Regulation D

Rule 502: the general conditions

Rule 502 sets out four conditions that apply across Regulation D. Learn these as a group, because most exam questions are really about one of them.

Integration, in Rule 502(a), now simply points to Rule 152. The old five-factor test is gone, replaced in 2021 by a general principle plus four safe harbours. The principle is that offers and sales will not be integrated if the issuer can establish that each offering either complies with registration or has its own available exemption. The safe harbour candidates most need is the first one in Rule 152(b): any offering made more than 30 calendar days before another offering commences, or more than 30 calendar days after another terminates or completes, is not integrated with it. Regulation S offerings are never integrated with domestic ones, and an offering permitting general solicitation is not integrated with a later exempt offering that also permits it. The question integration answers is whether two offerings are really one — because if they are, the combined offering has to satisfy a single exemption.

Information, in Rule 502(b), is narrower than most candidates expect. The issuer must furnish specified information only where it sells under Rule 506(b) to a purchaser who is NOT an accredited investor. There is no mandated information requirement for sales to accredited investors, and none at all under Rule 504. Where the requirement does bite, the content scales with size: the financial statements are those required by Part F/S of Form 1-A, at one level for offerings up to twenty million dollars and a higher one above that. A non-accredited purchaser must also be given the chance to ask questions and receive answers, and must be told in writing about the resale limitations.

One line in the rule deserves more attention than its placement suggests. A note to Rule 502(b)(1) says that when an issuer provides information to non-accredited investors, "it should consider providing such information to accredited investors as well, in view of the anti-fraud provisions of the federal securities laws." The information requirement is waived for accredited investors. The antifraud provisions are not waived for anybody.

Limitation on manner of offering, in Rule 502(c), prohibits the issuer and anyone acting on its behalf from offering or selling by any form of general solicitation or general advertising — naming advertisements in newspapers, magazines, television and radio, and any seminar whose attendees were invited by general solicitation. The exceptions are Rule 504 in certain state-registered circumstances and Rule 506(c). Filing the Form D itself is expressly not general solicitation.

Limitations on resale, in Rule 502(d), state the consequence: securities acquired under Regulation D have the status of securities acquired under Section 4(a)(2) and cannot be resold without registration or an exemption. The issuer must exercise reasonable care to ensure purchasers are not underwriters, and the rule gives three steps that demonstrate it — reasonable inquiry into whether the purchaser is buying for themselves, written disclosure of the resale restriction before sale, and a restrictive legend on the certificate.

Rule 503: Form D

Rule 503 requires an issuer offering or selling in reliance on Rule 504 or Rule 506 to file a notice of sales on Form D with the Commission, electronically through EDGAR, no later than 15 calendar days after the first sale of securities in the offering. If that day falls on a Saturday, Sunday or holiday, the deadline moves to the next business day.

Note what starts the clock. Not the launch of the offering, not the closing — the FIRST SALE.

Amendments are required to correct a material mistake as soon as practicable, to reflect a change in the information as soon as practicable, and annually while the offering continues. The rule then lists a set of changes that do NOT require an amendment, and those are worth a glance: a decrease in the total offering amount, or an increase of no more than ten percent; an increase in the number of non-accredited investors, so long as it does not go above 35; and a decrease in sales commissions or finders' fees, or an increase of no more than ten percent.

Failing to file a Form D does not, by itself, destroy the exemption — the filing is not a condition of Rules 504 or 506. What it does is expose the issuer to Rule 507, which makes the exemption unavailable to an issuer that has been enjoined by a court for failing to comply with Rule 503. The Commission may waive this on a showing of good cause.

The Form D also matters at state level, for reasons the last section of this lesson explains.

Rule 504, and the number FINRA's own outline gets wrong

Rule 504 exempts offerings up to an aggregate offering price of ten million dollars, less the aggregate offering price of all securities sold in the twelve months before the start of and during the offering, or sold in violation of Section 5(a).

It is worth pausing on that number. FINRA's published Series 82 content outline, which dates from 2020, still titles the rule "Exemption for Limited Offerings and Sales of Securities Not Exceeding $5,000,000." The cap was raised to ten million dollars effective in 2021. The outline is a map of the syllabus, not a statement of current law, and this is a live example of why a preparation course that repeats an outline's phrasing rather than reading the rule teaches a number that is five years out of date.

Rule 504 is not available to an issuer that is an Exchange Act reporting company, an investment company, or a blank-check development stage company with no specific business plan or whose plan is to merge with an unidentified company.

General solicitation and the resale restriction are ordinarily required, but Rule 504(b)(1) lifts both in three state-registered circumstances — broadly, where the securities are registered in a state that requires public filing and delivery of a substantive disclosure document, or are sold exclusively under state exemptions that permit general solicitation and limit sales to accredited investors. This is the one place in Regulation D where securities can come out unrestricted.

Rule 504 also carries the Rule 506(d) bad-actor disqualification.

Rule 506(b) and Rule 506(c)

Rule 506 has no dollar limit at all, and it is the exemption behind the overwhelming majority of private placements. It comes in two mutually exclusive versions, and a representative's day-to-day conduct depends entirely on which one an offering is using.

Rule 506(b) is the traditional private placement. There is no general solicitation. The issuer may sell to an unlimited number of accredited investors and to no more than 35 purchasers who are not accredited — and note the current wording, which counts "no more than 35 purchasers of securities from the issuer in offerings under this section in any 90-calendar-day period." Each non-accredited purchaser must, either alone or with a purchaser representative, have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the investment, or the issuer must reasonably believe so immediately prior to sale. Where any non-accredited purchaser is present, Rule 502(b)'s information requirements switch on for the whole offering.

Rule 506(c), added in 2013 under the JOBS Act, trades the solicitation restriction for a verification duty. General solicitation and general advertising are permitted — the offering may be advertised publicly. In exchange, ALL purchasers must be accredited investors, and the issuer must take reasonable steps to VERIFY that they are.

That verification duty is the substance of 506(c), and it is not satisfied by a checkbox. The rule gives five non-exclusive, non-mandatory methods for natural persons: reviewing IRS forms reporting income for the two most recent years plus a written representation about the current year; reviewing asset documentation dated within the prior three months, such as bank or brokerage statements, tax assessments or third-party appraisals, together with a consumer report for liabilities and a written representation that all liabilities have been disclosed; obtaining written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney in good standing or a certified public accountant that they have verified the person within the prior three months; a certification from an investor who bought in the same issuer's earlier 506(b) offering as an accredited investor and still holds; and, for a person previously verified under one of these methods, a written representation at the time of sale, which remains good for five years from the earlier verification.

The practical consequence for a representative: under 506(b) an investor's own questionnaire ticking the accredited box can be enough, provided nothing contradicts it. Under 506(c) it is not. Selling a 506(c) offering the way you would sell a 506(b) offering is how an exemption fails.

Both branches require compliance with Rule 501 and with Rule 502(a) and (d). Only 506(b) carries 502(b) and 502(c).

Bad actors, insignificant deviations, and the states

Rule 506(d) disqualifies an offering entirely if a covered person has a disqualifying event. The list of covered persons is long and the exam likes it: the issuer, its predecessors and affiliated issuers; any director, executive officer, other officer participating in the offering, general partner or managing member; any beneficial owner of 20 percent or more of the issuer's outstanding voting equity, measured by voting power; any promoter connected with the issuer in any capacity; any investment manager of a pooled investment fund; and — this is the one that reaches your firm — "any person that has been or will be paid, directly or indirectly, remuneration for solicitation of purchasers in connection with such sale of securities," together with that solicitor's general partners, managing members, directors, executive officers and participating officers.

A placement agent is a compensated solicitor. Its own disciplinary history can disqualify the issuer's offering.

The disqualifying events include criminal conviction within ten years of the sale (five years for issuers, predecessors and affiliated issuers) for a felony or misdemeanour in connection with the purchase or sale of a security, involving a false Commission filing, or arising out of the business of an underwriter, broker, dealer, municipal securities dealer, investment adviser or paid solicitor; court orders entered within five years restraining such conduct; and final orders of state securities, banking, insurance and credit union regulators, federal banking agencies, the CFTC and the NCUA. Events occurring before the rule took effect are not disqualifying, but Rule 506(e) requires them to be disclosed in writing to purchasers a reasonable time before sale.

Rule 508 forgives insignificant deviations, and its exceptions are the point. A failure will not cost the exemption as to a particular investor if it did not pertain to a condition intended to protect that investor, was insignificant to the offering as a whole, and a good faith and reasonable attempt at compliance was made. But the rule then declares that a failure to comply with Rule 502(c), with Rule 504's offering limit, or with Rule 506(b)'s 35-purchaser limit "shall be deemed to be significant to the offering as a whole." General solicitation in a 506(b) deal, blowing the dollar cap, or the thirty-sixth non-accredited purchaser are never insignificant.

Finally, the states. Section 18 of the Securities Act makes a security a "covered security" — beyond state registration — when the transaction is exempt under Commission rules issued under Section 4(a)(2), which means Rule 506. States retain the power to require notice filings substantially similar to those in effect on September 1, 1996, and to collect fees, and they retain their antifraud jurisdiction. That is why a Rule 506 offering still results in state Form D notice filings.

Rule 504 is not preempted. A 504 offering is a state-law offering as well as a federal one, and must satisfy the blue-sky law of every state in which it is sold. This asymmetry between 504 and 506 is a favourite of exam writers.