Start-up businesses seeking to raise capital through a private placement offering are frequently perplexed as to which approach will best address SEC regulations governing investor offerings. Many times, Issuers' legal counsel will present them with options that include SEC Regulation D (Reg D) and/or Regulation S (Reg S). For those looking for a primer on the difference between Reg S and Reg D, here is an easy-to-understand explanation that distills the difference between Reg S and Reg D.

In most cases, an American corporation that wishes to sell securities to investors must first register them with the Securities and Exchange Commission (SEC). Companies may, however, be exempt from registration in certain circumstances under certain regulations. Regulation D (Reg D) is one such regulation, which allows a company to issue securities without registering them with the SEC as long as the company meets all of the requirements of the regulation. One important aspect of Reg D is that the offering must be private, which means that the issued securities cannot be sold to the general public. As a result, no advertising or marketing of debt or equity securities is permitted. This aspect of the regulation is covered by Rule 506(b), a subset of Regulation D. Individuals approached as prospective investors may be citizens of any country, both within and outside the United States. However, the method of approach cannot be made public in any way, and there can be no domestic or international advertising.

Surprisingly, another aspect of Regulation D contradicts Rule 506(b) by allowing the issuer of the securities to publicly solicit and advertise. The issuer may publicize their securities through television, radio, the internet, print, and in-person under this rule. This Reg D route is known as Rule 506 (c). Again, the targeted investors may be citizens of any country; however, when the issuer is publicly soliciting them, the issuer must ensure that the majority of their audience is comprised of accredited investors.

There must be verification before any investor subscribes to an issuer of a private placement offering. This means that the company must take steps to ensure that all prospective investors are "accredited" before selling securities to them. If the company fails to conduct this verification, it will be in violation of Regulation D via Rule 506 (c). If this is not done correctly, it will lead to future complications with the SEC because this problem cannot be solved later. Before any securities are sold, they must be verified.

To summarize, Regulation D Rule 506(c) is beneficial to issuers of a private placement offering in that it allows issuers to publicly inform prospective investors about their securities; however, it also requires the process of timely, thorough verification of all investors. The issuer is not required to conduct verifications on their own for this process. There are independent accredited investor verification services that perform these evaluations while adhering to all aspects of Rule 506 at the same time (c). Interestingly, Rule 506(c) is a new addition to Regulation D, and it is because of this that most issuers of private securities prefer to use Rule 506(b), which prohibits them from making public advertisements.

Regulation S is similar to Regulation D in that it exempts private securities from registration with the SEC. The main distinction is that Regulation S is only applicable to offerings aimed solely at international investors. The status of “international investor” is determined more by geography than by citizenship. For example, if an investor is physically based in the United States, even if they are not a citizen of the country, they are considered a domestic investor. Sales are only permitted to non-US residents under Regulation S. To support this main tenet of the regulation, the second requirement states that no advertising solicitation can take place within the United States.

In many cases, securities law firms will structure offerings in such a way that Issuers can claim Reg S and Reg D exemptions for all potential investors who are located outside of the United States. This is done to ensure that if one exemption does not work out, there is a backup plan. If, for example, there is no exemption to fall back on, the Issuer may face a situation in which they conducted an offering that was neither exempt nor registered, resulting in significant complications.

When pursuing these two exemption strategies, one must exercise extreme caution to avoid certain complications. For example, if Rule 506(c) is used under Regulation D (the newer avenue that allows public advertising), it is important to remember that public advertising in the United States is prohibited under Regulation S. So, if you use the two-exemption strategy, you can choose Rule 506(c), but you can't publicly advertise because of Reg S.

In this day and age of technology and easily accessible information, it can be extremely difficult to advertise a private placement offering publicly outside of the United States without individuals within the United States discovering it. Although it is difficult, it is still possible. Unfortunately, if this advertising is not done carefully and individuals in the United States gain access to it, a Regulation S private placement offering may be lost. If this occurs, the private placement offering under Rule 506(c) must be carefully followed. If not, there is a risk of losing both offering exemptions, which would leave the offering unregistered and un-exempt, causing many complications and exposing the offering to SEC enforcement. Securities issuers who claim both the Regulation S and D exemptions are primarily interested in investors outside the United States. If the issuers also want to approach potential investors in the US, they can conduct a companion offering to sell the same securities while only claiming Regulation D exemption, because Regulation S cannot be used for individuals in the US by definition.