Reg D Offering: Valuation Guide

From 2021 to 2023, the Reg D offering increased by up to $6.2 trillion, 23% higher than the registered public offerings. This proves the Reg D offering is simpler and straightforward as it has direct access to potential investors. Another reason is that you will not need to undergo the time-consuming SEC filing process.

Reg D is an equity crowdfunding that lets you raise capital from outside investors. It is a great choice when you want to raise a large amount of capital and eliminate the need for SEC filing.

Everything for a successful Reg D offering begins with a business valuation, which guides the offering statement. The articles below explain the Reg D offering and how a business valuation helps make it a success.

Business valuation and Reg D offering

Why do you need a business valuation for a Reg D offering? The basic reason for conducting a business valuation during a Reg D offering is to support the offering statement. A business valuation will shape the contents of the Reg D offering statement, requiring comprehensive details about the company, its leadership team, and the value of stocks and equity owned by employees and shareholders.

What is Reg D offering?

The Securities and Exchange Commission (SEC) developed Reg D to help companies raise money without registering their securities for public offering. Without the requirement for SEC filing, businesses will find it easier to access financial markets and draw in potential investors.

There are three main types of Reg D offerings: Rule 504, Rule 506(b), and Rule 506(c), each with different requirements and limitations.

Issuers must fulfill particular requirements listed in Regulation D. Form D filing is required. You have fifteen days to finish the filing from the day the investments are sold. Form D includes information on the issuer’s revenue, name, and address; it is more about giving the SEC the form to notify them of your Reg D offering.

How do I get ready for the Reg D offering?

Reg D offering requires several important preparations to guarantee adherence to SEC rules and successfully draw prospective investors. We’ll see what they are:

Understand the Reg D exemptions

There are a few exemptions that give you the “safe harbor” status for your Reg D offering. Understanding them is important to utilize them fully.

• Rule 504 – Companies can offer up to $10,00,000 in securities in 12 months without filing the offering with the SEC. They can sell these securities to accredited and non-accredited investors and should provide the disclosure documents to the investors.
• Rule 506(b) – Authorises raising an unlimited amount of securities to unlimited accredited investors and for a maximum of 35 non-accredited investors.
• Rule 506(c) – permits general solicitation but applies only to accredited investors.

In all these exemptions, verifying the investor’s accredited status is important.

Conduct a Business Valuation

The initial step in preparing for a Reg D offering is to conduct a thorough business valuation. Reach our experts at Eqvista for conducting a business valuation to meet your requirements.

Several approaches to conducting business valuation exist, such as Income, Market, and Cost approaches. Seeking support from a professional valuer can help determine accurate value and thorough analysis.

Business valuation for Reg D offering requires a comprehensive approach, from choosing the correct valuation approach to providing compliance.

Valuation requirements for Reg D offering

You will require a reasonable valuation for your securities for reg D offerings. You can achieve this by using standard valuation methods. Also, you should be ready with your accurate financial statements to ensure the valuation’s precision. An in-depth analysis of market factors, including the growth prospects, will improve your business valuation.

You should disclose all the required documents to maintain transparency, and choosing the correct third-party valuation is important while considering the business valuation.

Valuation strategies for Reg D offering

To conduct a business valuation, the valuer will use three strategies. They are:

Income approach of valuation Strategy

The business valuation specialist may use the revenue approach when dependable market data is difficult to obtain. Generally speaking, cash flow is the future anticipated economic advantage that this method converts into a current value. This strategy works best for well-established, profitable companies because it bases value on their capacity to produce future financial benefits.

Example for Income-Based Approach

Let’s go under this with the example of Deep Corp., whose future cash flows are:

Forecast Future Cash Flows:

• Year 1: $700,000
• Year 2: $750,000
• Year 3: $800,000
• Year 4: $850,000
• Year 5: $900,000

Identify the Discount Rate:

• Let’s use a discount rate of 12%, considering the risk profile and alternative investment opportunities.

Calculate Discounted Cash Flows:

• Year 1 DCF: $700,000 / (1 + 0.12)^1 = $625,000
• Year 2 DCF: $750,000 / (1 + 0.12)^2 = $597,895
• Year 3 DCF: $800,000 / (1 + 0.12)^3 = $569,424
• Year 4 DCF: $850,000 / (1 + 0.12)^4 = $540,190
• Year 5 DCF: $900,000 / (1 + 0.12)^5 = $510,684

Estimate Terminal Value:

• Terminal Value: $900,000 x (1 + 0.04) / (0.12 – 0.04) = $11,700,000
• Discounted Terminal Value: $11,700,000 / (1 + 0.12)^5 = $6,638,894

Calculate Total Firm Value:

• Total DCF for 5 years of $2,843,193
• Total Value of Dawson and Associates: $2,843,193 + $6,638,894= $9,482,087

Therefore, Deep Corp. is estimated to have an approximately $9.48 million valuation.

Asset-based approach of valuation strategy

The asset-based approach to business valuation determines the value of the business by identifying the total assets (tangible and intangible) and deducting them from the total liabilities. It is a complicated but flexible approach; including off-balance-sheet entities like liabilities or contingent assets proves the flexibility. However, the process becomes complicated when the valuer has to estimate the worth of intangible assets.

Example for Asset-Based Approach

Company: Reliable Builders

Assets:

• Land: A plot designated for a future construction project (valued at market price) – $20,000,000
• Construction Equipment: Fleet of vehicles, machinery, and tools (valued at net book value with adjustments) – $10,000,000 (book value) – $2,000,000 (depreciation) = $8,000,000
• Inventory: Building materials for ongoing projects (valued at cost price) – $5,000,000
• Work in Progress: Partially completed construction projects with a calculated value based on percentage of completion – $3,000,000
• Cash & Cash Equivalents: Available funds in bank accounts – $1,000,000

Total Assets: $20,000,000 + $8,000,000 + $5,000,000 + $3,000,000 + $1,000,000) = $37,000,000

Liabilities:

• Bank Loan: Outstanding loan used for equipment purchase – $4,000,000
• Accounts Payable: Amounts owed to suppliers for materials – $2,000,000

Net Asset Value Calculation:

• Net Asset Value: $37,000,000 (Total Assets) – $4,000,000 (Loan) – $2,000,000 (Payables) = $31,000,000

Market approach of valuation strategy

Using the market approach, the valuer can calculate the business’s value by comparing the market values of similar assets or enterprises that have recently been sold or acquired. When companies are similar in terms of industry, revenue, growth potential, market influence, etc., the market approach becomes the ideal method for valuation. It works well when sufficient data is available for comparisons.

Example for Market-Based Approach

A promising food delivery app startup is being valued using the market approach. Here’s how it might work:

1. Comparable Companies – Two similar food delivery startups in the region are identified. Startup A was acquired for $20 million with a yearly revenue of $10 million (2x revenue multiple). Startup B went public with a market capitalization of $50 million and an annual revenue of $15 million (3.3x revenue multiple).
2. Valuation Range – Based on these acquisitions, a reasonable revenue multiple for the food delivery app could be between 2x and 3.3x.
3. Adjustments – The food delivery app has even faster year-on-year growth than the comparable companies. A slightly higher multiple, say 3.5x, might be justified to account for this higher growth potential.
4. Valuation Estimate – If the food delivery app generates $5 million in yearly revenue, applying the 3.5x multiple will result in a valuation estimate of $5 million * 3.5 = $17.5 million.

Considerations and Best Practices for Reg D Offering

When your company provides Reg D offering, the following are the points to consider:

Determine Appropriate Reg D Exemption

As we already know, there are a few exemptions to the Reg D offering (504, 506(b) and 506(c)). Choose the exemption that best suits your company’s needs and investor base. Businesses can lessen the likelihood of breaking federal securities regulations when they sell or offer securities to US-based qualified investors by using these safe harbors.

Getting support from legal and financial advisors to select the best is better, as each has its benefits and limitations.

Draft Offering Documents

When planning a Reg D offering, you must create thorough and clear offering documents. The “Private Placement Memorandum (PPM)” is the most important document. These documents provide details about the issuer, their security offerings, and any disclosures to potential investors. Though this document is not mandatory, not filing it can raise red flags among investors.

Verify Accredited Investor Status

Verifying the investor’s qualification is important before providing the securities. You will need a financial advisor’s support to verify the investor’s accreditation. A verification process can help ensure legal compliance with the SEC.

File Form D

Filing Form D is a mandatory process to inform investors about your company’s Reg D offering. Filing this form on time is important to maintain the exemption status and gain their confidence. Filing Form D will help the SEC know about your Ref D offering and its details. It also enables you to comply with the SEC regulations.

Comply with State Blue Sky Laws

Compliance with state blue sky laws or securities regulation is important when conducting a Reg D offering. These laws are available to protect investors from fraudulent issuers. So, when you do a Reg D offering, you must provide the specifics of your securities. Though the Blue Sky laws vary from state to state, the companies must comply with them to prohibit any misleading statements about their securities.

Those filing with the state’s blue sky laws are optional; it is better to do it to keep the slate clean.

Avoid General Solicitation (Rule 506(b))

Though the exemption 506(b) allows for unlimited capital with unlimited qualified investors, it does not allow for general solicitation. That is, you cannot advertise or market the securities. If you opt for 506(b) for your safe harbor, ensure you do not publicly advertise your offerings.

Conduct Reasonable Due Diligence

During the Reg D offering, you should conduct reasonable due diligence, which involves assessing the financial statements and all the offering materials to ensure accuracy and mitigate any risks in the Reg D offering. Thorough due diligence, you can guarantee transparency and investor protection to attract more investors to the offering.

Benefits of engaging experts for Reg D offering valuation

Given the importance of conducting a Reg D offering, valuing the shares is equally important to attract more investors and raise capital. You can effectively do this by hiring a valuing expert in your business valuation process.

The following are the benefits of engaging an expert for your Reg D offering valuation:

• Accurate Valuation – Accuracy is the first point to consider in the Reg D offering valuation. At Eqvista, we always prioritize accuracy through our comprehensive research. Which in turn helps you set a reasonable price for your securities.
• Concrete Knowledge of Company Assets – The valuer should know the company’s assets to value them precisely. Our team, with experience in different companies, values all types of assets by maintaining the integrity and reliability of the valuation process.
• Better Negotiation Position – Business valuation helps companies negotiate securities value with flexibility and helps to set realistic expectations. Eqvista insights can guide the structuring of term sheets, ensuring that terms are favorable and aligned with the company’s long-term goals.
• Obtaining the Real Value – The primary reason to conduct a business valuation in a Reg D offering is to determine your company’s value. Eqvista emphasizes just that, helping you determine your company’s real worth.
• Help during Mergers/Acquisitions – The business valuation report generated for Reg D offering can also help during Mergers and acquisitions. Considering the future use of the valuation reports, Eqvista emphasizes precise valuation reports. We provide valuation ranges based on different scenarios, allowing for flexibility in usage and helping set realistic expectations.
• Time and cost saving – Outsourcing your business valuation saves time and resources. At Eqvista, experts bring specialized knowledge to the valuation process. They are familiar with the regulatory requirements and specific financial metrics, which allows them to conduct the business valuation without the trial-and-error approach, significantly saving time.

By leveraging expertise in valuation assessments, companies conducting Reg D offerings can provide potential investors with reliable, comprehensive and credible valuations, enhancing transparency and instilling confidence in the offering.

Why Choose Eqvista for your Stock Valuation?

In Reg D offering, which uses business valuation to ascertain the offering statement, Eqvista can handle all of your valuation requirements. We adapt our procedure to maintain accuracy, considering the complexity of the process.

With our support, you can meet the legal requirements, position yourself for more successful negotiations, draw in possible investors, and fully realize your business’s potential.

We can also help with a precise business valuation, simplifying the procedure and allowing you to raise capital for expansion. Contact us now to know more about how we can offer our expertise for your company valuation.