Burn, Baby, Burn – Reg D Inferno*

A recent report issued by SEC’s Division of Economic and Risk Analysis shows that Regulation D remained “hot” as a means to raise capital – even before the recent amendments to that rule take effect. The report updates a 2012 SEC report that analyzed Form D filings from the beginning of 2009 through the first quarter of 2011. The updated report contains information through the end of 2012 and provides additional analysis.

Among the highlights of the report:

• Capital raised through Regulation D offerings continues to be sizeable – $863 billion reported in 2011 and $903 billion in 2012. By contrast, public equity offerings raised less than $250 billion in each of those years.

• Since 2009, hedge funds reported raising $1.3 trillion through Regulation D offerings. Private equity funds reported $489 billion; non‐financial issuers reported $354 billion. Foreign issuers account for 19% of the total amount sold.

• Since 1993, the number of Regulation D offerings fluctuates directly with the S&P 500, suggesting that the health of the private market is closely tied to the health of the public market (and thereby contradicting the view that the private capital markets step in during times of public market stress).

• Rule 506 accounts for 99% of amounts sold through Regulation D. More than two‐thirds of non‐fund issuers could have claimed a Rule 504 or 505 exemption based on offering size, indicating that issuers value the Blue Sky law preemption allowed under Rule 506.

• More capital was raised in Regulation D offerings in 2012 than in public equity offerings or Rule 144A offerings; public debt offerings raised slightly more capital than Regulation D, but, as the authors noted, public debt offerings include many refinancings of existing debt, while approximately two-thirds of Regulation D offerings represent new equity capital.

• There have been more than 40,000 Regulation D offerings by non‐financial issuers since 2009 with a median offer size of less than $2 million.

• Form D filings report that more than 234,000 investors participated in Regulation D offerings in 2012, of which 91,000 participated in offerings by non‐financial issuers, more than double the number of investors participating in hedge fund offerings.

• Nonaccredited investors were present in only 10% of Regulation D offerings (suggesting that the recent amendments permitting general solicitations, provided that there are no sales to nonaccredited investors, should have little adverse effect).

• Only 13% of Regulation D offerings since 2009 reported using a broker‐dealer or finder, which usage may decline after general solicitation becomes permissible.

• Nearly 10% of all SEC reporting companies raised capital through Regulation D offerings during the period 2009-1011, and about 6% in 2012.

The authors noted that the actual amount of capital raised through Regulation D offerings may be higher than reported because there is no requirement to file a final From D showing the total raised and, further, some issuers do not file a Form D at all.

The bottom line is that the recent Regulation D amendments permitting general solicitation will likely add additional fuel to this already hot market.

* With humble apologies to The Trammps and their 1976 hit, “Disco Inferno.”

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