Regulation D provides exemptions that let an eligible company sell securities without SEC registration. For startups, its three principal routes are Rule 504, Rule 506(b) and Rule 506(c). Rule 506 is a Regulation D safe harbor; it is not a synonym for Securities Act Section 4(a)(2), which remains a separate statutory private-placement exemption. Not every private offering must use Regulation D.
Stock, SAFEs, convertible notes and warrants can all be securities. Securities Act Section 5 regulates offers as well as sales, so compliance analysis begins when the investment opportunity is offered—not only when cash changes hands or when an instrument later converts into preferred stock. Choosing a different financing instrument does not eliminate the exemption analysis.
Which exemption fits your raise?
Start with two questions: will you advertise the investment opportunity, and who will invest?
Rule 506(b) can fit a raise conducted without general solicitation. It permits accredited investors and a limited number of sophisticated non-accredited purchasers, with additional disclosure requirements for the latter.
Rule 506(c) permits public advertising, but every purchaser must be accredited and the company must take reasonable steps to verify that status.
Rule 504 may be useful for a raise within its $10 million ceiling, including from non-accredited investors. State registration or exemptions need separate review, and advertising is generally prohibited unless a specified exception applies.
Choose the exemption before making offers. Check the company’s eligibility, the offering amount, the investors and the states involved. Each route has conditions beyond these starting points, and all remain subject to antifraud rules.
The three principal Regulation D routes
| Feature | Rule 504 | Rule 506(b) | Rule 506(c) |
|---|---|---|---|
| Offering ceiling | $10 million under the rule’s rolling calculation | No dollar ceiling | No dollar ceiling |
| Non-accredited purchasers | Permitted federally, subject to applicable conditions and state law | Up to 35 in any 90-calendar-day period, applying counting, sophistication and disclosure rules | Not permitted |
| General solicitation | Generally prohibited, with specified state-law-based exceptions | Prohibited | Permitted |
| Accreditation verification | Depends on the route and relevant conditions | Accredited status or reasonable belief at sale; sophistication for non-accredited; no separate 506(c)-style verification | Reasonable verification steps required |
| State registration preemption | No comparable blanket Rule 506 preemption | Yes, for qualifying Rule 506 securities; notices, fees and antifraud authority remain | Same |
Rule 504: check both the federal ceiling and state law
Rule 504 is unavailable to specified issuers, including Exchange Act reporting companies, investment companies and certain blank-check companies. Bad-actor provisions also apply.
The $10 million ceiling takes account of the securities sold under Rule 504, and the specified sales in violation of Securities Act Section 5(a), during the rule’s preceding-12-month and offering period. Dividing a financing into differently named rounds does not reset that calculation.
Example: an issuer sells $6 million under Rule 504 and attempts another $6 million within the relevant 12-month period. Rule 504 cannot cover the entire second sale if it exceeds the remaining capacity. Under the instruction to Rule 504(b)(2), a transaction that exceeds the ceiling does not automatically destroy the exemption for earlier compliant transactions.
General solicitation and resale restrictions ordinarily apply, but Rule 504(b)(1) provides specific exceptions involving state registration, disclosure or qualifying state exemptions. Evaluate the actual exception and all relevant state requirements before advertising. Rule 504 is not simply Rule 506 with a smaller dollar limit.
Rule 506(b): no general solicitation
Rule 506(b) permits unlimited accredited purchasers and up to 35 counted non-accredited purchasers in any 90-calendar-day period. Apply Rule 501(e)’s counting rules and the offering/integration framework.
Each non-accredited purchaser must be capable of evaluating the investment’s merits and risks, alone or with a purchaser representative, or the company must reasonably believe that immediately before sale. Naming a purchaser representative does not automatically cure every sophistication problem; the representative and the purchaser must meet the applicable Rule 501 conditions. Give these purchasers the information required by Rule 502(b) a reasonable time before the sale. The financial statements required depend on the issuer and offering.
A pre-existing substantive relationship is one means of demonstrating the absence of general solicitation, not an independent requirement for every purchaser in every Rule 506(b) offering. Under SEC staff guidance, pre-existing generally means the relationship was formed before the offering began (or through a qualifying process not designed merely to evade the solicitation restrictions), and substantive means the issuer (or person acting on its behalf) has sufficient information to evaluate the prospective investor’s financial circumstances and sophistication. A LinkedIn follow, CRM entry, single meeting, or “30-day wait” label does not by itself establish either element. A casual acquaintance or referral does not automatically establish such a relationship. SEC staff Questions 256.26–256.33 explain the factual analysis. An online platform or angel network does not automatically manufacture a qualifying relationship for every contact on its list.
For a purchaser treated as accredited, the company needs actual accredited status or a reasonable belief at the time of sale. Rule 506(b) does not impose Rule 506(c)’s separate verification requirement, but the company should follow up on facts that contradict an investor’s representations.
Rule 506(c): advertising with accredited purchasers
Rule 506(c) permits general solicitation, but all purchasers must be accredited and the issuer must take reasonable steps to verify their status. The rule’s methods for natural persons are nonexclusive and nonmandatory. They include reviewing specified income records with a current-year representation, reviewing recent net-worth documentation with a liabilities representation, and obtaining a written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney in good standing, or a CPA in good standing that the professional has taken reasonable steps to verify accredited status within the prior three months. Two narrow methods also address certain grandfathered purchasers and previously verified investors. These safe methods are examples; they are not the only possible reasonable steps, and they are not mandatory exclusive procedures.
High minimum investments can support a fact-specific verification approach under SEC staff guidance, subject to the specified qualification, financing, representation and knowledge conditions. A large check alone does not make an investor accredited. Tax returns are not required in every case.
An online platform can help administer an offering, but its brand does not establish the exemption or remove issuer responsibility. Review the actual offering documents, investor process and intermediary role. For the detailed comparison, see Rule 506(b) versus Rule 506(c).
Investors cannot freely resell Rule 506 securities
Securities sold under either Rule 506(b) or Rule 506(c) are restricted securities. Investors need registration or an available resale exemption to sell them, and company agreements may impose additional transfer restrictions. Rule 506(c)’s permission to advertise the offering does not make the securities freely tradable.
Who is an accredited investor?
An individual may qualify with income exceeding $200,000 in each of the two most recent years, or joint income exceeding $300,000 with a spouse or spousal equivalent, plus a reasonable expectation of the applicable level in the current year. Joint tax filing is not required. A new salary cannot replace a deficient historical year.
Other routes include net worth exceeding $1 million after the primary-residence and debt adjustments; specified licenses in good standing; certain issuer roles; and knowledgeable-employee status for the relevant private fund. Entities, trusts and family offices have their own categories and conditions. The family-office threshold is more than $5 million in assets under management, not merely $5 million.
Use the full accredited-investor guide to identify the correct Rule 501(a) category and distinguish qualification from verification.
Form D: required notice, not SEC approval
Rule 503 requires the initial Form D within 15 days after the first sale. The first sale occurs when an investor is irrevocably contractually committed; it may precede the transfer of cash. If the filing deadline falls on a Saturday, Sunday or holiday, it moves to the next business day.
Form D is not a registration statement or SEC approval. Timely filing is a legal obligation, but it is not itself a condition of the Rule 504 or 506 exemption. A missing notice does not automatically establish an unregistered-sale violation, and a filed notice does not cure a failure to satisfy the exemption. Address a missed filing promptly and assess the consequences.
Rule 503 also requires amendments for specified errors and changes and annually for an offering continuing beyond a year. Exceptions apply to particular changes; maintain a filing calendar instead of treating every update alike.
State notices, fees and antifraud rules remain relevant
Qualifying Rule 506 securities are “covered securities” under NSMIA: federal law preempts state registration or qualification requirements for those securities. That is not a blanket statement that Rule 506 preempts all state securities law. States can still require notices, consent-to-service filings and fees, and they retain antifraud and enforcement authority. A late state notice does not automatically destroy the federal Rule 506 exemption; state consequences vary. Rule 504 generally requires a separate state registration or exemption analysis.
Review the jurisdictions of offers and sales and their actual rules; do not rely only on a mailing address or a generic fee estimate. Also examine whether a person paid to find investors must register as a broker or satisfy an applicable exemption.
Bad-actor disqualification (Rule 506(d))
Rules 504 and 506 are unavailable if a covered person is subject to a disqualifying event under Rule 506(d), subject to exceptions including the reasonable-care exception and specified timing rules. Covered persons are not limited to founders and directors: they include the issuer, predecessors and affiliated issuers; directors, executive officers, and other officers participating in the offering; general partners and managing members; promoters; beneficial owners of 20% or more of the issuer’s outstanding voting equity securities (calculated on voting power as specified in the rule); compensated solicitors of purchasers; and, for pooled investment funds, specified investment managers and related persons. A historical regulatory issue does not automatically disqualify the offering—timing, exceptions, the reasonable-care exception, and Commission determinations all matter. Pre-September 23, 2013 events that would otherwise disqualify may still require written disclosure to purchasers under Rule 506(e) a reasonable time before sale. Bad-actor questionnaires are a diligence tool that can support a reasonable-care inquiry; they are not themselves a statutory safe harbor that guarantees reasonable care. Paying transaction-based compensation to finders raises a separate broker-dealer registration analysis; Rule 506 availability does not by itself authorize unregistered broker activity.
Integration: when separate offerings may count as one
Integration is the question of whether separate offerings must be treated as one when determining compliance with securities registration requirements or an exemption. Rule 152 provides ways to keep offerings separate. Giving rounds different names does not settle the question.
The sequence matters. A company that properly completes a Rule 506(b) offering can then begin a Rule 506(c) offering under Rule 152(b)(4), without a required 30-day wait. Each offering must satisfy its own exemption, and completion is determined under Rule 152(d).
Going from 506(c) to 506(b) requires a different analysis. Even when relying on the safe harbor for offerings separated by more than 30 calendar days, the company must reasonably believe each purchaser in the later private offering was not solicited through general solicitation or had a substantive relationship with the company or someone acting on its behalf before that offering began.
Other safe harbors address employee-benefit, offshore and registered offerings. Outside a safe harbor, apply Rule 152(a)’s conditions to establish that each offering independently complies. Rule 504’s rolling dollar ceiling still applies separately.
A practical compliance checklist
- Identify the issuer, security, purchasers and exemption before making offers.
- Control solicitation consistently with the selected exemption.
- Document qualification, sophistication, counting and verification where applicable.
- Deliver required disclosure before sale and avoid misleading statements or omissions.
- Check covered persons under the bad-actor rules, including lookback periods, exceptions and any required historical disclosures.
- Document related offerings and the applicable Rule 152 analysis.
- Complete corporate approvals, subscriptions, Form D, state notices and the amendment calendar.
Do not promise that a late document, a small extra investment or a later change in an investor’s wealth cures an earlier defect. Rule 508 treats specified solicitation, offering-limit and purchaser-count deviations as significant. An actual problem requires analysis of the facts, the rule, possible alternative exemptions (including Section 4(a)(2) outside Regulation D), and available remedies. If no exemption covers an offer or sale, Securities Act Section 5 and potential Section 12(a)(1) rescission exposure may arise—subject to the actual facts and defenses—not an automatic right for every investor to rescind.
Frequently asked questions
What if I include a 36th non-accredited purchaser?
First apply Rule 501(e) counting, the 90-calendar-day period and Rule 506(b)’s reasonable-belief language. If the offering actually violates the purchaser limit, do not assume the extra check is insignificant: Rule 508 treats that deviation as significant. Later accreditation is not an automatic retroactive cure. Obtain a transaction-specific exemption and remedy analysis.
Does late Form D automatically destroy the exemption?
No. The filing obligation is separate from the substantive exemption conditions. File promptly, assess the consequences and check state requirements; neither a late nor a timely Form D proves the offering otherwise complied.
Can I use both Rule 506(b) and Rule 506(c)?
A company can conduct separate offerings if each satisfies its exemption and Rule 152. It cannot use a 506(b) label to accept non-accredited purchasers into a generally solicited offering without a valid legal basis for treating the transactions separately.
Can I raise from international investors?
Potentially. Regulation D can cover qualifying transactions involving non-U.S. investors. Regulation S is a separate route with offshore-transaction, directed-selling-effort and other conditions; foreign citizenship alone does not establish it. Analyze relevant foreign law too.
Related reading and next steps
Rule 506(b) versus Rule 506(c) · Accredited-investor requirements · Rule 701 for compensatory equity
For help with the exemption, investor process and filings before opening a round, book a 20-minute call.
This article provides general information, not legal advice.
