In installments, we are going to publish our analysis of the market for Reg D securities. This first installment reports summary statistics based on our review of all Form D reports filed with the SEC from January 1, 2009 through July 31, 2022. We present the number, dollar amount raised and other characteristics of the securities offered under Reg D in aggregate and broken out by issuer's industry and year of sale.
Future installments will (1) report summary statistics for broker-sold Reg D securities, (2) document the connection between Reg D sales and customer complaints, and (3) illustrate specific examples of potentially problematic offerings.
A PDF of the full report is available to download and print by clicking here.
Securities issuers can either register their securities with the Securities and Exchange Commission, making extensive information about their business and the offering publicly available, or they can sell unregistered securities making almost no information available to regulators. Issuers of unregistered securities file Form D reports with the SEC on which the issuers provide cursory information and claim an exemption from registration requirements under either Rule 506(b) or Rule 506(c). Rule 506(b) allows for sales to up to 35 nonaccredited investors but prohibits general advertising. Rule 506(c) allows general advertising but requires all purchasers to be accredited investors.2 Almost all exempt offerings are sold pursuant to Rule 506(b) and so can be sold to nonaccredited investors.
In recent years, more securities have been issued and sold to investors subject to these exemptions from registration than have been issued with the benefits of SEC Registration. In 2019, over $1.5 trillion in unregistered securities were issued compared to only $1.2 trillion in registered securities.3
There is very little research on the returns to exempt securities offerings. Issuers are not required to file updated Form D reports as an offering progresses including when an offering is complete. The Form D reports typically list the maximum offering amount and amount sold as of the filing date. Issuers do not make the offering circulars public and do not publish financial results.
The dramatic increase in exempt offerings sold to nonaccredited investors and the lack of information on issuers raises very serious investor protection concerns. 14% of Regulation D ("Reg D") offerings and 39% of the maximum offering amount were sold through broker-dealers. Customer complaints against broker-dealers involving illiquid investments (non-traded REITs and BDCs, private equity, and limited partnerships) have increased from 10% to 43% of customer complaints between 2018 and 2021.4 This increase in customer complaints may significantly understate the potential problem. Without reliable market values, investors who bought these broker-sold Reg D offerings may not know they have suffered losses or suspect their broker of misconduct; investors who buy exempt securities directly from issuers have even less information and less recourse.