Scope of the Investigation and the Feasibility Question

No two Regulation D offerings get the same investigation. A broker-dealer (BD) has to size the effort to the specific deal in front of it rather than run a fixed script.

What Drives How Much Investigation Is Required?

• The amount and nature of the investigation required depends, among other factors, on the nature of the recommendation, the firm's role in the transaction, its knowledge of and relationship to the issuer, and the size and stability of the issuer. The guidance names these four; it does not close the list.
• A more thorough investigation is required for securities issued by smaller companies of recent origin, a category that could include many Regulation D issuers.
• There is no fixed checklist that guarantees an adequate investigation. Each firm determines the scope of its investigation from the facts and circumstances of that offering.

Exam Tip: Gotchas

• "No fixed checklist" cuts one way, not two. A firm cannot point to a completed checklist as automatic proof of a reasonable investigation, and leaning on one mechanically can leave the investigation inadequate by itself.

What Is the Minimum Investigation for Suitability Purposes?

At a minimum, a reasonable investigation in a Regulation D offering should address:

• The issuer and its management
• The business prospects of the issuer
• The assets held by, or to be acquired by, the issuer
• The claims being made
• The intended use of proceeds of the offering

A reasonable investigation is required for each offering. An investigation performed for an earlier offering by the same issuer does not carry over to a later one.

Exam Tip: Gotchas

• "Same issuer, already investigated" is a trap. Every new offering by that issuer requires its own reasonable investigation.

What Is a Feasibility Study?

No FINRA rule and no SEC rule governing private placements defines a feasibility study. It names a testable idea rather than a specific regulatory requirement in this context, so the description below reflects how the industry uses the term.

Think of it this way: An issuer runs its own internal analysis of whether the proposed venture can work: whether the business plan, its forecasts, and the assumptions behind them hold up under scrutiny. That internal analysis is the feasibility study. The representative's due diligence is what tests that analysis rather than accepts it at face value.

The closest sourced due-diligence practices come from the business-prospects investigation. The guidance lists these among other practices in that group rather than as a closed set of three:

• Requesting the issuer's business plan or business model
• Analyzing the assumptions behind any business forecast
• Testing financial models against information from representative assets to validate projected returns, break-even points, and other figures given to investors

Exam Tip: Gotchas

• In a private placement, a feasibility study is not a defined regulatory checklist. If a stem treats it as though a rule governing these offerings spells out its contents, that framing is the trap, not the content.

What Should You Check on Exam Day?

• Match the depth of investigation to the facts given in the stem (issuer size, firm's role, relationship to the issuer) rather than assuming one standard depth applies everywhere.
• Confirm all five minimum-investigation items appear in a scenario before concluding the investigation was adequate: issuer and management, business prospects, assets, claims, and use of proceeds.
• Treat a prior offering by the same issuer as a fresh investigation requirement, not a shortcut.
• Recognize "feasibility study" as industry usage tested by the outline, with no rule text of its own in the private-placement context.