If you believe what you read, you might come to associate Regulation D private placements with bad deals, ponzi schemes, scam artists, and unscrupulous securities brokers pushing bad investment products on innocent people. The headlines often include a reference to Reg. D as if it was somehow an accessory to the fraud and misfortune that has resulted in the loss of billions of dollars in recent years. But don’t let those headlines fool you. Regulation D continues to play a vital role in our economy by offering small businesses a mechanism to efficiently raise capital without having to invest a year or more of effort and hundreds of thousands of dollars in transaction costs to register a public offering with the SEC. Regulation D had as much to do with those well-publicized investment scams and independent broker-dealer failures as El Nino. Once the credit markets and investor confidence normalize, the Reg. D private placement market will recover and prove once again to be a driving force in the alternative investment and small business capital markets.
The Real Estate Investment Securities Association will soon release a final version of a Best Practices Guide for Regulation D offerings, and there is even some talk at the SEC of lifting the ban on general solicitation and advertising in Regulation D offerings, which has long been a murky area of law, little understood by business owners and despised by marketing and business development officers.
So don’t be scared by the bad press into believing there is something inherently wrong with Reg. D private placements. From a legal perspective, the Reg. D exemptions (especially Rule 506) are alive and well and just waiting to be used by entrepreneurs, real estate syndicators, private equity funds, and the small business community to raise capital.