Question

Describe and discuss how the SEC's Regulation D serves as a securities registration "safe harbor."

Answer 1

SEC Regulation D lists the exemptions available to companies offering private placement of securities, either equity or debt. Every security that is offered to the public at large must be registered. However, this registration of securities is a tedious process and requires a lot of resources. Small companies were unable to tap the capital market due to these costs. To make the life easier for smaller companies and enable them to raise money in the capital market, SEC introduced Regulation D. As per this regulation, companies offering private placement of securities, i.e. to a select group of accredited investors, need not register their securities and hence, reduce their costs of raising capital.

Some of the pre-conditions for this exemption are listed below:

1. The securities should not be offered to public

2. The investors cannot resell the securities.

3. The accredited investors must be 'sophisticated' enough who fully understand the risks involved with purchase of such securities. One thing to note here is that one of the benefits of the exemption is that company offering securities does not have to submit a detailed disclosure to the SEC. Hence, only a limited disclosure is asked from the company, SEC has insisted that only 'sophisticated' accredited investors should be allowed to buy since chances of their making a wrong investment decision due to less disclosure is limited.

This last point is the reason why Regulation D is said to provide a Safe Harbor since the exemption is only provided for those securities which cannot be directly or indirectly sold to the public.