Regulation D (Rules 504, 505, 506)
Definition
Regulation D is a set of SEC rules (Rules 501–508) providing safe harbors from Securities Act §5 registration requirements for certain private and small offerings. Regulation D offerings are the most common method by which startups and small businesses raise equity capital in the United States.
Common Conditions (Rule 502)
All Regulation D offerings must comply with:
- Integration: Offerings within 6 months before or after may be integrated (aggregated) as a single offering; the 6-month safe harbor prevents evasion through sequential offerings.
- Information requirements: For offerings to non-accredited investors, issuers must provide specified disclosure (similar to registered offering disclosure; varies by size).
- No general solicitation or advertising (unless Rule 506(c) applies — see below).
- Restricted securities: Purchasers receive restricted securities; must be informed they cannot resell without registration or exemption.
- Resale limitations: Reasonable care to ensure purchasers are not underwriters.
Individual Rules
Rule 504: Up to 1M) in a 12-month period; available to non-reporting issuers; no limit on number or type of purchasers; no mandated disclosure; general solicitation permitted if offering registered under state law with disclosure requirements.
Rule 505 (rescinded 2017): Up to $5M; up to 35 non-accredited + unlimited accredited investors; no general solicitation; bad actor disqualifications applied. Note: Rule 505 was rescinded by SEC in 2017.
Rule 506(b): Unlimited offering amount; up to 35 non-accredited investors who must be sophisticated + unlimited accredited investors; no general solicitation; issuers must provide non-accredited investors with disclosure similar to registered offering.
Rule 506(c) (added by JOBS Act 2012): Unlimited offering amount; general solicitation and advertising permitted but all purchasers must be accredited investors and issuer must take reasonable steps to verify accredited status.
Key Definitions (Rule 501)
- Accredited investor: Institutions (banks, registered funds) or individuals with income > 300,000 joint) for past two years with reasonable expectation of same, or net worth > $1M (excluding primary residence).
- Sophisticated investor: Non-accredited person with knowledge and experience to evaluate investment risk.
Rule 508 — Minor Violations
Insignificant deviations from Regulation D conditions do not destroy the exemption if: (1) the violation was not intentional; (2) the violation did not involve any specific condition designed to protect the interest of the relevant class of investors; (3) the violation was immaterial to the offering.
Policy / Rationale
- Reduces regulatory burden for small and growth-stage companies raising capital.
- Accredited investor framework assumes sophisticated investors need less regulatory protection.
- JOBS Act amendments reflect Congressional intent to facilitate capital formation for emerging growth companies.