SEC Regulation D: Private Placements and Capital Raising for Turkish Investors

SEC Regulation D is the most widely used framework for private capital raising in the United States. It provides exemptions from the SEC's registration requirements, allowing companies to raise capital from private investors without the time and expense of a public offering.

For Turkish investors, Regulation D is relevant in two ways:

1. As investors: Turkish investors who invest in U.S. startups, private equity funds, real estate syndications, and other private offerings are investing in Regulation D offerings
2. As issuers: Turkish-owned U.S. companies that want to raise capital from private investors can use Regulation D to structure their offerings

The Securities Act of 1933 requires that any offer or sale of securities be registered with the SEC unless an exemption is available. Registration is expensive and time-consuming — it requires audited financial statements, a detailed prospectus, and ongoing SEC reporting obligations.

Regulation D provides three key exemptions from the registration requirement:

• Rule 504: Allows offerings of up to $10 million in a 12-month period to any investors (not limited to accredited investors)
• Rule 506(b): Allows unlimited offerings to accredited investors and up to 35 non-accredited sophisticated investors; no general solicitation permitted
• Rule 506(c): Allows unlimited offerings to accredited investors only; general solicitation permitted if all purchasers are verified accredited investors

Rule 506(b) and 506(c) are by far the most commonly used exemptions for larger capital raises.

The SEC's definition of accredited investor includes:

Individuals:

• Net worth exceeding $1 million (excluding primary residence), individually or jointly with spouse
• Annual income exceeding $200,000 (or $300,000 jointly with spouse) in each of the prior 2 years, with reasonable expectation of the same in the current year
• Holders of certain professional certifications (Series 7, Series 65, Series 82 licenses)
• "Knowledgeable employees" of private funds

Entities:

• Banks, broker-dealers, insurance companies, registered investment companies
• Entities with total assets exceeding $5 million
• Entities in which all equity owners are accredited investors

Under Rule 506(c) (which permits general solicitation), issuers must take reasonable steps to verify that all purchasers are accredited investors. Acceptable verification methods include:

• Reviewing tax returns, W-2s, or other income documentation
• Reviewing bank statements, brokerage statements, or other asset documentation
• Obtaining a written confirmation from a registered broker-dealer, investment adviser, attorney, or CPA

Under Rule 506(b) (no general solicitation), issuers can rely on self-certification by investors (though they should maintain records).

Turkish investors who meet the accredited investor criteria — regardless of their citizenship or residency status — can invest in Regulation D offerings. The accredited investor definition applies to the investor's financial status, not their nationality.

Issuers that rely on Regulation D must file a Form D with the SEC within 15 days of the first sale of securities in the offering. Form D is a brief notice that includes:

• Basic information about the issuer
• The Regulation D exemption being claimed
• The amount of securities offered and sold
• The number of investors

Form D is publicly available on the SEC's EDGAR database.

Unlike registered public offerings, Regulation D offerings are not subject to SEC review. Turkish investors must conduct their own due diligence, including:

• Reviewing the offering memorandum (private placement memorandum or PPM)
• Reviewing the issuer's financial statements
• Assessing the management team's track record
• Understanding the investment structure and exit strategy
• Reviewing the subscription agreement and investor rights

Regulation D investments are typically illiquid — there is no public market for the securities, and investors may not be able to sell their interests for years. Turkish investors should only invest in Regulation D offerings with capital they can afford to have illiquid for an extended period.

Because Regulation D offerings are not reviewed by the SEC, they are a common vehicle for investment fraud. Turkish investors should be cautious of:

• Offerings that promise unusually high returns
• Issuers that pressure investors to invest quickly
• Offerings that lack clear documentation
• Issuers that cannot provide audited financial statements

Turkish investors in Regulation D offerings must consider:

• U.S. withholding tax: Dividends and interest paid to foreign investors are subject to U.S. withholding tax (30% or lower treaty rate)
• FIRPTA: If the Regulation D offering involves U.S. real property interests, FIRPTA withholding may apply on exit
• Turkey-U.S. Tax Treaty: The Treaty may reduce withholding taxes on certain types of income

Turkish-owned U.S. companies that want to raise capital from private investors can use Regulation D to structure their offerings.

• Rule 506(b): Best for companies raising capital from a small number of known investors (family, friends, angel investors). No general solicitation, but up to 35 non-accredited sophisticated investors are permitted.
• Rule 506(c): Best for companies that want to broadly market their offering (through websites, social media, or broker-dealers). All investors must be verified accredited investors.

A Regulation D offering typically includes:

• Private Placement Memorandum (PPM): A detailed disclosure document describing the company, the offering, the risks, and the use of proceeds
• Subscription Agreement: The agreement between the issuer and investor
• Operating Agreement or Shareholders Agreement: Governing the rights of investors

In addition to federal Regulation D, issuers must comply with state securities laws ("blue sky laws") in each state where they offer or sell securities. Most states have exemptions that parallel the federal Regulation D exemptions, but the specific requirements vary by state.

1. Verify your accredited investor status: Before investing in a Regulation D offering, confirm that you meet the accredited investor criteria.

2. Conduct thorough due diligence: Do not rely on the issuer's representations alone. Review all offering documents carefully and engage independent advisors.

3. Understand the liquidity profile: Regulation D investments are typically illiquid. Understand when and how you can exit the investment.

4. Consider tax implications: Engage U.S. tax counsel to understand the U.S. tax implications of your investment, including withholding taxes and FIRPTA.

1. Engage securities counsel before offering: Regulation D compliance requires careful structuring. Engage U.S. securities counsel before making any offers.

2. Prepare a comprehensive PPM: A well-prepared PPM reduces the risk of investor claims and demonstrates professionalism.

3. File Form D on time: File Form D within 15 days of the first sale. Late filing is a common compliance failure.

4. Comply with state blue sky laws: Identify all states where you will offer securities and ensure compliance with applicable state laws.

SEC Regulation D is the foundation of private capital markets in the United States. For Turkish investors, understanding Regulation D is essential for evaluating private investment opportunities. For Turkish-owned U.S. companies, Regulation D provides a flexible framework for raising capital without the burden of SEC registration.

ULF New York advises Turkish investors and issuers on Regulation D compliance, private placement structuring, securities law, and cross-border investment transactions. Contact us to discuss your capital raising or investment needs.

This article is for informational purposes only and does not constitute legal or investment advice. Securities law is complex and subject to change; consult qualified securities counsel for advice specific to your situation.