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Startup Financing and 506 / Form D disclosure

This topic has come up several times recently, and I'd like to get a straw-poll on the following 4 points.

-A Convertible Debt or Convertible Equity round is, even if no securities are issued, effectively an issuance of equity securities in the eyes of the SEC.  

-If you do the above (issue securities, or enter into a contract to do so), you have suddenly gone public unless you fit into one of two exemptions, namely 504 and 506.

-Even with these exemptions, if you fall into a 506 exemption you need to have *audited* financials; for 504 I believe you don't need that.

-In either case, you need to file form D.

So, if I borrow $10K from my Mom to start a company, and promise to give her $10K worth of stock if and when a valuation is set (aka convertible debt), I *probably* don't need to pay $50K for an audit, but I do have to file form D, right?

And....has anyone actually done this (filed a form D for a friends and family round)?  Why or why not?

Feel free to reply anonymously ;-)


Topic Expert
Joseph Ori
Title: CEO
Company: Paramount Capital Corporation
(CEO, Paramount Capital Corporation) |

You are correct. The Reg D exemptions from security registration are available for smaller capital raises and were limited to 500 investora and no solicitation. These rules have been relaxed by this years job act which increases investor limit to 2000 and allows advertising/solicitation.

Anyone can get a group of friends together, chip in $50000 and make an investment without Red D compliance. Reg D is primarily for capital raises in a fund or pooled format and across state lines.


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