faq

General Information

What is an "equity" offering?

An equity offering is where the subject company sells an ownership stake in the company or project to investors. Equity is usually preferred by early stage companies that need flexibility regarding capitalization. 

In an equity situation investors profit as the company profits since they are partial owners. In some cases, for example an LLC raising capital for real estate acquisitions, there may be a Preferred Return distribution made first to investors prior to sharing proportionally in additional operating income with management and founders. Most operating companies sell 5%-30% of their company for a first round funding – obviously there are exceptions but this tends to be the average range.

What is a "debt" offering?

A debt offering functions much like a private business loan where the company sells a promissory note to investors. The note sets forth the terms and conditions of the loan arrangement between the company and the investor. Thus, a note would provide a certain interest rate typically paid annually to investors with a maturity date that dictates when the principal is paid back in full to investors.

The downside to a debt offering is;

  • (a) you have a balance sheet capitalized with debt which may limit options for leveraging external funding and;
  • (b) you have default risk should you fail to make an interest payment or fail to repay funds at maturity.

Notes can be convertible into equity within the company which provides investors the security of a Note but the capability to participate in equity ownership at a later date.

Why do many Companies fail at raising private capital?

One primary reason for failure is significant: the company did not provide investors with the fundamental capability to execute the investment transaction.

Many companies do not execute a proper private placement securities offering in conjunction with their capital raise – instead relying on a business plan or executive summary to serve as the basis for investment. This is not only unprofessional, but it doesn’t provide the basis for accommodating investment from individual investors properly, effectively, or in compliance with State and Federal rules.

A substantial number of companies severely restrict their capital raising activities by simply using a business plan to solicit investors. While a business plan may disclose certain information about the company’s current or planned business activities it in no way provides the capability to accommodate actual capital investment. Further, any capital raised would most likely be in violation of certain State or Federal rules regarding the investment transaction.

Investor Portals

What type of Investor Raise Portals are built by the Red Rock Securities Law affiliated technology company Red Rock Investor Technology Inc.?

Red Rock Investor Technology can build and deploy an Investor Raise Portal to administer a Regulation D, Regulation CF or Regulation A+ offerings. The Regulation CF and Regulation A+ investor portals use third party integrations with transfer agent and, in some cases, broker dealer systems as an SEC transfer agent is required on a Reg CF or Reg A+ offering.

If we already have an offering prepared - can we just use your Investor Raise Portal Build Services?

Yes – prospective customers interested in only an Investor Raise Portal Build can contract with red Rock Investor Technology for a build directly.

Regulation D

What is the difference between a Regulation D 506(b) and a Regulation D 506(c) offering?

Regulation D 506(c) offering summary:
  • Advertising and general solicitation of investors is allowed
  • Participating investors must be “accredited” investors per the Regulation D Rule 501 definitions and provide suitable verification
  • No maximum offering amount limitation
  • Require a SEC Form D notice filing and State notice filings
Regulation D 506(b) offering summary:
  • 506(b) allows up to 35 non-accredited investors every 90 days and allows an unlimited number of accredited investors
  • There is no third party verification for accredited investors
  • General advertising and solicitation of the offering is not allowed
  • Identical SEC filing process with the 506(c) offering.

Are audited financials required for a Regulation D offering?

No – audited financials are not required.

Is a transfer agent required for a Regulation D offering?

No – a transfer agent is not required for a Regulation D offering although some companies may still opt to use a transfer agent to manage the cap table.

What are the re-sale restrictions on Regulation D issued securities?

Regulation D issued securities are Rule 144 restricted. In general, this means the securities need to be held for one year prior to resale to a third party.

What SEC filings need to be made for 506(c) and 506(b) offerings?

A Form D is required to be filed with the SEC.  Minimally there are two filings, at the start and at the conclusion of the offering, but updates can be filed between those two time frames.  The Form D must be filed no later than 15 days after the first subscription is accepted.

What is the definition of an accredited investor?

  • a bank, savings and loan association, insurance company, registered investment company, business development company, or small business investment company or rural business investment company
  • an SEC-registered broker-dealer, SEC- or state-registered investment adviser, or exempt reporting adviser
  • a plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5 million
  • an employee benefit plan (within the meaning of the Employee Retirement Income Security Act) if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million
  • a tax exempt charitable organization, corporation, limited liability corporation, or partnership with assets in excess of $5 million
  • a director, executive officer, or general partner of the company selling the securities, or any director, executive officer, or general partner of a general partner of that company
  • an enterprise in which all the equity owners are accredited investors
  • an individual with a net worth or joint net worth with a spouse or spousal equivalent of at least $1 million, not including the value of his or her primary residence
  • an individual with income exceeding $200,000 in each of the two most recent calendar years or joint income with a spouse or spousal equivalent exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year or
  • a trust with assets exceeding $5 million, not formed only to acquire the securities offered, and whose purchases are directed by a person who meets the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment
  • an entity of a type not otherwise qualifying as accredited that own investments in excess of $5 million
  • an individual holding in good standing any of the general securities representative license (Series 7), the investment adviser representative license (Series 65), or the private securities offerings representative license (Series 82)
  • a knowledgeable employee, as defined in rule 3c-5(a)(4) under the Investment Company Act, of the issuer of securities where that issuer is a 3(c)(1) or 3(c)(7) private fund or
  • a family office and its family clients if the family office has assets under management in excess of $5 million and whose prospective investments are directed by a person who has such knowledge and experience in financial and business matters that such family office is capable of evaluating the merits and risks of the prospective investment

What is an accredited investor verification?

Investors in the offering will need to provide the Company with verification that meets the standards and form using one or multiple methods as listed below:

Income: The Company may verify an individual’s status as an accredited investor on the basis of income by reviewing copies of any IRS form that reports net income, such as Forms W-2 or 1099 (which are typically filed by an employer or other third party payor), or Forms 1040 filed by the prospective purchaser (with non-relevant information permitted to be redacted). Under this method, the Company must review IRS forms for the two most recent years and obtain a written representation from the prospective purchaser that he or she has a reasonable expectation of attaining the necessary income level for the current year. Where accredited investor status is based on joint income with the person’s spouse, the IRS forms and representation must be provided with respect to both the purchaser and the spouse.

Net Worth: Under this method, the Company will need to review bank or brokerage statements or third-party appraisal reports to verify the purchaser’s assets and a credit report to verify liabilities, in each case dated within the prior three months, and will need to obtain a written representation from the prospective purchaser that all liabilities have been disclosed. Where accredited investor status is based on joint net worth with the person’s spouse, the asset and liability documentation and representation must be provided with respect to both the purchaser and the spouse.

Reliance on Determination by Specified Third Parties to Provide Verification: The Company may satisfy the verification requirement if it obtains a written confirmation from a registered broker-dealer (who the investor has had an account with longer than 6 months), an SEC-registered investment adviser, a licensed attorney, or a certified public accountant that within the prior three months such person or entity has taken reasonable steps to verify that the purchaser is an accredited investor and has determined that the purchaser is an accredited investor. Third party services, such as verifyinvestor.com (managed by an attorney) are also qualified third party providers of verifications.

Proper verification must be submitted with the subscription for securities in order for the Company to verify the investor’s suitability for investment and accept the subscription.

Accredited Investor Qualifications:
Any natural person whose individual net worth, or joint net worth with that person’s spouse, exceeds $1,000,000.

  • (i) Except as provided in paragraph (a)(5)(ii) of this section, for purposes of calculating net worth under this paragraph (a)(5):
    • (A) The person’s primary residence shall not be included as an asset;
    • (B) Indebtedness that is secured by the person’s primary residence, up to the estimated fair market value of the primary residence at the time of the sale of securities, shall not be included as a liability (except that if the amount of such indebtedness outstanding at the time of sale of securities exceeds the amount outstanding 60 days before such time, other than as a result of the acquisition of the primary residence, the amount of such excess shall be included as a liability); and
    • (C) Indebtedness that is secured by the person’s primary residence in excess of the estimated fair market value of the primary residence at the time of the sale of securities shall be included as a liability;
  • (ii) Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;

Regulation CF

What is the annual amount of capital that can be raised under a Reg CF?

$5,000,000 in any 12 month period.

What is a "Direct" Reg CF and why is it different than a traditional Reg CF offering?

The original Reg CF rules required that all CF offerings executre through an SEC approved CF Platform. While there were many of these platforms that materialized, they tend to be very expensive to utilize (8-11% comissions and 2-3% equitey alonge with CF preparation and Form C filing fees).

A “Direct CF offering takes advantage of a rule change that allows approved broker dealer intermediaries to engage in administration of a Reg CF platform. This allows the CF issuer to bypass the expensive Reg CF platforms and execute “direct” using a broker dealer managed website portal for executing the securities’ sales.

The benefit of a “direct” Reg CF Offering using our services is execution fees and commissions that are 1/4 the cost of using a traditional Reg CF Platform while maintaining a fully SEC compliant sales process.

Do we need audited financials for a Reg CF?

If the offering is less that $1,235,000, then your historical financials do not need to be audited.

Offerings above $1,235,000 require historical financials to be audited by a CPA.

How much can a Non-Accredited Investor invest into a Reg CF?

If you are a non-accredited investor, then the limitation on how much you can invest into a Reg CF depends on your net worth and annual income.

If either your annual income or your net worth is less than $124,000, then during any 12-month period, you can invest up to the greater of either $2,500 or 5% of the greater of your annual income or net worth.

If both your annual income and your net worth are equal to or more than $124,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is greater, but not to exceed $124,000.

How much can an Accredited Investor invest in to a Reg CF?

An accredited investor is not limited on investment subscription amount in a Reg CF?

Can a company execute a Reg CF and subsequently execute a Reg A+ Offering?

Yes! Many companies use Reg CF to get them “on market” raising capital while they are preparing a Reg A+ offering for a larger raise.

Can a company generally advertise the Reg CF to the public and use social media to reach potential investors?

Yes! The Reg CF campaign can be announced to the public and you can use social media to gain exposure for the offering.

Are there any on-going reporting requirements with Reg CF?

Yes – a fairly simple annual update filing is required although an issuer can opt out of that filing under certain circumstances.

Regulation A+

How much can a company raise under Regulation A+?

Tier 1 – $20,000,000
Tier 2 – $75,000,000

Do we need audited financials for Regulation A+?

If you are executing under Tier 1, audited financials are not required. Audited financials are required under Tier 2. It should be noted that the cost to qualify a Reg A+ Tier 1 at the state level will quickly exceed the cost of an audit after only a handful of states. Further, certain states under the state rules you have to qualify the Tier 1 offering under will, in fact, require audited financials.

Issuers should note that for a new entity with no operational history, only the opening balance sheet would be audited, assuming a timely submission of the Form 1A from formation of the entity.

Are Reg A+ securities restricted on resale?

No – Regulation A+ securities are freely trading from sale.

What is the “Selling Shareholder” feature of Regulation A+?

Regulation A+ allows for up to 30% of the offering to constitute “selling shareholder” sales. Essentially – this allows existing shareholders to sell their shares through the Reg A+ offering at the sale price of the Reg A+ offered shares. This is a unique benefit of Regulation A+ offerings and allows existing shareholders the ability to have a liquidity event via the Reg A+ offering.

Is a broker dealer required in a Regulation A+ offering?

No – however very few Regulation A+ offerings will execute without a FINRA broker dealer of record on board to provide compliance support. It should also be noted that certain states, if you are an issuer under Reg A+ and don’t have a broker dealer on board, will consider you a broker dealer and require additional state level filing work.

Is a transfer agent required in a Regulation A+ offering?

Yes.

Are there update filings due for Regulation A+ issuers?

Yes.  In general – issuers under Reg A+ will have a semi-annual and annual update filings.  These are streamlined update filings in comparison to what a public company would be required to file.

Program Comparisson

Regulation D 506(c) Regulationd D 506(b) Regulation A Tier 1 Regulation A Tier 2 Regulation CF
Offering Size
No Limit
No Limit
$20M per 12 months
$75M per 12 months
$5M per 12 months
Public Promotion of the Offering
Accredited Investors
Non-Accredited Investors
Yes, limited to 35 every 90 days
Accreditation Requirements
Third Party Letter
Self Verification
Audited Financials
SEC Filing
Form D within 15 days of first sale
Form D within 15 days of first sale
Form 1-A inclduing 2 years of financial statements
Form 1-A inclduing 2 years of financial statements
Form C for review and qualification
Ongoing SEC Reporting
Final Form D ammendment at offering termination
Final Form D ammendment at offering termination
Exit Report
Annual, semi-annual, current and exit reports
Progress and annualreports
Domestic Investors
International Investors
Preemption of State Registration and qualification