Regulation D is a series of rules governing the limited offer and sale of securities without registration (the securities) under the Securities Act of 1933, as amended. Regulation D allows companies the ability to raise capital through the sale of securities without registering the securities with Federal or State governmental agencies.  Such transactions are not exempt from the antifraud, civil liability, or other provisions of the federal securities laws.

An issuer must file a Form D, Notice of Exempt Offering of Securities, with the SEC through the SEC’s EDGAR system  within 15 days after receiving the first investment. We encourage issuers to file the Form D before approaching investors to enable investors to review the issuer’s Form D filing, as part of their due diligence. Obviously, having filed the Form D adds credibility to the issuer. After the issuer receives the first investment, the issuer may have to file a Form D or similar form in the state where the issuer received the capital. Please check with your state’s regulatory authorities on their state’s filing requirements.

Under the federal securities laws, any offer or sale of a security must either be registered with the SEC or meet an exemption. Regulation D provides a number of exemptions from the registration requirements, allowing some companies to offer and sell their securities without having to register the offering with the SEC. To rely on a specific rule of Regulation D you will need to determine how much capital you’re raising, from whom you are raising it, which state (or states) you are raising it in and whether or not you wish to use general solicitation to support your capital raise.

The most commonly used Rules of Regulation D are Rules 504 and 506. Rule 504 allows companies to raise up to $5,000,000 within a 12 month period, while Rule 506 allows companies to raise an unlimited amount of money. The SEC notes that 99% of companies who filed their Form D expressed that they relied on Rule 506, regardless of the amount of money they were raising. The SEC also noted that only 13% of companies reported using a registered broker-dealer to sell their securities, meaning, the securities were sold by a designated member of the company, e.g., CFO, or CEO.

You can find the state security regulator on the NASAA web site.

Yes. State governments have their own securities laws and regulations. If your company is selling securities, it must comply with both federal regulations and state securities laws and regulations in the states where securities are offered and sold (typically, the states where offerees and investors are based). A particular offering exempt under the federal securities laws is not necessarily exempt from any state laws. Each state’s securities laws have their own separate registration requirements and exemptions to registration requirements. To locate a state securities regulator and learn more about a particular state’s securities laws, you may visit the website of the North American Securities Administrators Association (NASAA).

Historically, most state legislatures have followed one of two approaches in regulating public offerings of securities, or a combination of the two approaches. Some states review the securities offerings of small businesses to determine whether companies disclose to investors all information needed to make an informed investment decision. Other states also analyze the terms of public offerings using substantive standards to determine whether the structure of the offerings are fair to investors.

Offerings that are exempt from provisions of the federal securities laws may still be subject to the notice and registration requirements of various state laws. You should make sure to check with the appropriate state securities regulators before proceeding with your company’s offering. 

“Restricted securities” are previously-issued securities held by security holders that are not freely tradable. Securities Act Rule 144(a)(3) identifies what offerings produce restricted securities. After such a transaction, the security holders can only resell the securities into the market by using an effective registration statement under the Securities Act or a valid exemption from registration for the resale, such as Rule 144.

Rule 144 is a “safe harbor” under Section 4(a)(1) providing objective standards that a security holder can rely on to meet the requirements of that exemption. Rule 144 permits the resale of restricted securities if a number of conditions are met, including holding the securities for six months or one year, depending on whether the issuer has been filing reports under the Exchange Act. Rule 144 may limit the amount of securities that can be sold at one time and may restrict the manner of sale, depending on whether the security holder is an affiliate. An affiliate of a company is a person that, directly, or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the company.

Certain securities offerings that are exempt from registration may only be offered to, or purchased by, persons who are “accredited investors.” An “accredited investor” is:
  • A bank, insurance company, registered investment company, business development company, or small business investment company;
  • An employee benefit plan (within the meaning of the Employee Retirement Income Security Act) if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
  • A tax exempt charitable organization, corporation or partnership with assets in excess of $5 million;
  • A director, executive officer, or general partner of the company selling the securities;
  • An enterprise in which all the equity owners are accredited investors;
  • An individual with a net worth of at least $1 million, not including the value of his or her primary residence;
  • An individual with income exceeding $200,000 in each of the two most recent calendar years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or,
  • A trust with assets of at least $5 million, not formed only to acquire the securities offered, and whose purchases are directed by a person who meets the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment.

Some advantages of Rule 504 include:

  • The offering cap was increased to $5 million from $1 million (less the aggregate offering price for all securities sold within the 12 months before the start of and during the offering of securities under Rule 504, in violation of section 5(a) of the Securities Act);
  • Unaccredited investors can purchase securities;
  • There is no need to verify accredited investor status (unless issuer is relying on state law exemptions from registration that permit general solicitation and general advertising so long as sales are made only to “accredited investors”);
  • The offering is not limited to the state where issuer has its principal place of business and is doing business.

A significant disadvantage of Rule 504 is:

  • There is no state blue sky law preemption, so the offering must either be registered in the state(s) in which the offering is being made or must be made under an available state registration exemption.

Except in limited circumstances, purchasers of securities offered pursuant to Rule 504 receive “restricted” securities, meaning that the securities cannot be sold for at least six months or a year without registering them

Securities issued in Rule 506 offerings are considered “covered securities” under Section 18 of the Securities Act of 1933.  Section 18(a) preempts state registration and review of, but not state anti-fraud authority with respect to, offerings for these “covered securities.” For Rule 506 offerings, however, Section 18 does not preempt state requirements that the issuer file a notice with the states together with a consent to service of process and any required fee with the states. See Section 18(b)(4)(E) and Section 18(c) of the Securities Act.

Yes, as long as the conditions of Rule 506(c) are satisfied with respect to all sales of securities in the offering.  To the extent the issuer already filed a Form D indicating its reliance on Rule 506(b), it must amend the Form D to indicate its reliance on Rule 506(c) instead, as that decision represents a change in the information provided in the previously-filed Form D.

Yes, as long as the conditions of Rule 506(b) have been satisfied with respect to all sales of securities that have occurred in the offering.  To the extent the issuer already filed a Form D indicating its reliance on Rule 506(c), it must amend the Form D to indicate its reliance on Rule 506(b) instead, as that decision represents a change in the information provided in the previously-filed Form D.

Yes.  An issuer does not lose the ability to rely on Rule 506(c) for an offering if a person who does not meet the criteria for any category of accredited investor purchases securities in the offering, so long as the issuer took reasonable steps to verify that the purchaser was an accredited investor and had a reasonable belief that such purchaser was an accredited investor at the time of the sale of securities.

Yes.  This method of verification is not limited to written confirmations from attorneys and certified public accountants who are licensed or registered in a jurisdiction within the United States.

Some advantages of Rule 506(b) include:

  • Rule 506(b) is a widely used exemption so investors, issuers, placement agents, and lawyers are familiar with it;
  • This exemption is available to public companies;
  • The amount of capital that can be raised is not capped;
  • State blue sky laws are preempted;
  • Offerings are not limited to the state where the issuer has its principal place of business and is doing business; and,
  • No line item disclosures are required unless sales are made to unaccredited investors (Rule 506(b) offerings are rarely structured to do so).
  • If necessary, however, an issuer can sell to up to 35 unaccredited investors and must provide the required disclosures.

A disadvantage of Rule 506(b) is:

  • General solicitation and advertising is not permitted.

Some advantages of Rule 506(c) include:

  • General solicitation and advertising is permitted;
  • The amount of capital that can be raised is not capped;
  • State blue sky laws are preempted;
  • The offering is not limited to the state where issuer has its principal place of business and is doing business; and,
  • No line item disclosures are required because the securities can be sold only to accredited investors.

Some disadvantages of Rule 506(c) include:

  • The issuer cannot sell to unaccredited investors; and,
  • The issuer must take “reasonable steps” to verify accredited investor status of the investors.