Regulation D of the Securities Act of 1933 provides several "safe harbor" exemptions that offer companies raising capital a clear path to compliance with Section 4(a)(2), which exempts certain securities offerings from the SEC’s registration requirements.
These safe harbors are intended to give companies greater certainty that their capital-raising activities will qualify for exemption, provided they meet the specific criteria set forth in the applicable rule. In doing so, they help streamline the fundraising process while maintaining essential investor protections against fraud and misconduct.
The primary safe harbors under Regulation D include:
1. Rule 504 — Exemption for Limited Offerings
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Offering Limit: Up to $10 million in any 12-month period.
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Investor Type: Can include non-accredited investors (no specific limit).
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Solicitation/Advertising: Permitted only if the offering is registered in one or more states or if an exemption from state law allows advertising.
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Resale Restrictions: Generally restricted; securities are considered “restricted securities.”
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State Law Compliance: Yes — subject to “Blue Sky” laws in each state.
Common Use: Small, early-stage offerings that need flexibility with investor type and minimal federal involvement.
2. Rule 506(b) — "Traditional" Private Placement
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Offering Limit: Unlimited.
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Investor Type: Unlimited number of accredited investors and up to 35 non-accredited but sophisticated investors.
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Solicitation/Advertising: Prohibited.
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Verification: Self-certification by investors (no mandatory third-party verification).
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Disclosure Requirements: Extensive if non-accredited investors participate (similar to registered offerings).
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State Law Compliance: Preempted under NSMIA, but notice filings (Form D) are still required.
Common Use: Most common exemption; used when issuers prefer a quiet, controlled raise without public marketing.
3. Rule 506(c) — General Solicitation Offering
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Offering Limit: Unlimited.
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Investor Type: Only accredited investors.
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Solicitation/Advertising: Permitted — including online, public statements, etc.
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Verification: Issuer must take “reasonable steps” to independently verify accredited status (e.g., tax returns, third-party certifications).
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Disclosure Requirements: No mandated disclosure, but often provided to reduce risk.
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State Law Compliance: NSMIA preempts, but Form D and state notice filings required.
Common Use: Used by startups, funds, and platforms that want to market widely and raise from a broad pool of accredited investors.
Summary Table
Rule Offering Limit Investors Allowed General Solicitation Verification Required Use Case Rule 504 $10 million Accredited & non-accredited Limited No Small raises with state oversight Rule 506(b) Unlimited Accredited + ≤35 non-accredited Not allowed No (self-certify) Traditional private placements Rule 506(c) Unlimited Accredited only Allowed Yes (independent steps) Publicly marketed private raises
By relying on these safe harbors, companies raising capital can reduce the risk of non-compliance with federal securities laws as well as state securities laws. It can also help a company avoid the very high costs, complexities, and common delays associated with registering their securities with the SEC (i.e., a "public offering"). However, each safe harbor has its own specific requirements and limitations as briefly touched on above, and companies should consult with experienced legal, accounting, and financial professionals to determine which safe harbor is best suited to their capital raise needs.
