Hedge Fund Articles

Regulation D

According to Wikipedia, Regulation D is a regulation of the U.S. Securities and Exchange Commission and is also a term for an investment strategy, mostly associated with hedge funds, based upon that regulation. It provides a “safe harbor” from the general requirement that all offerings of securities be registered with the SEC, and also exempts certain offerings which total under $5,000,000 from the SEC’s registration requirement.228558211.jpg

Basically, Regulation D outlines the stipulations for hedge funds, since they vary greatly from traditional investment vehicles. Hedge funds are very loosely regulated and most individuals who invest in them are thought to have plenty of experience when it comes to investing. Therefore, most of Regulation D deals with who hedge funds may target, and less about the structure of hedge funds.

Rule 501 of Regulation D provides the definition “accredited investor” as any natural person who had an individual income in excess of $200,000 for each of the two most recent years or joint income with that person’s spouse in excess of $300,000 for each of those years and has a reasonable expectation of reaching the same income level in the current year.

Rule 502 of Regulation D contains the general conditions that must be met to take advantage of the exemptions under Regulation D. This rule prohibits any form of a general solicitation or general advertising. Hedge funds cannot be made available to the general public, so hedge fund managers do not have the luxury of mass marketing their product. Rather, they must take advantage of the outlets they can use. This includes websites, though only accredited investors are allowed to enter the site. The general public may see the homepage, but the homepage is not allowed to list any information about the actual fund. Rather, the homepage will contain only the company logo and the login option.

Rule 503 requires issuer to file a Form D with the SEC when they make an offering under Regulation D.

Rule 504 and 505 allows the SEC to exempt issuances of under $5,000,000 from registration.

Rule 506 says that any company who meets the following criteria is exempt from registration:

  • Can raise an unlimited amount of capital
  • Does not use general solicitation or advertising to market the securities
  • Sale of securities can be to an unlimited number of accredited investors and up to 35 other purchasers. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated – that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment
  • Seller must be available to answer questions by prospective purchasers
  • Financial statement requirements as for Rule 505
  • Purchasers receive restricted securities, which may not be freely traded in the secondary market after the offering

Finally, Rule 507 penalizes the issuers who do not file the form D as required by Rule 503.

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