What Is a Reg D Offering and How Does It Work?

Regulation D provides a framework for companies to raise capital by offering and selling securities without the extensive and costly process of registering them with the U.S. Securities and Exchange Commission (SEC). Established under the Securities Act of 1933, these rules offer exemptions from full registration, a significant advantage for businesses seeking funding. Regulation D’s primary purpose is to facilitate capital formation, especially for smaller companies, by streamlining the offering process while still providing appropriate investor protections. It enables private offerings, allowing businesses to access investment funds more efficiently than through a public stock exchange listing.

Defining Regulation D

Regulation D is a series of rules that permit companies to offer and sell securities without the necessity of registering them with the Securities and Exchange Commission. This framework is crucial for facilitating what are known as “private placements,” which stand in contrast to public offerings where securities are registered and sold to the general public. The rules aim to strike a balance between easing the burden of capital raising for businesses and safeguarding potential investors. By providing these exemptions, the SEC acknowledges that the full registration process, while comprehensive, can be prohibitively expensive and time-consuming for many issuers.

The rationale behind these exemptions centers on fostering capital formation, particularly for small and emerging businesses that might not have the resources for a full public offering. Regulation D offers a pathway for these entities to secure investment by selling securities directly to a limited group of investors. Private placements typically involve less public disclosure than registered offerings, relying instead on the investors’ ability to assess risk or their relationship with the issuer. The framework helps ensure that, even without full registration, there are mechanisms for investor protection, primarily through limiting who can invest or how information is provided.

Investor Qualifications and Solicitation Rules

A central concept in Regulation D offerings is the “accredited investor,” a designation determining who can participate in certain private placements. An individual is generally considered accredited if they meet specific financial criteria:
An annual income exceeding $200,000, or $300,000 jointly with a spouse, for the past two years with an expectation of similar income in the current year.
A net worth of over $1 million, alone or with a spouse, excluding the value of their primary residence.
Certain entities, such as trusts with assets over $5 million and corporations or partnerships with total assets exceeding $5 million.

Accredited investors are presumed to have sufficient financial sophistication or resources to evaluate the risks of unregistered offerings and bear potential losses. Regulation D also addresses “general solicitation,” which involves public advertising or other broad communications to potential investors. While generally prohibited in many private offerings, certain Regulation D rules permit it under specific conditions.

When general solicitation is not permitted, companies typically rely on pre-existing relationships or private networks to identify potential participants. Adequate disclosure of material information is necessary for investors to make informed decisions. For offerings including non-accredited investors, the issuer must provide more extensive information, comparable to a registered offering. These rules collectively shape how companies find investors and what information they must provide in a Regulation D offering.

The Specific Rules of Regulation D

Regulation D encompasses several distinct rules, each with its own parameters regarding offering size, investor types, and solicitation methods.

Rule 504

Rule 504 generally permits non-reporting companies to offer and sell up to $10 million in securities within a 12-month period. Offerings under Rule 504 are typically restricted from general solicitation, and the acquired securities are considered restricted, meaning they cannot be freely resold without registration or an exemption.

Rule 506

Rule 506 is divided into two sub-sections: Rule 506(b) and Rule 506(c).
##### Rule 506(b)
Rule 506(b) allows for an unlimited offering amount. Under this rule, a company can sell to an unlimited number of accredited investors and up to 35 non-accredited investors, provided these non-accredited investors are sophisticated. Sophisticated investors have sufficient knowledge and experience to evaluate the merits and risks of the investment. A strict prohibition against general solicitation applies to offerings conducted under Rule 506(b).

##### Rule 506(c)
In contrast, Rule 506(c) also permits an unlimited offering amount but allows for general solicitation and advertising. All purchasers in a Rule 506(c) offering must be accredited investors. The issuer must take “reasonable steps” to verify each purchaser’s accredited status, often involving reviewing financial documents or third-party letters. This verification ensures investments are limited to those capable of bearing the risks.

Required Filings

Companies conducting an offering under Regulation D must submit a specific notice filing to the SEC, known as Form D. This form is not a registration statement that the SEC reviews or approves; instead, it serves as a notice that an issuer has sold securities in reliance on a Regulation D exemption. Form D’s purpose is for the SEC to collect data on private offerings. It provides basic information about the company, the offering, and the terms of the sale, contributing to the SEC’s oversight of capital markets.

The Form D filing must be made within 15 days after the first sale of securities in the offering. This timing ensures the SEC receives timely notification of private placements. While the SEC does not approve or disapprove the offering based on this filing, failure to file Form D can result in a company losing its ability to use Regulation D exemptions for future offerings. This procedural requirement is a fundamental aspect of compliance for any company utilizing the Regulation D framework for capital raising.