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What's With All The SEC Regulations?

Updated: Dec 6, 2021

Regulation A and Regulation D allow businesses and entities to raise capital for their offerings. Usually, a private company would have to go through the Securities and Exchange Commission’s registration process and be limited to only Accredited Investors. These baseline funding requirements are complex enough to involve securities laws and regulations, but there are three exemptions under Regulation D that are available to us as Syndicators and Fund Managers:

  • Rule 504

  • Rule 505

  • Rule 506

What are the exemptions under the SEC’s Regulation D?

Rule 504 – This exemption allows your business to sell securities for a total value of up to $1 million to accredited investors only. The securities are restricted, and you must comply with Blue Sky Laws that require you to report financial details of your offerings and sellers and the investors involved in the transactions.

Rule 505 – This exemption allows your business to sell restricted securities up to $5 million in total value. However, you are limited in how you advertise your offering and how many non-accredited investors may purchase securities.

Rule 506 – This is the most applicable to most syndicators. In 2013, after the JOBS Act, Rule 506 expanded from one exemption to two. This new exemption allows private companies to “generally solicit” (advertise) as long as they only accept Accredited Investors. This has become a very popular exemption because Blue Sky Laws do not restrict businesses under this exemption.

The following are the two subsections of Rule 506 of Regulation D:

Rule 506(b)

  • No public advertisement or “general solicitation”

  • 35 non-accredited investor limit (sophisticated investors)

  • Investors must receive a private placement memorandum

Rule 506(c)

  • Accredited investors only

  • Public advertisement of offering permitted (general solicitation)


What is an accredited investor?

In the U.S, the definition of an accredited investor is put forth by SEC in Rule 501 of Regulation D. Any investor that does not meet the above criteria is considered non-accredited, or sophisticated, according to the SEC.

To be an accredited investor, a person must have an annual income exceeding $200,000 ($300,000 for joint income) for the last two years with the expectation of earning the same or a higher income in the current year. An individual must have earned income above the thresholds either alone or with a spouse over the last two years. The income test cannot be satisfied by showing one year of an individual's income and the next two years of joint income with a spouse.

A person is also considered an accredited investor if they have a net worth exceeding $1Million, either individually or jointly with their spouse, not including their primary residence. The SEC also considers a person to be an accredited investor if they are a general partner, executive officer, or director for the company that is issuing the unregistered securities.

An entity is considered an accredited investor if it is a private business development company or an organization with assets exceeding $5 million. Also, if an entity consists of equity owners who are accredited investors, the entity itself is an accredited investor. However, an organization cannot be formed with the sole purpose of purchasing specific securities. If a person can demonstrate sufficient education or job experience showing their professional knowledge of unregistered securities, they too can qualify to be considered an accredited investor.

What is Form D?

Form D is used to file a notice of an exempt offering of securities with the SEC. No matter the type or number of investors, your business must disclose specific information on the offering by completing Form D. This form must be completed and submitted within 15 days of your first sale.

What is a Private Placement Memorandum?

Rule 506 requires that you provide a Private Placement Memorandum (PPM) to non-accredited investors. In it, you will detail your company’s financial information and risk analysis of the investment offered. This is a legal document that must be drafted with care and precision to avoid misrepresentations or omissions.


The below represents regulations related to CrowdFunding. While not something we are interested in at the moment, they are worth noting.

What are Regulation A and Regulation A+

Regulation A allows private companies to fundraise up to $50 million by selling securities under less-stringent legal regulations.

Like Rule 506 of Regulation D, Regulation A also shifted after the JOBS Act passed in 2012 to become more like an Initial Public Offering (IPO) in that businesses must be qualified with the SEC or meet exemption qualifications. But since that time, it has become more reasonable for companies to take this exemption because of the increased cap on the dollar amount that can be raised.

The new Regulation A+ offers two tiers, both of which now allow accredited and non-accredited investors:

  • Tier 1: raise up to $20 million per year

  • Tier 2: raise up to $50 million per year (investment amounts per investor in this tier are limited)

In Tier 1, companies must register their offering in the state or states where they are selling their securities. In some instances, a multi-state review program makes it possible to file the offering in multiple states.

In Tier 2, companies may advertise their offering generally before registering their offering with the SEC. Once the company begins to sell those securities, they must file an offering statement from their investors for qualification. Investors may include accredited and non-accredited funders and the securities are not restricted.

Freetrading Securities – since the securities sold in Tier 2 of Regulation A+ are not restricted, companies that sell enough securities to create a market, which is at least 100 shares held by at least 30 shareholders, may be able to file a Form 211 Application under the Exchange Act. Under the Financial Industry Regulatory Authority (FINRA), this application allows the securities to be quoted on the Pink Over-the-Counter (OTC) marketplace. It enables the company to engage an OTC sponsor. Benefits of listing on the OTC marketplace include more direct trade with fewer regulations.

Reporting requirements for Tier 2 Offerings are minimal compared to requirements for public companies. They include only:

  • Annual or semi-annual reports

  • Current event reports

What is Regulation CF?

The JOBS Act also created a crowdfunding regulation (Regulation CF, or Reg CF) that allows private companies to raise money online by selling securities and makes more allowances for general solicitation or marketing.

In Regulation Crowdfunding, the fundraising allowance is capped at $1 million per year, but it may be raised from both accredited and non-accredited investors. The stipulation is that all crowdfunding investors must invest through a registered broker-dealer or funding portal, and there are limits on what each investor may contribute.

  • Common stock

  • Convertible notes

  • KISS

  • Preferred stock

  • SAFEs

  • Series Seed

What opportunities are there for companies using Regulation CF?

Opportunities for companies using Regulation CF include:

  • Use social media for advertising an offering

  • Use events for fundraising

  • Use a funding portal for networking and marketing

  • Sell securities to accredited and non-accredited investors


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