Edge-ucation / Investing Coaching

The Total Breakdown of a Regulation D Offering

  • Austin Still

    Austin holds a Bachelor of Commerce from the University of Saskatchewan and brings over 10 years of investing experience. With a belief the most important decision investors make when buying stocks is the price paid, Austin aims to blend growth with value by finding companies with accelerating growth combined with a discounted valuation. More specifically, Austin’s expertise lies in the technology sector, identifying businesses showing strong growth, a lasting competitive advantage, and sound fundamentals, paired with a valuation that supports further stock price appreciation.

    View all posts
Regulation D Offerings - Legal Capital Raising

Image Source: Regulation D Offerings – Legal Capital Raising | Moschetti Law

Every business owner dreams of finding the money needed to expand their business.

Though, in a world filled with uncertainty and ambiguity, finding a way to safely secure capital for your company is easier said than done.

With this realization, central governments created the Regulation D Offering, where entrepreneurs can partake in a structured and regulated way to sell their restricted securities to willing investors.

This has drastically improved the process, reliability, and transparency of business transactions in the private equity market, making it easier for businesses to raise capital and for investors to find exciting investment opportunities.

In this article, we’re going to cover everything you will need to know about Regulation D, including its main rules, eligibility requirements, and the process of conducting an offering. We’ll end with a quick look at the future outlook of Reg D offerings.

Introduction to a Regulation D Offering

The ability to raise capital is a vital component for the growth and sustainability of any business, especially startups and small to medium enterprises (SMEs). While public offerings are a well-known and effective path for capital raising, they are often cumbersome, expensive, and not realistic for smaller companies.

This is where a Regulation D Offering (which lies under specific federal securities laws) comes into play, providing a critical and realistic alternative for smaller companies to raise money through private placements.

Understanding Regulation D

U.S. SEC seal on a building

Image Source: How to raise funds under Reg D, Rule 506(b) | Open VC

Regulation D consists of a set of rules (in particular, Rules 504, 506(b), and 506(c)) that allow a business to raise capital through the sale of equity or debt securities without the need to register these securities with the Securities Exchange Commission (SEC). This exemption is an important piece of the U.S. securities law, intended to facilitate easier access to capital for smaller companies while still providing protection for investors.

The creation of Regulation D goes back to the Securities Act of 1933, which was developed to ensure more transparency in financial statements and to prevent fraud in the securities market following the stock market crash of 1929. Regulation D was introduced as a part of a series of amendments to this act aimed at easing the capital-raising process for smaller companies.

Defining Characteristics of Regulation D

Regulation D offerings have 4 main characteristics that investors and business owners should understand:

  • Accessibility: Regulation D provides a more accessible avenue for small and emerging companies to raise capital. This is essential in an economic environment where such companies might find it challenging to attract public funding or bank loans.
  • Flexibility: These offerings offer flexibility in terms of the amount of capital that can be raised and the kind of investors who can participate.
  • Reduced Costs and Complexity: By exempting companies from the full registration process with the SEC, Regulation D reduces legal, accounting, and administrative costs significantly. This is particularly beneficial for smaller companies that wouldn’t be able to afford the large expenses associated with other forms of raising capital.
  • Investor Protection: Despite being less stringent than public offerings, Regulation D still offers investor protections. Rules 506(b) and 506(c), for instance, include provisions about the type of investors who can participate and the information that needs to be disclosed to them, ensuring a balance between accessibility to capital and investor protection.

Key Provisions of a Regulation D Offering

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Image Source: What Is the Difference Between Law, Policy, and Regulation? | Up Journey

Regulation D, as a part of the U.S. Securities and Exchange Commission rules, plays a pivotal role in how private companies raise capital without the need for a full public offering.

Its primary rules – 504, 506(b), and 506(c) – each serve different needs and scales of investment. Understanding these rules is crucial for both issuers and investors to navigate this method of investing/raising money.

Rule 504

Rule 504 of Regulation D allows eligible companies to raise up to $10 million within a 12-month period. This rule is particularly attractive for smaller enterprises due to its relatively straightforward requirements:

  • Cap on Raising: Companies can raise up to $10 million in a 12-month period.
  • Investor Types: There is no restriction on the types of investors; both accredited and non-accredited investors can participate.
  • State Compliance: Issuers must comply with state securities laws and regulations, which can vary significantly.

Rule 506(b)

Rule 506(b) is a safe harbor under Regulation D, meaning if the conditions of the rule are met, the offering is deemed to comply with the following exemption requirements:

  • No Cap on Raising: There is no limit on the amount of money that can be raised.
  • No General Solicitation: Issuers cannot use general solicitation or advertising to market the securities.
  • Investor Types: The rule allows for an unlimited number of accredited investors and up to 35 non-accredited investors.
  • Disclosure Requirements: If non-accredited investors are involved, the issuer must provide additional disclosures similar to those required in registered offerings.

Rule 506(c)

Rule 506(c) was introduced to modernize the Regulation D framework to accommodate developments in technology and fundraising methods:

  • No Cap on Raising: Like Rule 506(b), there is no limit on the amount that can be raised.
  • General Solicitation Allowed: Issuers can broadly solicit and advertise their offering, a significant deviation from Rule 506(b).
  • Accredited Investors Only: Sales are limited strictly to accredited investors. Issuers must take reasonable steps to verify that all purchasers are accredited investors.
  • Simplified Disclosure: The disclosure requirements are less stringent compared to Rule 506(b), especially since only accredited investors can participate.

Differences and Applicability

Each rule under Regulation D caters to different issuer needs and investor profiles. Rule 504 is ideal for smaller-scale offerings and allows more flexibility in investor participation. Rule 506(b), the most commonly used, is preferred for larger raises that involve a mix of accredited and non-accredited investors with more stringent information requirements.

Rule 506(c), meanwhile, is tailored for issuers comfortable with using general solicitation and various marketing methods and who also only want to deal with accredited investors.

Eligibility Criteria for Regulation D Offerings

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Another important aspect to understand in a Regulation D offering is the eligibility requirements for investors.

These criteria ensure that the offerings are made to those who are eligible, providing protection for investors and maintaining the integrity of the private investment market.

Investor Eligibility

Accredited Investors

Having accredited investor status is reserved for individuals or entities that meet certain financial thresholds set by the SEC. For individuals, this includes having a net worth exceeding $1 million (excluding the value of one’s primary residence) or an annual income of at least $200,000 ($300,000 together with a spouse) for the last two years, with the expectation of earning the same or higher income in the current year.

In essence, accredited investors face fewer restrictions when looking to buy or sell securities through Regulation D offerings since they are presumed to have the financial sophistication to understand and bear the risks of their investments.

Non-Accredited Investors

Non-accredited investors can participate in certain Regulation D offerings, like those under Rule 506(b), but the number is limited to 35 per offering. These investors must be ‘sophisticated,’ meaning they must have sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the investment in question.

Offerings that include non-accredited investors require issuers to provide additional disclosures similar to those in registered offerings, including financial statements.

Issuer Eligibility

Not only do investors have specific eligibility requirements, but the private companies seeking to raise capital through a Regulation D offering do as well.

Below, we’ve broken down the key information business owners should know when trying to understand the requirements of a Regulation D offering:

  • Type of Entities: Regulation D is available to a wide range of entities, including corporations, partnerships, limited liability companies, and trusts.
  • Compliance with Laws: Issuers must ensure compliance with both federal and state securities laws. This includes making necessary filings, like Form D with the SEC, and adhering to state-specific regulations, which can vary.
  • Reporting Requirements: While Regulation D offerings are exempt from extensive SEC reporting requirements, issuers are still required to provide certain information to investors, especially when non-accredited investors are involved.
  • Bad Actor Disqualification: Issuers must not fall under the “bad actor” disqualification, which bars certain individuals and companies with a history of securities law violations from participating in Regulation D offerings.

Key Considerations for Issuers

  • Offering Scale and Structure: Issuers must choose the appropriate rule under Regulation D that aligns with their capital raising objectives and investor base.
  • Investor Verification: When using Rule 506(c), business owners have a responsibility to take reasonable steps to verify that all purchasers are accredited investors.
  • State Compliance: Complying with state securities laws, often referred to as “blue sky laws,” is essential. These laws vary by state and can affect how the offering is conducted.

Understanding these criteria (for both the investor and issuer) is an incredibly important step in any Regulation D offering. Make sure to take your time to fully understand what is required and expected from you.

The Process of a Regulation D Offering

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Image Source: Examples of Effective Corporate Presentation Slides | Virtual Speech

Going through the process of a Regulation D offering involves several critical steps.

For issuers, understanding and following these steps is essential to ensure compliance with SEC regulations and to successfully raise capital.

And for investors, it’s equally important to understand the steps a business will take when giving them capital.

Preparation Phase

Identifying the Appropriate Rule

The first step for an issuer is to determine which Regulation D rule (504, 506(b), or 506(c)) best suits their needs based on the amount to be raised, the type of investors targeted, and the desired level of disclosure and solicitation.

Drafting Offering Documents

Although not always legally required, a PPM (Private Placement Memorandum) is highly recommended, especially when non-accredited investors are involved. This document outlines the details of the offering, the risks involved, the terms of the investment, and background information on the company.

Next, a company can begin to draft a subscription agreement, which is a contract between the issuer and the investor detailing the terms of the investment.

And finally, an investor questionnaire is used to establish whether investors are accredited or non-accredited, which is especially important under Rule 506(b) and 506(c).

Filing and Compliance

When selling securities, a company has several filing and compliance steps they will need to follow. Below, we touch on two important concepts/procedures business owners should know.

Form D Filing

Within 15 days of the first sale of securities, the issuer must file Form D electronically with the SEC. Form D includes information about the issuer, the offering, and the types of investors.

Additionally, issuers must comply with state ‘blue sky’ laws, which may involve filing notices and paying filing fees in each state where securities are offered or sold.

Ongoing Compliance

If there are any material changes to the offering, the issuer must file an amended Form D.

Issuers should regularly review state securities laws to ensure ongoing compliance, as these can vary and change.

Conducting the Offering

Marketing and Solicitation

Under Rule 506(c), companies can use general marketing and solicitation techniques to advertise their private placement but must take reasonable steps to verify that all investors are accredited.

For Rule 506(b), issuers often rely on existing networks of contacts and referrals, as general advertising is not permitted.

Managing Investor Relations

Clear and ongoing communication with potential and actual investors is vital. This includes addressing investor questions, providing updates, and maintaining transparency throughout the offering process.

Closing the Offering

Receiving Funds

Funds are often held in escrow until a predetermined minimum amount is raised. This ensures funds are returned to investors if the offering is not successful.

Finalizing Investments

Once the investment criteria are met and the offering is closed, securities are issued to the investors.

Post-Offering Reporting

Regular updates to investors about the business’s performance and use of the capital raised are crucial for maintaining investor trust and relationships. This is a step that can often be neglected by busy business owners. However, it is extremely important to maintain a strong relationship with new investors.

Conclusion & Future Trends

Blockchain.com to possibly raise capital at 71%-79% discount to prior value  - report | Seeking Alpha

Image Source: Blockchain.com to possibly raise capital at 71%-79% discount to prior value – report | Seeking Alpha

Regulation D offerings have proven essential for startups and SMEs in raising capital, striking a balance between accessibility for issuers and protection for investors.

As we look ahead, the way these offerings will take place will differ dramatically based on technological and process changes.

Some of the most important trends shaping Regulation D offerings include:

  • Blockchain and Tokenization: These technologies are set to alter private securities trading. Their impact lies in enabling more secure, efficient, and transparent private transactions.
  • Regulatory Adaptations: As technology evolves, regulatory frameworks also adapt. This ongoing change in regulations will ensure both the integrity of the market and the interests of the stakeholders are maintained.
  • Expanded Investor Participation: There’s currently a strong movement towards bringing retail traders into private investing. This shift will not only open up new sources of capital for issuers but also level the playing field between high-net-worth individuals and the average investor.

In summary, Regulation D offerings have been very successful in helping encourage private investments by providing a structured framework for both issuers and investors. This framework has helped reduce fraud, encourage investment, and provide rules that investors and businesses can rely on.

In regards to the future of Regulation D offerings, the above trends are quickly working to further improve the industry, as more and more investors look for ways to invest in pre-IPO stocks.


We are not brokers, investment, or financial advisers; you should not rely on the information herein as investment advice. If you are seeking personalized investment advice, please contact a qualified and registered broker, investment adviser, or financial adviser. You should not make any investment decisions based on our communications. Our stock profiles are intended to highlight certain companies for YOUR further investigation; they are NOT recommendations. The securities issued by the companies we profile should be considered high risk and, if you do invest, you may lose your entire investment. Please do your own research before investing, including reading the companies’ public filings, press releases, and risk disclosures. The company provided information in this profile, extracted from public filings, company websites, and other publicly available sources. We believe the sources and information are accurate and reliable but we cannot guarantee it. The commentary and opinions in this article are our own, so please do your own research.

Copyright © 2023 Edge Investments, All rights reserved.

  • Austin Still

    Austin holds a Bachelor of Commerce from the University of Saskatchewan and brings over 10 years of investing experience. With a belief the most important decision investors make when buying stocks is the price paid, Austin aims to blend growth with value by finding companies with accelerating growth combined with a discounted valuation. More specifically, Austin’s expertise lies in the technology sector, identifying businesses showing strong growth, a lasting competitive advantage, and sound fundamentals, paired with a valuation that supports further stock price appreciation.

    View all posts

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