capital raising in the u.s.-an analysis of unregistered offerings using the regulation d exemption...

7/28/2019 Capital Raising in the U.S.-an Analysis of Unregistered Offerings Using the Regulation D Exemption (2009-2012)

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CapitalRaisingintheU.S.:AnAnalysisofUnregisteredOfferingsUsingtheRegulationDExemption,20092012

1

Anupdate

of

the

February

2012

study

2

JULY2013

VLADIMIRIVANOVANDSCOTTBAUGUESSDivisionofEconomicandRiskAnalysis(DERA)

U.S.SecuritiesandExchangeCommission

ABSTRACT

In2012,weissuedareportoncapitalraisingintheU.S.throughunregisteredofferings,using

informationextractedfromFormDfilingsreceivedbytheU.S.SecuritiesandExchange

Commissionsincethebeginningof2009throughthefirstquarterof2011.Inthisreportwe

updateouranalysisthroughtheendof2012andprovideadditionalanalysisonthetypesof

issuers,investors,andfinancialintermediariesthatparticipateinsuchofferings.Aswithour

previousreport,theresultsareintendedtoinformtheCommissionabouttheamountand

natureofcapitalraisedthroughunregisteredofferingsclaimingaRegulationDexemption,and

toprovidesomeperspectiveonthestateofcompetitionandpotentialregulatoryburdenin

capitalmarkets.Inparticular,wecomparetheamountofcapitalraisedinrelianceon

RegulationDtocapitalraisedfromregisteredandotherunregisteredofferingmethods.This

informationmaybeparticularlyusefulinassessingthepotentialneedforcurrentorfuture

rulemakingactivity.ThisanalysisisnotintendedtoinformtheCommissionaboutcompliance

withorenforcementoffederalsecuritieslaws.

1ThisstudywaspreparedforCraigLewis,DirectorofDERAandChiefEconomist,andisafollowuptoa2012study

byasimilarname.ThedocumentwasreviewedbyGeraldLaporteandKarenWiedemann,DivisionofCorporation

Finance.ResearchassistanceprovidedforbyRossGoetz.TheU.S.SecuritiesandExchangeCommission,asa

matterofpolicy,disclaimsresponsibilityforanyprivatepublicationorstatementofanyofitsemployees.The

viewsexpressedhereinarethoseoftheauthorsanddonotnecessarilyreflecttheviewsoftheCommissionorof

theauthorscolleaguesonthestaffoftheCommission.2Seehttp://www.sec.gov/info/smallbus/acsec/acsec103111_analysisregdoffering.pdf


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SUMMARYOFMAINFINDINGS CapitalraisedthroughRegulationDofferingscontinuestobelarge$863billion

reportedin2011and$903billionin2012.

Since2009,hedgefundsreportedraising$1.3trillionthroughRegulationDofferings.Private

equity

funds

reported

$489

billion;

non

financial

issuers

3

reported

$354

billion.

Foreignissuersaccountfor19%ofthetotalamountsold.

Since1993,thenumberofRegulationDofferingsishighly,positivelycorrelatedwithmarketperformance,suggestingthatthehealthoftheprivatemarketiscloselytiedto

thehealthofthepublicmarket.

BecausethereisnoFormDclosingfilingrequirement,theamountofcapitalraisedthroughRegulationDofferingsmaybeconsiderablylargerthantheamountsdisclosed.

Only63%ofcapitalsoughtsince2009isreportedassoldwithin15daysofthefirstsale.

Rule506accountsfor99%ofamountssoldthroughRegulationD.MorethantwothirdsofnonfundissuerscouldhaveclaimedaRule504or505exemptionbasedonoffering

size,indicatingthatissuersvaluetheBlueSkylawpreemptionallowedunderRule506.

ConsistentwiththeoriginalintentofRegulationDtotargetthecapitalformationneedsofsmallbusiness,therehavebeenmorethan40,000issuancesbynonfinancialissuers

since2009withamedianoffersizeoflessthan$2million.

FormDfilingsreportthatmorethan234,000investorsparticipatedinRegulationDofferingsin2012,ofwhich91,000participatedinofferingsbynonfinancialissuers,

morethandoublethenumberofinvestorsparticipatinginhedgefundofferings.Non

accreditedinvestors

were

present

in

only

10%

of

Regulation

D

offerings.

Only13%ofRegulationDofferingssince2009reportusingafinancialintermediary(brokerdealerorfinder).Therealestateissuersuseintermediariesthemost(27%of

offerings),whilehedgefundsusethemtheleast(6%ofofferings).

Whenanintermediaryisused,commissionsorfeesare6%oftheoffering,onaverage,forofferingsunder$1million.Theratemonotonicallydeclinestolessthan2%for

offeringsgreaterthan$50million.

3AllissuersthatarenotpooledinvestmentfundsandthatarenotinthefollowingFormDlistedindustries:

commercialbanking,Insurance,Investing,investmentbanking,andotherbanking&financialservices.


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AlthoughtheaggregateamountofcapitalraisedthroughRegulationDofferingsislarge,

theaverageofferingsizeismodest,ontheorderof$30millionineachyear.Themedian

offeringsizeissignificantlylower,around$1.5millionineachyear,indicatingalargenumberof

smallofferings,consistentwiththeoriginalregulatoryobjectivetotargetthecapitalformation

needsofsmallbusiness.7ThesummarystatisticsinTable1alsoindicatethatalargefractionof

offeringsare

amendments

to

previously

filed

offerings,

mostly

attributed

to

the

continuation

of

privatefundofferingsdiscussedinmoredetailbelow.Underscoringtheimportanceofthe

RegulationDmarketasasourceofcapitaltosmallerfirms,asignificantnumberofissuershave

reliedonthismarketoverthelastfouryears.Therewere49,740uniqueissuersofnew

RegulationDofferingsoverthefouryearsunderconsideration.Thisnumberincreasesto

56,968withtheinclusionofongoing(amended)offerings.

Whiletheseestimatesdonotreflecttheactualamountsold,weestimateinFigure1an

upperboundforissuersreportingonFormDbasedontheirreportedtotalofferingamount,

whichfornonfundissuersrepresenttheamountofcapitalsoughtatthetimeofthefiling.This

isthe

statistic

used

in

the

OIG

reports

and

the

only

statistic

available

on

non

electronic

Form

D

filingspriorto2008.8Thestatisticislessrelevantforfundissuersthatseekanindefinite

amountofcapital.

Figure1.Totalamountsofferedandsoldbynonfunds

7TheCommissionstatedintheRegulationDadoptingreleasethatanimportantpurposeoftheFormDfiling

requirementwastocollectempiricaldatawhichwillprovideabasisforfurtheractionbytheCommissioneitherin

termsofamendingexistingrulesandregulationsorproposingnewones. Further,theproposedFormwouldallow

theCommissiontoelicitinformationnecessaryinassessingtheeffectivenessofRegulationDasacapitalraising

deviceforsmallbusinesses.ReleaseNo.336389(Mar.8,1982)[47FR11251](adoptingFormDasareplacement

forForms4(6),146,240and242).8See ElectronicFilingandRevisionofFormD,ReleaseNo.338891(Feb.6,2008)[73FR10592].

0

50

100

150

200

250

300

350

400

2009 2010 2011 2012

Amountsoldbynonfunds Amountofferedbynonfunds


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Figure1reportstheamountsoldfornonfunds,andtheadditionalamountsoughtbutnot

soldatthetimeoftheoriginalfiling.Weexcludeneworiginalfilingsthatindicatezeroamounts

soldatthetimeofthefilinganddonotsubsequentlyreportanyamountsold.Fortheyears

2009through2012,63%ofthetotalcapitalsoughtbynonfundswasreportedassold.

However,becauseofferingsmaynotbefullysubscribed,thetotalofferingamountisbest

viewedas

an

upper

bound

of

total

capital

raised

among

those

issuers

that

report

on

Form

D.

a. CyclicalityFigure2presentsamorecomprehensivetimeseriesofRegulationDofferingactivity

basedonthenumberofofferingsbycalendaryearstartingin1993.Thesenumberscorrespond

toallnew(nonamended)FormDfilingsontheEDGARfilingsystem.Whilethesenumbersdo

notindicatetheaggregateamountraisedthroughtheseofferings,Table1suggeststhat

offeringsizesoverthemostrecentfouryearsarefairlyconstant,suggestingthatyeartoyear

changesinthenumberofofferingsarelikelytoalsotrackchangesintheamountssold.

Figure2.NumberofRegulationDofferings,19932012

Thetrendshowsthat2009wasanabnormallylowyear,consistentwiththeonsetofthe

financialcrisis.

More

broadly,

there

is

a

strong,

positive

correlation

with

the

economic

condition

ofthepublicmarket.Inparticular,thelevelofRegulationDofferingactivitycloselyfollowsthe

leveloftheS&P500index.TherewerepeaksinthenumberofRegulationDofferingsin2000

and2007,consistentwithheightenedstockmarketvaluations.Hence,privateofferingsinthe

RegulationDmarketareprocyclical,suggestingthatthehealthoftheprivatecapitalmarketis

closelytiedtothatofthepubliccapitalmarket.Thisresultisinconsistentwiththeviewthat

privatecapitalmarketsstepinduringtimesofpublicmarketstress.

0

200

400

600

800

1,000

1,200

1,400

1,600

0

5,000

10,000

15,000

20,000

25,000

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

NewRegDofferings S&P500


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b. PrevalenceofRule506MostRegulationDofferingsareissuedunderRule506,94%since2009(Figure3),which

providesasafeharborfortheprivateofferingexemptionunderSection4(a)(2)oftheSecurities

Act,andisoneofthreeexemptiverulesforlimitedandprivateofferingsunderRegulationD.

Rule506offeringsaccountformorethan99%ofthereportedcapitalraisedthroughRegulation

Dofferings

since

2009.

The

current

Rule

506

permits

sales

of

an

unlimited

dollar

amount

of

securitiestobemade,withoutregistration,toanunlimitednumberofaccreditedinvestorsand

upto35nonaccreditedinvestors,solongasthereisnogeneralsolicitation,appropriateresale

limitationsareimposed,anyapplicableinformationrequirementsaresatisfiedandtheother

conditionsoftherulearemet.9

Inaddition,securitiesissuedunderRule506areconsidered

coveredsecuritiesunderSection18oftheSecuritiesAct,thusexemptfromBlueSkylaw

registration.Incontrast,alternativeprivateofferingexemptionsRules504and505offerings

arelimitedto$1millionand$5millionrespectively,andaresubjecttostateBlueSky

registrationlaws.10

WhileRule505limitstheparticipationofnonaccreditedinvestorsto35per

offering,Rule

504

allows

for

unlimited

number

of

non

accredited

investors.

Lastly,

issuers

relyingonRule504may,undercertaincircumstances,usegeneralsolicitationandalsosell

unrestrictedsecurities.

Figure3.FractionofofferingsandamountraisedbyRegulationDExemption,20092012

Table2showsthatRule506isthedominantofferingmethodevenamongthoseofferings

eligibleforRules504and505.Almost50%ofallRule506offeringsbynonfundssince2009

werefor$1millionorlessandthereforemayhavequalifiedfortheRule504exemptionbased

onoffering

size,

but

issuers

elected

to

claim

the

Rule

506

exemption.

An

additional

20%

of

offeringswereforbetween$1millionand$5millionandthereforecouldhaveclaimedaRule

505exemptionbasedonofferingsize.ThisevidencesuggeststhattheBlueSkylawpreemption

featureuniquetoRule506offeringshasgreatervaluetoissuersthantheuniquefeaturesof

Rule504orRule505offerings. WiththeadoptionofrulesunderTitleIIoftheJOBSActthat

9SeeSECReleaseNo.339211,page4andfootnote8.

10Seediscussionofrules504,505,and506orRegulationDathttp://www.sec.gov/answers/regd.htm

0.3%

1.4%

4.0%

94.2%

0.7%

0.1%

0.0%

99.2%

Missing

Rule505

Rule504*

Rule506

AmountRaised

NumberofOfferings


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removethebanongeneralsolicitationandallowissuerstogenerallysolicitandadvertiseto

everyoneinRule506offeringssoldonlytoaccreditedinvestors,therewillbeevengreater

incentiveforissuerstouseRule506.

Table2.Numberofofferingsbynonfundissuers,bysizeandexemptionclaimed,20092012*Offeringsize

$50

million

Rule504 1,997

Rule505 705 229

Rule506 19,424 11,957 8,103 1,268

*Considersonlynewofferingsandexcludesofferingswithamountsoldreportedas$0onFormD.

c. SizerelativetoregisteredofferingsInourpriorreport,wereportthatthetotalcapitalraisedannuallythroughRegulationD

offeringsislargewhencomparedtoothercommonsourcesofcapital,including:

Publicdebtandequity(registered)offerings11 Rule144A(resaleofunregisteredsecurities)12 RegulationS(offshorecomponentof144Aofferings)13 OtherSection4(a)(2)privateofferings14

Figure4illustratesthattheamountofcapitalraisedthroughRegulationDofferings

remainslargerelativetootherprivateofferingexemptionsandiscomparable,butlarger,than

theamountofcapitalraisedunderRule144A15

.Registeredofferings(debtandequity

combined)accountformorecapitalformationthattheRegulationDmarketalone,butnot

whenall

private

offering

methods

are

combined.

In

2012,

registered

offerings

accounted

for

$1.2trillionofnewcapitalcomparedto$1.7trillionraisedthroughallprivateofferingchannels.

Moreover,forthereasonsdescribedearlier,theamountraisedthroughprivateofferingsis

likelyunderstatedduetoourinabilityobserveallprivatecapitalactivity.

11DataforregistereddebtandequityofferingsfromThomsonFinancialsSDCPlatinum.

12DataonnonABSRule144AofferingscollectedfromThomsonFinancialSDCnewIssuesdatabaseandthe

Mergentdatabase.DataonABSRule144AofferingsarecollectedfromtheAssetBackedAlertandCommercial

MortgageAlertpublications.13

DataforRegulationSofferingscollectedfromThomsonFinancialsSDCPlatinumservice.

14Data

collected

from

Thomson

Financials

SDC

Platinum,

which

uses

information

from

underwriters,

issuer

websites,andissuerSECfilingstocompileitsPrivateIssuesdatabase.TheseincludeofferingsunderSection4(a)(2)

oftheSecuritiesActthatdonotclaimaRegulationDorRegSexemptionandthatarewithoutafollowonRule

144Asale.ThesenumbersareaccurateonlytotheextentthatSDCisabletocollectsuchinformation,andmay

understateactualtheamountofcapitalraisedunderSection4(a)(2)ifissuersandunderwritersdonotmakethis

dataavailable.15

ByitstermsRule144Aisavailablesolelyforresaletransactions. However,marketparticipantsuseittofacilitate

capitalraisingbyissuersbymeansofatwostepprocess,inwhichthefirststepisaprimaryofferingonanexempt

basistooneormorefinancialintermediaries,andthesecondstepisaresaletoqualifiedinstitutionalbuyersin

relianceonRule144A.


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Figure4.Aggregatecapitalraisedin20092012byofferingmethod($billions)

Table2showsthatRegulationDofferingsoccurwithfargreaterfrequencythananyother

offeringmethodsurveyed.Nootherofferingmethodhasbeenusedevenatenthasmuch

duringthesameperiod,indicatingthattheaccumulationofcapitalraisedthroughRegulationD

occursbywayofmuchsmallerofferingdenominationsthanothermethods,andisfurther

evidenceofitbeingaprimarytoolforsmallerentities.

Table2.NumberofofferingsbytypeofofferingandyearYear RegulationD Publicequity Publicdebt Rule144A RegS

Other

4(a)(2)

2009 20,841 942 1,445 1,240 294 648

2010 29,445 1,072 1,930 1,607 262 668

2011 30,710 863 1,465 1,148 97 863

2012 31,471 954 1,473 1,302 13 518

TheimportanceoftheRegulationDmarketismagnifiedwhenconsideringthat

approximatelytwothirdsofRegDofferingsrepresentnewequitycapital(Figure5),whichisa

morepermanentsourceofcapitalthandebt,andthusmorelikelytoreflectnewinvestmentas

opposedtotherefinancingofexistinginvestment.Putdifferently,totheextentthatdebt

offeringsare

attributed

to

the

rolling

over

of

existing

debt

due

to

an

expiring

term

or

refinancingduetoachangeininterestrateenvironment,suchtransactionsdonotreflectthe

financingofnewinvestment.16

Inaddition,alargerfractionofnonfinancialissuersrelyonReg

DforraisingcapitalcomparedtotheRule144Amarket,wherethevastmajorityofissuersare

financialinstitutionsandover99%ofsecuritiesaredebtsecurities.

16ItispossiblethatequityissuancesinRegulationDofferingsreflectdeleveragingconversionofdebttoequity,

whichmaynotreflectnewinvestment.

0

250

500

750

1,000

1,250

Publicdebt Publicequity RegD Rule144A RegS+Sec4(a)(2)

2009 2010 2011 2012


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Figure5.NumberandpercentofRegDofferingsbytypeofsecurityissued17

Combined,the

evidence

from

Form

D

filings

suggests

an

active

and

vibrant

market

for

privateofferingscomparedtoregisteredofferings,andisinconsistentwiththeviewthatthere

aresignificantfrictionsinthecapitalraisingprocessthatpreventissuersfromfunding

investmentthroughprivateofferingchannels.18

Moreover,theestimatedamountofcapital

raisedthroughRegulationDofferingsineachyearsince2009issimilarinmagnitudetothe

estimatedamountofcapitalraisedin2000priortostartoftheSarbanesOxleyregulatory

environment($960billion19

).Inthisrespect,andgiventhepaceofRegulationDofferingsfrom

2009until2012,thereisnoevidencethattheRegulationDofferingmarkethasshrunkoverthis

period.

II. RegulationDmarketparticipantsa. IssuersofsecuritiesunderRegulationD

ThelargestissuersintheRegulationDbyamountsoldmarketarepooledinvestment

funds,classifiedintheFormDfilingsashedgefunds,venturecapitalfunds,privateequity

funds,andotherpooledinvestmentfunds.Thepredominantentitiesamongotherpooled

investmentfundsareregisteredinvestmentcompaniesandcommoditypools.20

Sincethe

inceptionof

the

electronic

Form

D

filings,

beginning

in

2009,

pooled

investment

funds

have

17Thereare83,855issuesreferenced,whichisgreaterthanthetotal67,688newissuesinTable1.Thisisdueto

multiplesecuritieslistedinthesamefiling.18

Seee.g.,JosephMclaughlin,HowtheSECStiflesInvestmentandSpeech,WallStreetJournal,February3,2011.19

Seefootnote4anddiscussioninSectionI.20

Registeredinvestmentcompaniesareentitiessuchasmutualfundsthatissuesecuritiestoinvestors,holdpools

ofsecuritiesandotherassetsandareregisteredwiththeCommissionundertheInvestmentCompanyAct.

Commoditypoolsareinvestmenttrusts,syndicates,orsimilarenterprisesthatareoperatedforthepurposeof

tradingcommodityfutures.

8.4%

12.9%

13.3%

23.5%

65.8%

5,672

8,749

9,012

15,897

44,525

SecuritytobeAcquiredUponExerciseof

OptionorWarrant

Debt

Option,WarrantorOtherRightto

AcquireAnotherSecurity

PooledInvestmentFundInterests

Equity


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accounted$2.8trillionofnewcapitalraisedthroughRegulationDofferingsandreportedon

FormD(Figure6a),comparedto$623billionraisedbynonfunds.Hedgefundsarethelargest

fundissuer,accountingfor$1.26trillionofnewcapital,ofwhich$386billionwasraisedin2012

(Table3).Nonfinancialissuers,typicallyprivatecompanies,raised$354billionduringthefour

yearperiod,ofwhich$91billionwasraisedin2012.Financialservices,includingbankingand

insurance,accounted

for

$180

billion

raised

during

the

four

year

period.

Figure6a.Aggregatecapitalraised(amountsold)duringtheperiod20092012byissuertype($billions)

Althoughnonfinancialissuersraisedsubstantiallylessthanfundissuersinaggregate,

theyaccountforthemajority(60%)ofallnewofferingsandFormDfilings(Figure6b).

Consistentwiththis,themedianofferingsizefornonfinancialissuersissubstantiallylower

thanthe

median

offering

size

for

hedge

funds.

In

2012,

the

median

amount

sold

by

non

financialissuerswas$1.6millioncomparedto$100millionforhedgefunds,and$50millionfor

privateequityfunds(Table3).Thedifferencesinmeanofferingsizeareevenlarger.The

amountssoldbynonfundissuersaresubstantiallysmallerthanwhattheysoughttoraisein

2012(about49%),whichsuggeststhateithertheamountsreportedinFormDfilings

understatethefullamountofcapitalraisedinthemarket,ortheofferingsaregenerally

undersubscribed.

Almost99%ofthecapitalraisedunderRegulationDin2012($898billion)wasbyissuers

relyingontheRule506exemption,ofwhichpooledinvestmentfundsandnonfinancialissuers

accountfor$725billionand$173billionrespectively. Thisrepresentsasignificantincreasefor

nonfinancialissuerscomparedto2011whentheyreportedraisingonly$71billionunderRule

506.Inthesameyear,pooledinvestmentfundsraisedapproximately$778billion.

$56

$64

$180

$354

$489

$986

$1,257

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400

VentureCapitalFunds

RealEstate

FinancialServices

NonfinancialIssuers

PrivateEquityFunds

OtherInvestmentFunds

HedgeFunds


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12

Figure6b.Numberofinitial(new)offeringsduringtheperiod20092012byissuertype

Table3.

Amounts

sought

and

sold

through

Regulation

D

in

calendar

year

2012

by

issuer

type*

Number

of

offerings

Amount

sold

($Billions)

Amount

sold

Rule506

($Billions)

Amount

sought

($Billions)

Mean

offersize

($Millions)

Median

offersize

($Millions)

HedgeFunds 1,952 386 385 N/A 359 100

PrivateEquityFunds 1,083 159 159 N/A 307 50

VentureCapitalFunds 365 19 19 N/A 89 15

OtherInvestmentFunds 1,055 165 163 N/A 198 20

FinancialServices 1,069 63 63 165 62 4

RealEstate 1,900 20 20 48 15 2.3

Nonfinancial

Issuers

10,763

91

91

136

9

1.6

*Numberofofferingsincludesonlyinitial(new)FormDfilings;amountsoldincludescapitalraisedand

identifiedthroughbothnewandamendedFormDfilings;meanandmedianoffersizearebasedon

amountsoldreportedininitial(new)FormDfilingsonly.

Amongnonfundissuers,thelargestindustrygroupbydollaramountsoldisBanking,

followedbyTechnology,HealthCare,RealEstate,andEnergy(Figure7). However,issuersfrom

theTechnologyindustrygrouparethemostactive,making24%ofallreportedofferings.A

largefractionofofferings(22%)donotspecifyanindustryonFormD.Issuerrevenueranges

reportedinFigure8showthatissuersofprivateofferingstendtobesmall.Althougha

significantnumberofissuersdeclinetodisclosetheirrevenues(55%),forthosethatdo,most

haverevenuesoflessthan$1million. Only1.4%ofallnewofferingsarebyissuersthatreport

morethan$100millioninrevenues.21

Bywayofcomparison,50%ofSECreportingcompanies

withpubliclytradedequityreportrevenuesofgreaterthan$100millionattheendof2011

21FormDalsocontainsinformationonnetassetvalue(NAV)ofhedgefundsandotherinvestmentfunds.Since

2009,morethanthreequartersofissuershavedeclinedtodiscloseNAV,butofthosethatdo,atrendsimilarto

revenueisreportedthelargestsetofissuersisinthesmallestNAVcategories.

1,056

3,483

3,800

4,791

5,617

8,009

40,950

0 10,000 20,000 30,000 40,000 50,000

VentureCapitalFunds

PrivateEquityFunds

OtherInvestmentFunds

FinancialServices

RealEstate

HedgeFunds

NonfinancialIssuers


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13

fiscalyear22,evidencethatissuersseekingcapitalthroughRegulationDofferingsare

significantlysmallerthantheaveragepubliclytradedcompany.

Figure7.Mostactivenonfundissuersbyamountsold(2009 2012)

22CalculatedbasedonanDERAanalysisof6,760SECregistrantsinwhohadaclassofequitysecuritywitha

reportedmarketpricereportedbyStandardandPoorsCompustatdatabaseattheendoffiscalyear2011.

0.6%

1.3%

1.8%

0.6%

1.9%

3.3%

9.7%

14.2%

10.9%

24.2%

22.1%

9.3%

0.2%

0.4%

0.8%

1.0%

2.2%

4.7%

11.1%

11.2%

11.2%

14.0%

18.3%

24.9%

Travel

Restaurants

Businessservices

Agriculture

Retailing

Manufacturing

Energy

Healthcare

Realestate

Technology

Other

Banking

AmountRaised No.ofOffers


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14

Figure8.Distributionofnonfundissuersbyreportedrevenue(20092012)

IssuersthatfileperiodicreportswiththeCommissionundertheSecuritiesExchangeAct

of1934oftenconductprivateofferings.Figure9reportsthenumberofofferingsconductedby

nonfundissuers(leftaxis),andthefractionofthoseofferingsconductedbySECreporting

companies23or

by

issuers

that

subsequently

initiate

reporting

with

the

Commission

by

filing

an

S1registration(rightaxis).Overthefouryearanalysisperiod,13%ofRegulationDnonfund

offeringswerebySECreportingcompanies.Inaddition,about2.5%ofnonfundofferingswere

byissuersthatsubsequentlyregisteredanofferingwiththeCommissiononFormS1.Forthese

issuers,aRegulationDofferingwasaprecursortogoingpublic.

Figure9.OfferingsbynonfundRegulationDissuers,andthefractionthataremadebySECreportingcompaniesorissuersthatsubsequentlyregisteranofferingwiththeCommission

23WeidentifiedreportingcompaniesasthosethatfiledonForms10K,20F,or40Fduringtheanalysisperiod.

17.3%

12.3%

4.9%

3.4%1.6%

1.4%

55.4%

3.7%

NoRevenues

$1 $1mil

$1mil $5mil

$5mil $25mil$25

mil

$100

mil

Over$100mil

DeclinetoDisclose

Notapplicable

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2009 2010 2011 2012

OfferingsbynonfundRegDfilers Offeringsby10K/20F/40Ffilers

OfferingsbyfutureS1filers


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15

b. InvestorsinRegulationDofferingsRegulationDallowsbothaccreditedandnonaccreditedinvestorstoparticipateinprivate

offerings,withthenumberofnonaccreditedinvestorslimitedtomaximumof35forRule505

andRule506offerings.24

BasedoninformationcollectedfromFormDfilings,mostparticipants

areaccredited.Forexample,in2012,only10%ofnewofferingsincludenonaccredited

investors(Table

4).

Offerings

by

financial

issuers

and

REITs

are

more

likely

to

have

non

accreditedinvestors(14%ofofferingshaveatleastonesuchinvestor),whileofferingsbyVC

fundsonlyrarelyincludenonaccreditedinvestors(0.6%ofofferingshaveatleastonesuch

investor).AlthoughRule506allowsfortheparticipationofnonaccreditedinvestors,theyonly

participatedin11%oftheRule506offeringsconductedbetween2009and2012.Only8%of

theofferingsbyfundissuersincludednonaccreditedinvestors,comparedto12%ofthe

offeringsbynonfundissuers.

AggregatedFormDinformationalsorevealsmorethan234,000investorsparticipatingin

RegulationDofferingsin2012,ofwhichmorethan90,000participatedinofferingsbynon

financialissuers,triplethenumberofinvestorsthatparticipatedinofferingsbyhedgefunds.

However,becauseaninvestorcanparticipateinmorethanoneRegulationDoffering,this

aggregationlikelyoverstatestheactualnumberofuniqueinvestorsintheprivateoffering

market,andwehavenomethodofestimatingtheeffect.Themeannumberofinvestorsper

offering(13)issignificantlylargerthanthemedian(4),indicatingthepresenceofasmall

numberofverylargeofferings.OfferingsbypooledinvestmentfundsandREITshavethe

largestaveragenumberofinvestors(bothaccreditedandnonaccredited)peroffering,while

thosebynonfinancialissuershavethesmallest.

Table4.InvestorsparticipatinginRegulationDofferingsin2012Totalnumber

ofinvestors

Mean

investorsper

offering

Median

investorsper

offering

Fractionof

offeringswith

atleastone

nonaccredited

investor

HedgeFunds 29,646 15 3 7%

PrivateEquityFunds 19,374 18 5 5%

VentureCapitalFunds 5,275 15 3 0.6%

OtherInvestmentFunds 26,893 26 5 7%

FinancialServices

15,591

15

5

14%

RealEstate 47,135 25 7 14%

NonfinancialIssuers 90,758 8 4 10%

Total 234,672 13 4 10%

24InofferingsunderthenewRule506(c)thatpermitstheuseofgeneralsolicitation,onlyaccreditedinvestorswill

beeligibletopurchasesecurities.


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16

III. TheRoleofFinancialIntermediariesintheRegulationDmarketWhilefinancialintermediariescommonlyunderwritepublicofferings,thereisrelatively

littleinformationaboutintermediaryparticipationinprivateofferings.Onepossibleroleforan

intermediaryinaprivateofferingistohelpissuerslocatepotentialinvestorswithoutviolating

thebanongeneralsolicitation,aconstraintofcurrentRule506offerings.Usingapreexisting

andsubstantive

relationship

between

the

intermediary

and

potential

investors

is

one

method

fortheissuertoensurerulecomplianceandpreservetheRule506safeharbor.

InformationcollectedfromFormDfilingsrevealsthatintermediariesareusedrelatively

infrequentlyintheRegulationDmarket.Only13%ofallnewofferingssince2009usean

intermediarysuchasafinderorbrokerdealer(Figure10).Approximately11%ofnewofferings

reportsalescommissionsgreaterthanzero,whileapproximately3%reportfinderfeesgreater

thanzero.Issuersfromtherealestateindustryarethebiggestusersofintermediaries(27%of

allofferings)whilehedgefundsuseintermediariestheleast(6%ofallofferings).Nonfinancial

issuersrelyonintermediariesin12%ofofferings.Whenanintermediaryisused,mostclasses

ofissuersusebetweentwoandfourintermediaries,althoughVCsthatuseintermediaries

typicallyengageabout11intermediariesperoffering.

Figure10.UseoffinancialintermediariesbytypeofRegulationDissuer,20092012

Whenabrokerorfinderisused,thereissignificantvariationincommissionsorfees

acrosseachclassofissuer.InformationfromFormDfilingsrevealsthatcommissionsandfinder

feesaresmallestforpooledinvestmentfundsandlargestfornonfinancialissuers.Non

financialissuerspayonaverageabout6%commissioninRegulationDofferings.For

0%

5%

10%

15%

20%

25%

30%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

HedgeFund Private

EquityFund

Venture

CapitalFund

Other

Investment

Fund

Financial

Services

RealEstate Nonfinancial

%

ofofferingswithinte

rmediaries

Commissionorfeesasa

%

ofamount

sold

Brokercommissions Finderfee %0fferingswithIntermediaries


17/22

17

comparison,acompanygoingpublicpaysanaveragegrossspreadof7%toitsIPO

underwriters25

,whileapubliccompanyraisingequitythroughafollowon(seasoned)equity

offeringpaysagrossspreadofabout5.4%.26

Issuersraisingcapitalthroughregisteredbond

issuespaycommissionsbetween0.9%and1.5%ofthesizeoftheoffering.27

Incontrast,hedge

fundsraisingcapitalthroughRegulationDofferingspayonaverage0.4%commission.Brokers

andfinders

are

no

more

costly,

on

average,

than

the

underwriting

fees

charged

for

public

offerings,sofeesdonotprovideanobviousreasonfortheirrelativelyinfrequentusein

unregisteredofferings.

Figure11reportstheuseoffinancialintermediariesandfeesfordifferentofferingsizes,

irrespectiveofissuertype.Theuseofabrokerorfinderincreaseswithofferingsize;they

participatein13%ofofferingsforupto$1millionand18%ofofferingsformorethan$50

million.Moreover,commissionsandfinderfeesdecreasewithofferingsize.Unlikethegross

spreadsinregisteredofferings,thedifferencesincommissionsforRegulationDofferingsof

differentsizesarelarge:theaveragecommissionpaidbyissuersdoingofferingsofupto$1

million(6.5%)

is

almost

three

times

larger

than

of

the

average

commission

paid

by

issuers

doing

offeringsofmorethan$50million.Theseresultsareconsistentwithlargerdealsgenerating

scaleeconomiesfortheinvolvedintermediaries.Evenso,thevastmajorityoftheofferingsare

conductedwithouttheuseofafinancialintermediary.Figure11.Useoffinancialintermediariesbysizeofoffering

25SeeHsuanChiChenandJayRitter,TheSevenPercentSolution,JournalofFinance55,11051131(2000).

26SeeShaneCorwin,TheDeterminantsofUnderpricingforSeasonedEquityOffers,JournalofFinance58,2249

2279(2000).27

SeeL.Fang,InvestmentBankReputationandthePriceandQualityofUnderwritingServices,JournalofFinance60,27292761(2005).

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

0$1million $1million $5

million

$5million $10

million

$10million $50

million

Greaterthan$50

million

%

ofofferingswithinterm

ediaries

Commissionorfeesas

a%

of

amountsold

Brokercommissions Finder

fee %

0fferings

with

Intermediaries


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18

IV. StatisticsoncapitalraisedbyforeignanddomesticissuersOvertheperiodfrom2009to2012,foreignissuersaccountforapproximately19%ofall

capitalraisedbyRegulationDofferings,althoughthisfractionvariesovertime(Figure12).

Participationwaslowestin2011andhighestin2009(theheightofthefinancialcrisis).By

comparison,foreignissuersaccountfor49%ofcapitalraisedviaRule144Aofferings,35%of

capitalraised

through

public

debt

offerings,

and

only

13%

of

capital

raised

through

public

equityofferings.

Figure12.PercentofcapitalraisedinU.S.bydomesticandforeignissuersbyofferingmethod

Whenaggregatedacrosstypesofofferings,U.S.issuersraisedmorethantwiceasmuch

capitalasforeignissuersineachcalendaryearsince2009(Figure13).Duringthatperiod,the

amountofcapitalraisedbyforeignissuersdecreased23%,from$875billionto$674billion,

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012

RegulationD

Domestic(B) Foreign(B)

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012

Rule144A

Domestic Foreign

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012

PublicEquity

Domestic Foreign

0%

20%

40%

60%

80%

100%

2009 2010 2011 2012

PublicDebt

Domestic Foreign


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19

whiletheamountofcapitalraisedbydomesticissuersincreased5%,from$1.79trillionto

$1.87trillion.

Figure13.AggregatecapitalraisedintheU.S.bydomesticandforeignissuers($billions)

V. RegulationDofferingsbypubliccompaniesRegulationDofferingsareavailabletoanypotentialissuerwithoutregardtoitsSEC

reportingstatus.AmongissuersinRegulationDofferings,reportingcompaniesareunique

becausethey

have

previously

registered

securities

with

the

Commission

and

are

able

to

access

bothpublicandprivatecapitalmarkets.Therearemanyreasonswhyapublicfirmwouldselect

aRegulationDoffering(e.g.,loweroverallissuancecost,confidentialityissues,speedof

issuance,shelfregistrationineligibility,temporarylackofaccesstopubliccapitalmarkets).The

analysisbelowprovidescontextontheextenttowhichthisoccurs.Table7reportsthefraction

ofpubliccompaniesraisecapitalviathismarket,howmuchtheyraise,andhowlargethe

capitalraisedthroughRegulationDofferingsiscomparedtotheirpublicofferings.28

Nearly10%ofallSECreportingcompaniesraisedcapitalthroughRegulationDofferings

duringtheperiod2009to2011,andabout6%in2012.Reportingcompaniesaccountfor2%of

thetotalamountsoldthroughRegulationDofferings,onaverage,althoughthisvaries

significantlybyyear.Forcomparison,nonfundissuersthatarenotSECreportingcompanies

accountonaveragefor19%ofthetotalamountofcapitalraisedthroughRegulationDofferings

duringtheperiod2009to2012.Asagroup,reportingcompaniesthatmadeRegulationD

28WeusedlistingsintheStandardandPoorsCompustatandtheUniversityofChicagosCenterforResearchin

SecuritiesPrices(CRSP)databasestodeterminepubliccompanies,althoughitispossiblethatsmallerpublic

companiesarenotreportedbythesedataaggregationserviceproviders.

0

250

500

750

1000

1250

1500

1750

2000

2250

2009 2010 2011 2012

Domestic Foreign


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20

offeringsalsoraised,onaverage,$19billionannuallyviapublicofferingsand$12billion

annuallyviaRule144Aofferings.Thesizeoftheprivateofferings(RegulationDandRule144A)

bythesefirmsislargerthantheirpublicofferingsinthreeofthefouryearsunder

consideration,showingacontinuedpreferenceforprivatecapitalmarkets.

Table7.CapitalraisedbypubliccompaniesthatissueRegulationDofferings($billions)

Year

Numberoffirms

(%oftotalpublicfirms)

Meansize

of

RegulationDissues

(%oftotal)

Meansize

of

publicissues

(%oftotal)

Meansize

of

144Aissues

(%oftotal)

2009

533

(9.3%)

$26.8

(4.6%)

$28.2

(2.2%)

$19.0

(6.5%)

2010

542

(9.7%)

$6.6

(0.7%)

$24.2

(2.1%)

$23.3

(5.4%)

2011

542

(9.7%)

$4.9

(1.5%)

$13.5

(3.8%)

$6.0

(7.8%)

2012

481

(6.2%)

$25.5

(2.8%)

$10.8

(0.9%)

$0.4

(0.2%)


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21

AppendixThisappendixdescribestheproceduresusedtocollecttheRegulationDsampleandthe

dataontheotherofferings.OneoftheoriginalpurposesofFormD,firstadoptedin1982,was

tocollectandanalyzedataonissuersusingRegulationD.29

However,until2008,issuersfiled

Form

D

on

paper,

making

the

extraction

of

information

for

large

scale

statistical

analysis

problematic. InFebruary2008,theSECadoptedamendmentstoFormDthatrequiredissuers

tosubmittheirFormDfilingselectronically,inastructureddataformat.30

Asaresultofthese

requirements,whichwerephasedinfromSeptember2008throughMarch2009,FormDfilings

arenowmachinereadable.Usingbasictextparsingtools,DERAstaffwasabletoextractthe

reportedelementsandplacetheminadatabaseenablingthelargescalestatisticalanalysis

reportedhere.

A. RegulationDsampleThemethodsusedforextractingFormDinformationhavebeenmodifiedsinceour

originalreport

in

2012.

As

before,

we

collected

all

Form

D

filings

(new

filings

and

amendments)

onEDGARstartinginJanuary2009,andextendedthesamplethroughDecember2012.We

extractedallfieldsfromeachfilingandappliedthefollowingtreatmentstoarriveatourfinal

sample.

Subsequentamendmentstoanewfilingaretreatedasincrementalfundraisingandrecordedinthecalendaryearinwhichtheamendmentisfiled.Ifanissuerfiledonly

FormDamendments,andthosereferenceapost2008saledate,thefirstfiled

amendmentistreatedasanoriginalFormDfiling.

Theincrementalamountsoldbetweentwosuccessivefilingsofthesameissuerisdetermined

by

taking

the

difference

between

the

total

amount

sold

reported

in

eachsuchfiling.

Weestimatetheincrementalamountofcapitalraisedandreportedinamendedfilingsforwhichthereisnooriginalfilinginelectronicform.Thisoccursonlyin2009.

Theestimatedincrementalcapitalraisedintheseinstancesisbasedonahaircut

ofthetotalamountsoldreportedinthelatestfiledamendment.Thispercentageis

theaverageincrementalamountsoldinallamendmentsforwhichthereisan

originalfilinginelectronicform,calculatedseparatelyforfundsandnonfunds.This

resultedinhaircutpercentagesof11%and27%,respectively.Thistreatmentis

unnecessaryfor

offerings

starting

in

2010.

ForeignissuersaredeterminedbasedontheinformationonIssuerStatethattheyprovide.

29ReleaseNo.336389(Mar.8,1982);47Fed.Reg.11251(1982)(adoptingFormDasareplacementforForms

4(6),146,240and242).30

ReleaseNo.338891(Feb.27,2008);ElectronicFilingandRevisionofFormD,70Fed.Reg.10,592(2008)(tobe

codifiedat17C.F.R.pts.230,232&239).


22/22

22

Whenanissuercheckstheboxtoclaimmorethanoneofferingexemption(Rule504,505,or506),forthepurposeofthisanalysis,weassumethatanyissuerthat

checkstheboxforRule506isinfactrelyingonRule506.

B. Otherofferings DataonIPOs,equityofferingsbyseasonedissuers(EOSIs),convertibledebt

offerings,publicdebtofferings,andprivateofferingsaretakenfromSecuritiesData

CorporationsNewIssuesdatabase(ThomsonFinancial).DataonnonABSRule144A

offeringsaretakenfromSecuritiesDataCorporationsNewIssuesdatabaseand

Mergentdatabase.

DataonABSRule144AofferingsaretakenfromtheAssetBackedAlertandCommercialMortgageAlertpublications.WeusenonU.S.collateralbackeddealsto

proxyfordealsdonebyforeignissuers.

Publicdebtofferingsbygovernment,state,municipal,andquasigovernmentalissuers

(e.g.,

Fannie

Mae,

Freddie

Mac)

are

excluded

from

the

public

debt

sample.

C. Correctionsfromthelastreporta. WeobtainedadditionalnonABSRule144AdatafromMergent,whichallowed

ustobetterestimatethesizeofthatmarket.

b. Inthepreviousreport,welinkednewfilingsandsubsequentamendmentsbythesameissuerbyfirstsaledate,whichresultedinerrorsforofferingsthatdidnot

reportfirstsaledateorwhenthereweremultipleissuesonthesamedate.In

thisversion,welinkednewfilingsandtheircorrespondingamendmentsby

accessionnumber,

a

unique

identifier

that

allows

a

more

accurate

matching

of

newofferingsandamendments,andaccountsforthedifferentannualestimates

fromthepreviousreport.

capital raising in the u.s.-an analysis of unregistered offerings using the regulation d exemption...

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