These companies are increasingly active in working with small businesses.
Regional insurers sometimes loan amounts as low as $250,000.
There are many potential advantages to working with insurance companies:
● Potential for lower rates. Insurers are interested primarily in long-term arrangements. Almost all speak of “relationship financing,” which refers to recurring deals between a company and the insurer over many years, rather than a one-shot deal.

Therefore, they are inclined to be less concerned with short-term interest trends than are many bankers. This means insurance firms will often grant clients more favorable terms on short- and medium-term loans if this will help them nail down long-term business.
● Flexibility. Insurance companies will arrange straight loans, equity financing or the hybrid deals (debt plus equity financing) that have become popular recently. Keep in mind, though, that all insurance companies conduct their own credit checks. Most will consider deals only if the finances of the potential customer are regarded as “investment grade” (BBB or better) by a rating service. This means that your finances must be in good shape.

➤ Observation: If there is a disadvantage to working with an insurance company, it’s finding the right fit between your company’s financing needs and the insurance company’s investment policy. Some insurers, for example, specialize in certain industries. Some require an introduction through an adviser, such as an investment banker. Every insurance company’s investment strategy is unique to some degree, so you may have to do some hunting. Yet the search can be worthwhile. Look to the major insurance companies for this type of financing, such as Nationwide, Prudential, Aetna Life and Casualty, Transamerica and Travelers.