Regulation D includes safe harbors that enable issuers of securities exemptions from federal registration requirements. Rules 504, 505, and 506 contain these exemptions. The most commonly used exemption is provided by Rule 506 in private offerings, which account for the vast majority of offerings.
Rule 506 Exemption
The Securities Act of 1933, Section 4(a)(2) governs Rule 506(b). It allows companies to issue securities to 35 non-accredited investors and a limitless number of accredited investors. Rule 506 provides many benefits not offered under the other Reg D exemptions.
Federal Law Trumps State Law
Under Rule 506, if your Regulation D offering is prepared correctly, you can bypass registering at the state level. Under federal law, the states do not have the authority to review securities operating under the exemption provided by Rule 506. They may not impose additional requirements due to the 1996 National Securities Markets Improvement (NSMIA) Act. States are only permitted to require issuers to submit a notice filing and pay a filing fee.
No Loss of Exemption When Offering to Accredited Investor
If an offering conducted under Rule 506 is offered exclusively to accredited investors, the issuer will retain its exemption despite failing to make any prescribed disclosures. To protect the company from anti-fraud provision violations established under state securities laws, the Exchange Act, and the Securities Act, a private placement memorandum should be carefully put together.
General Solicitation and Advertising
Under Rule 506(c), if the issuer takes reasonable steps to verify the accredited investor status of the purchaser of its securities, the issuer may conduct general solicitation and advertisement. Under Rule 506(b), general solicitation and advertising are not permitted.
Beyond Regulation D Rule 506 there are other federal exemptions not used as often, such as Rule 504 and 505, Rule 147 Intrastate Offering Exemption, and SCOR offering.
Blue Sky Laws
State securities laws, also referred to as blue sky laws, require issuers of securities to either find an applicable exemption or register their securities. These laws are in addition to the federal exemptions.
States are not permitted to place other registration mandates regarding an offering made under Rule 506 for state and federal exemption, except to require the filing of Form D. Some additional exemptions are also available to issuers in individual states.
