The Different Types of Regulatory Exemptions

What are the different types of regulatory exemptions people can use to raise capital?

When raising capital, entrepreneurs must generally register with the SEC, or fall under a regulatory exemption. Those who register with the SEC are the likes of public companies, such as the ones you see on the New York Stock Exchange or the Nasdaq. However, the vast majority of capital raised in the United States is actually raised privately, not publicly, and falls under a private placement exemption.

Of the $1.8 Trillion raised under Regulation D from 2009-2017, 99.9% of the capital was raised under Rule 506(b) and 506(c). There’s good reason for this–those exemptions are fairly easy to use and provide federal preemption, meaning issuers don’t have to deal too much with state laws.

The general rule of thumb when it comes to the various SEC securites regulations and rules is that the more the SEC allows you to do, the more they’re going to ask for in return.

Most issuers raise capital under Rule 506(b), which allows an unlimited raise amount and unlimited numbers of accredited investors, but limits you to up to 35 non-accredited investors. You should have a substantial, pre-existing relationship with these investors, and cannot generally solicit (or advertise). Investors can self-certify (or fill out a form) that they are accredited.

About 4% of capital raised under Regulation D is raised under Rule 506(c)–a newer exemption that became effective only in 2013 as a result of the JOBS Act. Much like Rule 506(b), this rule allows unlimited raises and unlimited numbers of accredited investors, but bars investments from an non-accredited investors. However, issuers are allowed to generally solicit (or advertise) the offering, meaning that they can announce it online through ads, social media, at meetups, through unsolicited email, via radio, etc. However, issuers must verify that their investors are, in fact, accredited (thus, no more self-certification process, as was the case in Rule 506(b)). This is a more probing investigation of the investor involving W-2s and tax documents, and a source of friction when closing an investor, so many issuers will not use a Rule 506(c) offering unless they have a well thought-out plan to take advantage of the advertising capability that Rule 506(c) offers.

The Difference Between Joint Ventures and Syndications

A joint venture and syndication may often look alike, but are governed by vastly different laws.

A joint venture primarily governed by contract law and involves a few business partners who, regardless of whether they invest in the deal or not, are all actively involved and each contribute unique skills to the overall success of the project. Unique skills may include, for example, construction management, property management, due diligence, underwriting, searching for financing, handling accounting and legal, etc. However, these must all be real significance skills. Getting a group of people together every Tuesday to drink wine and vote on the color of the paint for the building, for example, doesn’t rise to the level of a unique skill.

In a syndication, one or few people are part of the sponsor or managing team. They are responsible for the overall success of the project and they each bring a unique skill. Everyone else who contributes money but is not actively involved in the deal is considered a passive investor. Syndications are a type of securities offering.

A security, or investment contract, is defined by the Howey test, which is a four prong test. It defines an investment contract or security as:

  1. an investment of money due to
  2. an expectation of profits arising from a
  3. common enterprise which
  4. depends solely on the efforts of a promoter or third party.

In a joint venture, because all business partners are involved, they are not relying on a third party for the venture to be successful. In a syndication, passive investors rely on the sponsor or management team to realize an ROI.

This is what female founders want

This is a slightly longer explication of my medium post.

Female tech founders are definitely well aware of the conversations surrounding gender these days. And let’s not kid ourselves–tech isn’t the only industry with issues around gender discrimination, harassment, or implicit bias.

I had the opportunity to attend Jason Calacanis’ Founder University with 50 other female founders this past week (which was organized by his amazing staff, including Jacqui Deegan, and graciously hosted by Wilson Sonsini).

Towards the end of two days of intense, deep learning from industry experts, Jason brought up the fact that the topic of gender discrimination was a topic that was not discussed at all (or, at least, barely. Only one person made a slight reference to it). Jason explained that he and Jacqui debated about whether or not to bring up the topic, and ultimately decided to leave it up to attendees to bring it up:

“But you didn’t want to talk about it — you just wanted to talk about your companies.”

Continue reading “This is what female founders want”