Hedge Fund Strategy: Regulation D

Regulation D (Reg D) securities are sold by companies that are raising capital through a private offering without having to register with the SEC.  Reg D contains a list of rules allowing companies to be exempt from filing.  There are three main rules 504, 505 and 506.

As part of an investment strategy, hedge funds are mainly interested in micro and small capitalization companies.  There are two reasons for participating in the offering:

• The offering price is at a discount to the current market price
• Since there is a price discrepancy in publicly traded and Reg D stocks, the manager can establish a simple arbitrage position of shorting the public stock and going long on the Reg D stock.

The advantage to the issuer company is the ability to raise cash quickly.