At Calkins Law Firm we often work with early stage and growth businesses as they raise money, search for investors, and plan to issue securities. We also find ourselves spending time explaining the logic behind a Regulation D private placement recommendation, since clients always ask, "Why?"
A private placement of securities is one that doesn't involve a public offering. So unlike an IPO that is funded by investment banks and made available for sale on the open market, private placement offerings release securities for sale to accredited investors only. Capital can be raised through the sale of equity or debt securities but these don't need to be registered with the SEC. Though many other regulatory requirements and safe harbor rules still apply.
Here's why we so often recommend opting for Regulation D offerings: They have a great deal of merit. They require full disclosure about the company that's up for offer, including any and all relevant risks. Investors are then fully informed and aware of the mechanics of the offering well before they invest. Investors can then honestly determine if they are in a position to fully understand, appreciate, and withstand the risks of a speculative and illiquid investment. There should then be no fear that they will later assert that they didn't know what they were getting involved in.
Full disclosure is the only logical choice, especially for an early stage or growth business. The one downside we see is that a full-blown private placement pursuant to Regulation D can cost a fair bit of money. Some businesses may choose to dispense with the formality and expense.
Regardless of what a company decides, we invariably recommend that businesses issuing securities follow the basic guidance and mandates of the Regulation D private placement safe harbor. This is true whether or not they choose to follow all of the other formalities. It's especially important when the accredited investors are family, friends, and other acquaintances that business owners hope to have good relations with in the future.