Not every securities offering goes through full Securities and Exchange Commission (SEC) registration. Several exemptions allow issuers to raise capital with reduced regulatory requirements, but each comes with its own rules and limitations.
What Is Regulation A (the Conditional Small Issues Exemption)?
Regulation A provides an abbreviated registration process using Form 1-A (not a full S-1 registration statement). The disclosure document is an offering circular, not a prospectus.
What Are the Two Tiers of Regulation A?
| Feature | Tier 1 | Tier 2 |
|---|---|---|
| Maximum offering | $20 million in 12 months | $75 million in 12 months |
| Affiliate sales limit | $6 million | $22.5 million |
| State registration | Required (blue-sky compliance) | Preempted (federal only) |
| Financial statements | Not required to be audited | Must be audited |
| Ongoing reporting | Not required | Required (annual, semiannual, current event reports) |
| Investment limits (non-accredited) | None | Greater of 10% of annual income or 10% of net worth |
How Do Qualification and Tradability Work Under Regulation A?
- A Reg A offering may not sell securities until the SEC qualifies the offering circular (Form 1-A), a review-and-comment process similar in spirit to registration. Contrast Reg D, where the issuer files Form D as a notice after the first sale, with no pre-sale SEC qualification
- Securities sold under Reg A are freely tradable, not restricted. This differs from Reg D private-placement securities, which are restricted and cannot be freely resold
What Is Regulation D (Private Placements)?
Regulation D provides an exemption from SEC registration for private offerings. These are the most commonly used exemptions for capital raising.
What Are the Key Rules Under Regulation D?
| Rule | Maximum Offering | Investor Limits | General Solicitation |
|---|---|---|---|
| Small-offering tier | $10 million in 12 months | No limit on number or type | Generally not permitted (exceptions apply) |
| Private-placement tier (no solicitation) | No dollar limit | Unlimited accredited + up to 35 non-accredited (must be sophisticated) | NOT permitted |
| Private-placement tier (with solicitation) | No dollar limit | Unlimited accredited only | Permitted (must verify accredited status) |
Who Qualifies as an Accredited Investor?
An accredited investor includes:
- Individuals with income exceeding $200,000 ($300,000 joint) for each of the last 2 years with reasonable expectation of the same
- Individuals with net worth exceeding $1 million (excluding primary residence)
- Certain entities: banks, insurance companies, registered investment companies
- Entities with total assets exceeding $5 million
What Disclosure Applies to General Solicitation and Non-Accredited Investors?
- General solicitation is any advertising or public communication that offers the securities broadly: newspaper, website, or social-media ads, public seminars, or mass emails to people with whom the issuer has no prior relationship. Communications that condition the market for the offering count as general solicitation
- When non-accredited investors participate (the no-solicitation private-placement tier), the issuer must give them disclosure comparable to a registered offering, typically a private placement memorandum (PPM) with audited financial statements
- An accredited-only offering has no mandated disclosure document, because accredited investors are presumed able to evaluate the offering and obtain information on their own
What Filing Does Regulation D Require?
- Form D must be filed with the SEC within 15 days of the first sale
- Securities sold under Reg D are restricted securities. They cannot be freely resold without registration or an exemption.
How Does an Issuer Verify Accredited Status?
Under the private-placement tier that permits general solicitation, a signed self-certification is not enough: the issuer must take reasonable steps to verify each purchaser's accredited status. Acceptable methods include:
- Income test: reviewing IRS forms (W-2, 1099, Schedule K-1, Form 1040) for the two most recent years, and obtaining a written representation from the purchaser that they reasonably expect to reach the qualifying income level this year
- Net-worth test: reviewing bank statements, brokerage statements, tax assessments, or appraisal reports for assets, plus a credit report for liabilities, all dated within the prior three months, and obtaining a written representation from the purchaser that every liability needed to compute net worth has been disclosed
- Third-party route: obtaining written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney, or a certified public accountant (CPA) that they verified the investor's status within the prior three months
By contrast, the no-solicitation private-placement tier lets the issuer rely on the investor's own representations (reasonable belief), since it is not advertising to a broad, unscreened audience.
Exam Tip: Gotchas
The no-solicitation private-placement tier allows up to 35 non-accredited investors but prohibits general solicitation, and accepts the investor's own representations. The general-solicitation tier permits advertising but requires ALL investors to be accredited and the issuer must take reasonable steps to VERIFY their status with documentation or a qualified third party, not just a signed checkbox. Neither document route stands alone: each one also needs a written representation from the purchaser. Know which path allows what.
What Is the Intrastate Offering Exemption?
The intrastate exemption covers offerings made entirely within one state to residents of that state.
What Are the Requirements for the Intrastate Offering Exemption?
- Issuer must be organized, doing business, and offering/selling within the same state
- Doing business test (80% rule): Must meet at least one of:
- 80% of revenues from in-state
- 80% of assets in-state
- 80% of net proceeds used in-state
- Majority of employees based in-state
- Resale restriction: Securities cannot be resold to out-of-state residents for 6 months from the date of sale by the issuer
Exam Tip: Gotchas
The intrastate-offering rule requires ALL buyers to be state residents. Even ONE sale to an out-of-state buyer can destroy the exemption for the ENTIRE offering, not just that one sale.