SEC Warns Investors About the Risks of Reg D

This past week, the Securities and Exchange Commission (SEC), staff of the Office of Investor Education and Advocacy, posted a warning about private placements under Reg D, including 506c and 506b, as well as Rule 504.

Reg D is an exemption that is widely utilized by private companies raising capital, incorporating a single filing that has been lauded for its effectiveness. The filed document is a single sheet submitted to the SEC outlining basic information about the firm and its principles and the money they aim to raise, without any funding cap. While typically available only to more sophisticated investors, the SEC worries that investors may succumb to fraudulent offerings raising capital under the exemption.

According to the post:

“… Fraudsters may use unregistered offerings to conduct investment scams.  See our Investor Alert about red flags to watch out for in an unregistered offering.  It may be difficult or impossible to recover the money you invest in an offering that turns out to be fraudulent.”


“Private and public companies, including everything from small start-ups to large, well-established companies, engage in private placements to raise funds from investors.  Hedge funds and other private funds also engage in private placements.  Private placements are an important way in which companies raise capital to grow, fund and expand their business.  Accordingly, these offerings play an important role in capital formation.”

The warning mentions both Reg CF and Reg A+ as other private exemptions with different requirements and disclosure needs.

Beyond fraud and other risks, including failure, the SEC notes that private offerings typically are illiquid and thus more difficult to sell, unlike public offerings.

While there are intrinsic risks to any investment, Reg D offerings provide capital to a highly important sector of the economy as most all promising early-stage firms utilize the exemption. It is a well-trodden path for the innovation economy.  The market is sizable, too – around $1 trillion annually  – larger than the IPO market in the US.

The current Commission has selected Reg D offerings, including the definition of an accredited investor, as a top regulatory item. The Commission is considering recommending amendments to Regulation D, including changes to the definition of an accredited investor, as well as Form D – ostensibly to improve protections for investors.

The Investor Alert on Reg D is viewable here.

The current SEC regulatory agenda is viewable here.

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