Regulation D Securities Exemptions: Rules 504 and 506

$3.9 Trillion Raised Under Reg D in 2023

Regulation D private placements raised approximately $3.9 trillion in reported capital in 2023 — more than three times the capital raised in registered public offerings the same year. Reg D is the dominant mechanism for startup financing, hedge fund formation, real estate syndication, and small business capital raises. Its exemption from SEC registration requirements comes with strict rules on who can invest, how issuers can communicate, and when securities can be resold.

The Three Reg D Exemptions Compared

Rule 506(b) is by far the most commonly used, accounting for over 90% of Reg D capital raised. Rule 506(c) was created by the JOBS Act of 2012 and allows general solicitation — advertising, social media, public presentations — but requires issuers to take "reasonable steps" to verify that every purchaser is actually an accredited investor, not merely rely on self-certification.

The Accredited Investor Definition: 2020 Expansion

Before the SEC's August 2020 amendments, accredited investor status was based entirely on wealth thresholds: $1 million net worth (excluding primary residence) or $200,000 annual income ($300,000 with spouse) for the past two years with reasonable expectation of same in the current year. These thresholds date from 1982 and were never adjusted for inflation.

The 2020 amendments added knowledge-based criteria that allow individuals to qualify regardless of wealth:

• Holders of FINRA Series 7, 65, or 82 licenses in good standing
• Directors, executive officers, or general partners of the issuer
• Knowledgeable employees of a private fund (for investments in that fund)
• Family offices with assets of $5 million or more and their family clients
• Investment advisers and broker-dealers registered under federal or state law

Entities qualify as accredited investors if all equity owners are accredited individuals, or if the entity has assets exceeding $5 million and was not formed solely to invest in the offering.

Form D: Filing Requirements and Consequences

Issuers relying on Reg D must file Form D with the SEC electronically within 15 calendar days of the first sale of securities. Form D is a brief notice disclosing basic information: the type of exemption claimed, the amount offered and sold, the number of investors, and information about the issuer and its officers.

Failing to file Form D does not automatically invalidate the exemption, but it:

• Can trigger state securities regulators to require retroactive compliance or impose fines
• Bars the issuer from claiming the Rule 506(b) exemption in the SEC's staff guidance on bad actor disqualification
• Creates a record problem if the SEC later examines the offering

The SEC's EDGAR system makes all Form D filings publicly searchable, giving competitors and journalists visibility into fundraising rounds even for private companies.

Rule 144: Resale of Restricted Securities

Securities sold under Reg D are "restricted securities" — they cannot be freely resold without registration or an applicable exemption. Rule 144 provides the primary safe harbor for resale, subject to holding period requirements:

• Reporting company issuers: 6-month holding period from date of full payment, then volume limitations, manner of sale, and filing requirements apply for affiliates; non-affiliates may sell freely after 12 months
• Non-reporting company issuers (most startups): 12-month holding period; after 12 months, non-affiliates may sell freely; affiliates remain subject to volume and manner-of-sale restrictions indefinitely

Volume limitations for affiliates restrict resales to the greater of 1% of the outstanding shares or the average weekly trading volume over the preceding four weeks. These rules are designed to prevent insiders from rapidly liquidating positions in ways that destabilize markets.

Bad Actor Disqualification

Rule 506 offerings are subject to "bad actor" disqualification provisions under Rule 506(d). Issuers may not rely on Rule 506 if the issuer, its executives, large shareholders, or underwriters have been subject to specified "disqualifying events" — SEC enforcement orders, criminal convictions involving securities, FINRA bars, and similar actions — within prescribed look-back periods ranging from 5 to 10 years. The issuer must affirmatively conduct due diligence on all covered persons before each offering.

This article is for informational purposes only and does not constitute legal advice.