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| Regulation D Fund |
Regulation D (Reg D) is a U.S. regulation that organizes the limited offer and sale of securities without registration under the Securities Act of 1933. It provides three exemptions from the Securities and Exchange Commission’s (SEC) registration requirements, which allow smaller companies to offer and sell their securities very quickly, at low cost, and with lower disclosure requirements than standard public offerings. Most domestic U.S. hedge funds rely on Reg D to place their securities directly to a selected group of investors.
Furthermore, Reg D offerings provide investment opportunities for hedge funds and thus build a hedge fund strategy. A Reg D fund invests in companies that are raising money using Reg D. This means that these funds are primarily holding illiquid positions in small-capitalized companies.
Depending on whether equity or convertible bonds are issued, investments take one of two forms. In an equity issue, the hedge fund buys the stocks of the offering company at a discount with respect to the current market price. The stocks are not registered on an exchange and the investor has to observe a holding period before the stocks can be sold on the stock market.
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During the holding period, the stocks can only be traded among accredited investors, so that there is hardly any liquidity. In a convertible issue, the investors purchase a convertible bond that can be converted into a specific number of shares at a predetermined price.
The Reg D companies often need immediate financing and offer very attractive conditions to investors. The profit the hedge fund manager tries to capture is the discount between the purchase price and the market value of the publicly traded stocks at issue.
