Since 1933, the SEC or the Securities and Exchange Commission has been regulating the sale of securities. The practical effect is that any company wanting to sell securities had to be registered with the SEC or they had to meet very specific exceptions from this rule.
Three exemptions to the Securities Act of 1933 were contained in Regulation D, which is known as Reg D. These three exemptions are Rules 504, 505 and 506. Companies that meet these exemptions still have to file, but it is a Form D that is required. This form is filed online after the sale.
The form contains information about the promoters of the company, the executives and directors and some general information about the offering. There is very limited information required of the company itself. Investors need to be very careful to ensure the offering they are considering from a company has an accompanying Form D on file with the SEC.
Originally, Rule 504 of Regulation D applied when companies are offering and selling up to a million dollars in their securities within a twelve-month period. Recently, Rule 504 was expanded to have a maximum capital raise of five million dollars within a twelve-month period. Unless specific criteria are met, Ruel 504 offering must generally be conducted without advertising or soliciting of the securities to the public.
Originally, this rule provides the exemption from registration if they company only sells up to five million in a year, sells to accredited investors, notifies that the securities are restricted (have to be held for six months or longer) and they do not use general advertising and solicitation for the sale. With the expansion of Rule 504 from one million dollars to five million dollars, Rule 505 has been repealed.
This is the most common safe harbor exemption used because it allows for an unlimited amount of capital to be raised, and because compliance with Rule 506 meant that states could not require those securities to be registered in their state (unlike Rule 504 and Rule 505, which requires state registration or a separate state exemption). Historically, with what is now known as Rule 506(b), there cannot be any general advertising or solicitation in the offering of the securities, and there could be an unlimited accredited investors and up to 35 non-accredited investors. With changes brought on by the JOBS Act, a new Rule 506(c) was established which does allow for general solicitation and advertising of the securities offering in exchange for an affirmative requirement by the issuer to take special steps to verify that the eventual purchasers of the securities were accredited investors. Rule 506(b) and Rule 506(c) of Regulation D are the most powerful and commonly used exemptions for raising capital available today.