Considering that one of the main reasons for raising funds through a Regulation D offering is lowering the risk of exposure to liability while still maintaining your control, it’s important to make sure you don’t lose out on the protection through small but common mistakes. Even if you have a PPM (Private Placement Memorandum) you may still fail to comply with Reg D, which will mean you won’t be protected by the “safe harbor” provided by Reg D. There are a few tips that will help you to ensure that you get the most out of Reg D, and will help you to avoid the more common errors.
The top priority is to make sure you have a securities attorney and accountant on board from from the beginning. Trying to comply with the complicated regulations and statutes on your own is a sure-fire way to end up losing out through costly errors. There are two main reasons for retaining counsel in this venture: 1. Raising funds in full compliance with Reg D will dramatically reduce your exposure, and give you greater protection. Failing to comply in any way, will leave you open to liability unnecessarily. 2. Not retaining counsel is likely to discourage investors who may otherwise have been interested in working with you.
Make sure you use a PPM. A business plan is not enough to satisfy the Reg D requirements in a Regulation D offering. The main difference between a business plan and a PPM, and the reason a business plan is not sufficient for this purpose is: A business plan is generally written in a sales-oriented style, whereas a PPM is focused more on disclosure, and therefore more comprehensive and aimed at investors. If you do use some of the information from your business plan within the PPM, you’ll probably need to rewrite it so that it is more appropriate to the language required in a PPM. A business plan usually fails to disclose the full facts and details, while a PPM is required to disclose everything. This gives potential investors peace of mind that they’re getting the full picture.
It’s important to take great care if using a finder. Using a finder can jeopardise your compliance with Reg D if you’re not very cautious. There are many complications as far as Reg D is concerned, when using consultants or advisers acting as finders. This includes the gray area between finder and broker. The challenge is that most finders are not licensed with the NASD, and if they are acting as a broker in this instance, according to the law, they need to be registered as a broker.
With a Regulation D offering, the issue of finders being so treacherous, it is best to avoid using finders where at all possible, and rather go with a licensed NASD securities broker instead. This is the safest and simplest option. If, however, you’re not able to find a broker who is interested in your deal, it’s best to consult your legal advisor before making any decisions on the subject of finders. It’s a very high risk, and it’s worth seeking legal advice in advance.