Regulation D Private Placements

Regulation D (Reg D) is the SEC's rulebook for private placements: securities sold without going through SA registration. Instead of a registration statement and prospectus, Reg D offerings rely on exemptions and deliver a private placement memorandum (PPM) to investors. The Series 6 exam tests the Rule numbers, the investor caps, and the solicitation rules.

What do Regulation D Rules 500 and 501 establish?

Rule 500 lays out the general framework: Reg D is a set of exemptions from SA registration built on Section 3(b) (small offerings) and Section 4(a)(2) (private offerings).

Rule 501 defines key terms. The most heavily tested term is accredited investor.

Accredited Investor Categories

An individual qualifies as accredited if they meet any of these tests:

• Income: over $200,000 in each of the last 2 years (or $300,000 joint with spouse), with a reasonable expectation of the same this year
• Net worth: over $1,000,000 alone or with spouse, excluding primary residence
• A director, executive officer, or general partner of the issuer

Entity-level accredited investors include:

• Banks, insurance companies, registered investment companies, and broker-dealers
• Certain pension plans and trusts
• Any entity with assets exceeding $5,000,000 not formed for the specific purpose of buying the offered securities

Exam Tip: Gotchas

• Primary residence value is excluded from the $1 million net worth test. This is the most-missed piece of the accredited investor definition. A homeowner with a $2 million house and no other assets does NOT meet the net worth test based on the house.

What are the four general conditions under Regulation D Rule 502?

Rule 502 sets four cross-cutting conditions on Reg D offerings:

• Integration: offers that are part of the same plan of financing are treated as one offering. Issuers cannot artificially split an offering to fit two separate exemptions.
• Information disclosure: if any non-accredited investor participates, the issuer must provide disclosure documents similar to a registered offering. If the offering sells only to accredited investors, no specific disclosure document is required (but antifraud rules still apply).
• Manner of offering: no general solicitation or general advertising under Rule 504 and Rule 506(b). Only Rule 506(c) permits general solicitation.
• Resale limits: Reg D securities are restricted securities. A resale typically requires compliance with Rule 144 (holding period plus other conditions).

Think of it this way: The tradeoff is simple. Reg D lets an issuer skip SA registration, but in exchange the buyers get locked in (restricted securities) and the issuer cannot broadcast the offer to the public.

When must Form D be filed under Regulation D Rule 503?

After an issuer begins selling under Reg D, it must file a Form D with the SEC.

• Filed within 15 calendar days after the first sale of securities
• A short notice filing, not a registration statement
• Identifies the issuer, the exemption relied on, the amount sold, and the use of proceeds

Exam Tip: Gotchas

• Form D is filed within 15 days AFTER the first sale. It is not filed before the offering begins. A common exam trap is to present Form D as a precondition to selling; it is not.

What does Regulation D Rule 504 allow?

Rule 504 is the smaller-dollar private placement exemption.

• Maximum raise: $10,000,000 in any 12-month period (raised from $5M in 2021)
• Permitted to non-accredited investors with no cap on number
• General solicitation generally prohibited (with limited state-level exceptions for certain registered offerings)
• Form D filing required within 15 days of first sale

Note: Older study materials may reference the historical $5M cap; the current SEC ceiling is $10M, but Series 6 items may test either depending on when they were written.

How do Rules 506(b) and 506(c) differ?

Rule 506 is the most heavily used Reg D exemption because it has no dollar limit. It has two sub-rules that the exam loves to compare.

"Sophisticated" non-accredited under 506(b) means a person who (alone or with a purchaser representative) has sufficient knowledge and experience in financial and business matters to evaluate the merits and risks.

"Reasonable steps to verify" under 506(c) can include reviewing:

• Tax returns, W-2s, or pay stubs (for income-based accreditation)
• Bank, brokerage, and credit reports (for net-worth-based accreditation)
• Written certifications from licensed professionals (attorneys, CPAs, registered investment advisers, or registered broker-dealers)

Exam Tip: Gotchas

• Rule 506(b) allows up to 35 non-accredited but sophisticated purchasers. Rule 506(c) allows ZERO non-accredited purchasers. This is the most-tested Reg D distinction on Series 6.
• General solicitation is only permitted under 506(c), and 506(c) requires VERIFICATION of accredited status (not just self-certification). If an offering is advertised publicly, it is 506(c) and every single investor must be accredited and verified.

When does Rule 507 disqualify an issuer from using Regulation D?

An issuer that has been enjoined by a court for violating the Rule 503 Form D filing obligation is disqualified from using Reg D for future offerings.

• SEC may grant case-by-case waivers
• Disqualification is a "bad actor" provision: it strips future access to the exemption

What does Rule 508 protect against in a Regulation D offering?

A technical failure to comply with a Reg D condition does NOT destroy the exemption as to a particular purchaser, if:

• The failure did not pertain to a term directly intended to protect that individual
• The failure was insignificant relative to the offering as a whole
• The issuer made a good-faith and reasonable attempt to comply

What Rule 508 does NOT do:

• Does not shield the issuer from SEC enforcement action
• Does not save the exemption if the deviation was material or intentional

Exam Tip: Gotchas

• Rule 508's "insignificant deviation" protection saves the exemption for an individual purchaser only; it does NOT prevent SEC enforcement against the issuer. The issuer can still be sanctioned even if investors keep their exemption.