Regulation D - Reg D

This rule lets companies sell to private investors rather than to the general public. Regulation D offerings don't need to be registered with the SEC, but they do need to toe the line in other ways. The offering can be made to any number of accredited investors, for example, but to only up to 35 unaccredited investors. Rule 144 lockup provisions may also apply to this type of offering. Or said another way...

It’s another diet regulation drink, which gets companies selling stocks or bonds out of the small forest they have to kill to print all the paperwork required by the SEC in a full rollout public offering. Regulation D is sort of the special situation common in these letter regulations… which in this case simply restricts the company issuing the securities to only sell to qualified private investors.

What is “qualified”?

Well, it generally means that those private investors are already wealthy: net worth of n millions of dollars; they have continuing income well into the hundreds of thousands of dollars per year. They're educated…yes, broadly defined, and it doesn’t just mean they’ve taken a $14 Shmoop course. And most importantly, they will have signed a big boy or big girl letter, which states that if this risky offering goes completely bust, then...no tears. Or lawsuits.

In a Reg D filing, there is usually an allocation for sales beyond the above accredited private investors and some amount of the stock can be sold to non-accredited investors. And in current Reg D land, that number is limited to 35.

So why would the SEC allow a highly risky private investment be made to a meaningful number of non-accredited investors - people who might be non-millionaires, uneducated, or unsophisticated in the wiles of the financial jungle? Because in many early-stage startup companies, the founder has a few dozen family members who are all anxious to find the next Amazon and even though they are a plumber and a carpenter and a cook, they have 5 grand of savings with which they want to buy a lottery ticket.

So the SEC makes accommodation for this investment in Reg D, and oh by the way, this actually happened when Jeff Bezos founded and started Amazon. So dreams really do come true...