What Is SEC Regulation D?

Definition and Examples of SEC Regulation D Filings

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The Securities and Exchange Commission (SEC) Regulation D is a section of the Securities Act of 1933. It sets up a process for entrepreneurs to qualify for an exemption from the rule that all offerings of securities must be registered.

As your business grows or if you are an entrepreneur who needs startup funds, you may have thought about selling stock to supporters, family, or friends. Maybe you’ve been scared off by the requirement that your stock offering must be registered with the SEC. But you may be able to skip the registration process if you qualify for an exemption under this part of the securities law. Here’s what you need to know.

What Is Regulation D?

Regulation D is a section of the Securities Act of 1933 that sets up a process for entrepreneurs to qualify for an exemption from the rule that all offerings of securities (like stocks and bonds)  must be registered. 

  • Alternate Names: Reg D, Exempt Offerings

The registration process is important because it gives potential investors information to guide their decisions. However, it’s also expensive, time-consuming, and complicated. 

To help small businesses and entrepreneurial startups sell securities easily, the securities laws include several ways to sell securities without registration through an exemption process. The SEC says it “seeks to foster capital formation by lowering the cost of offering securities to investors.”

Don’t confuse the SEC’s Regulation D with the Federal Reserve’s Regulation D. The latter puts reserve requirements on banks and other financial depositories for how much money they must keep on hand.  

How Does Regulation D Work? 

Regulation D sets up several different exemption processes for bypassing the rules for selling securities. To file a Reg D application, you must meet specific requirements including the type of investors. 

For example, the SEC may limit the number of non-accredited investors offered securities under Reg D. Accredited investors are individuals who have either: 

  • Earned income (from employment or self-employment) over $200,000 (or $300,000 with a spouse) in each of the prior two years, and reasonably expect the same for the current year
  • A net worth over $1 million, alone or with a spouse, and not including the value of the person’s primary residence (net worth is calculated by adding up all assets and subtracting all liabilities)

Non-accredited investors are individuals who don’t meet these qualifications.

The SEC warns that even if you have the exemption, you must give investors enough information to avoid violating the antifraud provisions of the securities laws. Your information must not be false or misleading and it should be as complete as possible. 

Uses of Regulation D Offerings

Some entrepreneurs and startups that use Reg D offerings include: 

  • Biotechnology companies like Marizyme  
  • Technology companies like Accelerated I/O
  • Media networks like Truli Media Group
  • Real estate investment trusts like IDR Core Property Index Fund 

Types of Regulation D Offerings 

Rule 506(b) Private Placements 

This is the main rule your company might use to sell securities privately to people like your family and friends, but not to the general public or to companies. Under this rule, a business can raise an unlimited amount of money and can sell securities to an unlimited number of accredited investors.

However, there are a few rules: 

  • You can’t advertise or solicit the sale
  • You can’t sell to more than 35 non-accredited investors 
  • You must give non-accredited investors information that’s the same as you would give accredited investors, including specific financial statements
  • You should be available to answer questions from non-accredited investors  

Rule 506(c) General Solicitation

You can use this rule to advertise restricted securities (previously issued securities that are not freely tradable) to the public. For this exemption, all purchasers must be accredited investors and you must verify their status. 

Rule 504 Offerings Under $5 Million

This rule allows companies an exemption to sell up to $5 million of securities in a 12-month period. The securities are restricted, meaning that they can’t be sold for at least six months or a year without registering them. Other restrictions also apply.   

Rules 506(b) and 506(c) exemptions don’t have to be registered with a state. But Rule 504 exemptions are subject to state securities laws and regulations.

The SEC also has another exemption process called Regulation Crowdfunding that allows entrepreneurs to qualify to offer and sell securities through crowdfunding (like Kickstarter or GoFundMe). See this SEC crowdfunding compliance guide for details.  

How to Get a Regulation D Exemption

The Regulation D notice process begins when you sell securities without registering them. You must file a notice of the offering to the SEC on Form D within 15 days after the first sale of securities in the offering. If the due date is on a weekend day, the deadline is the next business day. 

To file the Form D notice, you must use the SEC’s EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system.

Because Form D can be complex and labor-intensive, consider getting help from an attorney to make sure everything is correct and complete before you offer securities to investors and file. You must offer the securities for sale before you give notice to the SEC, and it’s better to be sure you meet the qualifications before you apply. 

Key Takeaways

  • Small businesses that want to sell shares of stock to investors may be able to qualify for an exemption from the SEC registration requirements using Regulation D. 
  • Regulation D includes several types of exemptions, including one for private placements—selling securities to private individuals, not the general public. 
  • Each type of exemption comes with requirements like giving information to potential investors and having accredited investors. 
  • The business can give notice for the exemption by filing Form D with the SEC within 15 days after offering the security to investors. 

Article Sources

  1. U.S. Securities and Exchange Commission. "Regulation D Exemption Process." Page vi. Accessed Aug. 19, 2020. 

  2.  Investor.gov. "Registration Under the Securities Act of 1933." Accessed Aug. 19, 2020. 

  3. Investor.gov. "Updated Investor Bulletin: Accredited Investors." Accessed Aug. 19, 2020. 

  4. U.S. Securities and Exchange Commission. ' Private Placements – Rule 506(b)" Accessed Aug. 19, 2020. 

  5. U.S. Securities and Exchange Commission."Exemption for Limited Offerings Not Exceeding $5 Million – Rule 504 of Regulation D." Accessed Aug. 19, 2020. 

  6.  U.S. Securities and Exchange Commission. "Filing a Form D Notice." Accessed Aug. 19, 2020.