Regulation D

Regulation D, codified at Rules 504 and 506 of the SEC's rules under the Securities Act of 1933, is the most widely used exemption from registration in the United States. The vast majority of venture capital financings, private equity deals, hedge fund capital raises, and early-stage startup investments are structured as Regulation D offerings. According to SEC data, Reg D offerings collectively raise far more capital each year than SEC-registered public offerings.

The most commonly used provisions are Rule 506(b) and Rule 506(c). Under Rule 506(b), issuers can raise an unlimited amount of capital from an unlimited number of accredited investors and up to 35 non-accredited but sophisticated investors, provided the offering is not conducted through general solicitation or general advertising. This means issuers must have a pre-existing substantive relationship with investors before approaching them, or use intermediaries such as registered broker-dealers to identify prospects.

Rule 506(c), added by the SEC in 2013 pursuant to the JOBS Act, allows issuers to conduct general solicitation — including internet advertising, social media campaigns, and public pitches — but requires that all purchasers be accredited investors and that the issuer take reasonable steps to verify that status. Verification typically involves reviewing tax returns, bank statements, third-party confirmation letters from attorneys or CPAs, or using third-party verification services.

Accredited investor status is defined under Rule 501. For individuals, it includes those with income exceeding $200,000 (or $300,000 jointly with a spouse) in each of the two prior years with a reasonable expectation of the same in the current year, or a net worth exceeding $1 million excluding the primary residence. The SEC expanded the definition in 2020 to also include individuals with certain professional certifications (such as the Series 7, 65, or 82 licenses) and knowledgeable employees of private funds.

Issuers conducting Reg D offerings must file a Form D with the SEC within 15 days of the first sale of securities. Form D is a brief notice — not a full registration statement — that discloses the issuer's identity, the type of securities offered, the exemption claimed, and the amount raised. While Reg D offerings are exempt from federal registration, they are not exempt from state blue sky laws, though Rule 506 offerings receive a federal preemption that overrides state registration requirements (though states retain anti-fraud jurisdiction).

Investors in Reg D offerings receive restricted securities that cannot be freely resold without registration or another applicable exemption. This illiquidity is a critical distinction from publicly traded securities and must be factored into any investment decision.