Reg D and Accredited Investors: Raising Capital Without SEC Registration

Every company that sells securities — equity, debt, or other investment instruments — must either register the offering with the SEC or find an applicable exemption from registration. SEC registration is expensive, time-consuming, and subject to ongoing public disclosure obligations that are appropriate for large public companies but impractical for most startups and private businesses. Regulation D, a set of safe harbor rules under the Securities Act of 1933, provides the primary framework for private securities offerings by US companies. Understanding Reg D — and following its requirements carefully — is essential for any company raising private capital.

The Two Primary Reg D Exemptions

Rule 506(b): The Traditional Private Placement

Rule 506(b) is the most widely used Reg D exemption. It allows a company to raise an unlimited amount of money from an unlimited number of accredited investors and up to 35 non-accredited but sophisticated investors. The key restrictions are that there may be no general solicitation or general advertising — the offering cannot be marketed to the general public through advertisements, websites, email blasts to strangers, or other mass communications. Securities sold under Rule 506(b) are ‘restricted securities’ that cannot be resold for at least one year without registration or another exemption.

Rule 506(c): General Solicitation Permitted

Rule 506(c), added by the SEC in 2013 under the JOBS Act, permits general solicitation and advertising — companies can publicly advertise their offering through websites, social media, investor conferences, and other channels. The significant tradeoff is that all investors must be accredited investors, and the company must take ‘reasonable steps’ to verify that each investor actually meets the accredited investor definition, rather than simply relying on investor self-certification. Rule 506(c) offerings are increasingly common for companies that want to market openly to sophisticated investors, particularly through online platforms and at industry conferences.

Who Is an Accredited Investor

The accredited investor definition is set by SEC Rule 501 and was substantially updated in 2020. An individual is an accredited investor if they have earned income exceeding $200,000 in each of the two most recent years and reasonably expect to earn the same in the current year ($300,000 combined with a spouse or spousal equivalent), or if they have a net worth exceeding $1 million (individually or jointly with a spouse or spousal equivalent), excluding the primary residence.

The 2020 amendments also established professional knowledge and certification categories. An individual holding a FINRA Series 7, Series 65, or Series 82 license in good standing qualifies as an accredited investor. So does a ‘knowledgeable employee’ of a private fund. Entities can qualify as accredited investors if they have total assets exceeding $5 million and were not formed specifically for the purpose of acquiring the securities being offered, or if all equity owners are accredited investors.

Disclosure Obligations

Rule 506(b) offerings that include non-accredited sophisticated investors must provide those investors with certain specified information — essentially the level of information that would be included in a registered offering. All-accredited-investor offerings under 506(b) are not required by the rule itself to provide any particular disclosure, though prudent practice (and anti-fraud obligations under Rule 10b-5) requires providing investors with accurate, complete material information. Rule 506(c) offerings have no mandatory disclosure format under the rule, but again, all material information must be disclosed accurately.

Regardless of the specific disclosure format used, private placement memoranda (PPMs) are the standard document used to describe the business, the offering terms, the use of proceeds, and the risk factors associated with the investment. A well-drafted PPM is not just a disclosure document — it is a litigation defense document that demonstrates to investors that they were fully informed of all material facts and risks before investing.

Form D Filing

Companies relying on Reg D must file a Form D with the SEC within 15 days after the first sale of securities in the offering. Form D is a brief notice that discloses basic information about the offering: the identity of the issuer, the type of securities offered, the amount raised, and the exemption being used. Most states also require a notice filing (and payment of a filing fee) in each state where investors reside. Failure to make timely Form D filings can result in loss of the exemption in some states and can complicate future securities offerings.

State Securities Law: Blue Sky Laws

Federal Reg D does not preempt state securities law for all purposes. While Reg D offerings that meet the requirements of Rule 506 are federally preempted from state registration requirements, states retain authority to require notice filings and payment of fees, and retain anti-fraud enforcement authority. Companies must file notice filings in each state where securities are sold. Failing to make these filings, while generally not affecting the federal exemption, can expose the company to state enforcement action and claims by state investors.

Common Mistakes in Reg D Offerings

The most common errors in Reg D offerings include general solicitation in a Rule 506(b) offering (which can invalidate the exemption), failing to verify accredited investor status under Rule 506(c), failing to make timely Form D and state blue sky filings, including material misstatements or omissions in offering documents (which violates the anti-fraud provisions regardless of which exemption is used), failing to restrict the resale of securities properly, and commingling offering proceeds with the company’s general operating funds.

The Bottom Line

Regulation D provides a workable, well-established path to private capital for US companies at virtually any stage. But it requires careful adherence to its requirements, starting with the no-general-solicitation rule under Rule 506(b), the verification obligations under Rule 506(c), and the timely filing of Form D and state notice filings. Any company raising money through private securities sales should engage securities counsel at the outset — the cost of doing a Reg D offering correctly is far less than the cost of an SEC enforcement action or investor lawsuit arising from a defective offering.