Whether you’re a company raising capital from venture capitalists, a business broker, a registered investment adviser, hedge fund, or a private equity firm raising capital from a large institution, a private placement memorandum is critical. If the fund-raising target you’re aiming at ranges from $75,000 to $15,000,000, the structure of a Reg D offering will definitely assist you. In fact, it’s almost a necessary requirement.
According to the SEC, Private Placement Memorandum And Regulation D: The ยง4(2), or private-offering, exemption is the basis on which most emerging business enterprises are able to sell securities in the United States. (The term refers to that section in the ’33 Act that contains the exemption.)
You’ve probably heard the term “Reg D” thrown around. And if you’re like me, you once knew what it was, but reality and more important things crowded out your understanding of the rule.
So to make things clear, one of the main elements of Regulation D centers on its definition of an accredited investor.
I’ve taken the most thorough definition of an accredited investor, which I got from the most extensive private placement memorandum out there: here
Each prospective investor must represent in writing that he or she is an Accredited Investor. A prospective investor will be an accredited investor only if the investor meets one of the following tests:
(1) The investor is a natural person who has a net worth or joint net worth with the investor’s spouse exceeding $1 million at the time of the investor’s purchase.
(2) The investor is a natural person who had an individual income in excess of $200,000 in each of the two most recent years and who reasonably expects an income in excess of $200,000 in the current year, or who together with their spouse had joint income in excess of $300,000 in each of the two most recent years and who reasonably expects a joint income in excess of $300,000 in the current year.
(3) The investor is a (i) bank, savings and loan association or trust company, (ii) a broker/dealer registered under the Securities Exchange Act of 1934, as amended (the “34 Act”), (iii) an insurance company, (iv) an investment company registered under the Investment Company Act of 1940, (v) a pension or profit sharing trust (other than a self-employed individual retirement plan or individual retirement account), (vi) a governmental agency, (vii) small business investment company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958, (viii) a business development company as defined in Section 2(a)(48) of the Investment Company Act of 1940 or (ix) a private business development company as defined in Section 202(a)(22) of the Investment Advisors Act of 1940.
(4) The investor is an officer of the Partnership or occupies a position with the Partnership substantially similar to those of an executive officer of a corporation.
(5) The investor is a relative, spouse or relative of a spouse of any other purchaser who has the same principal residence as such other purchaser or any corporation, trust or estate in which any purchaser owns more than 50% of the equity or beneficial interest.
(6) The investor is a trust with total assets in excess of $5,000,000 not formed for the specific purpose of acquiring the Interests.
(7) The investor is a tax-exempt organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the “Code”), and has assets of not less than $5,000,000 as of its most recent audited financial statements.
(8) The investor is a corporation, partnership, trust or other entity and each and every equity owner of such entity certifies that the investor meets the qualifications set forth in (1) through (7) above.
As used herein, the term “net worth” means the excess of total assets at fair market value, including home and personal property, over total liabilities including mortgages and income taxes on unrealized appreciation of assets. In determining income, “individual income” means adjusted gross income as reported for federal income tax purposes, less any income attributable to a spouse or to property owned by a spouse, increased by the following amounts (but not including any amounts attributable to a spouse or to property owned by a spouse): (i) the amount of any interest income received which is tax-exempt under Section 103 of the Code; (ii) the amount of losses claimed as a limited partner in a limited partnership (as reported on Schedule E of Form 1040); (iii) any deduction claimed for depletion under section 611 et seq. of the Code; and (iv) any amount by which income from long-term capital gains has been reduced in arriving at adjusted gross income pursuant to the provisions of Section 1202 of the Code.
In addition to meeting these standards pertaining to the economic ability of the proposed investor to undertake the risks inherent in the purchase of Interests, each prospective investor will also be required to represent in writing, among other things, that such investor has either (i) a preexisting business or personal relationship with the executive officers or directors of the Partnership, or (ii) such knowledge and experience in financial and business matters that such investor is capable of evaluating the merits and risks of an investment in the Interests and of making an informed investment decision, or has retained an attorney, accountant, or other financial or business advisor who is able, on behalf of the investor, to evaluate the merits and risks of such an investment and to make an informed investment decision with respect thereto. Additionally, each investor will also be required to represent that the Interests are being acquired for his or her own account solely for investment and not for distribution.
You can learn more about venture capital focused private placement memorandums here
