The Securities Act prohibits offering a security for sale until a registration statement covering the security has been filed with the SEC. Section 4(2) of the Act establishes a statutory exemption from registration for private offerings—i.e. private placements of securities. Regulation D specifies the conditions for claiming the statutory private placement exemption, which is the most common exemption for start-ups.
Regulation D or Reg D is made up of 3 rules, Rule 504, 505 and 506. These rules establish the different conditions for exemption, also known as safe harbors, based on the size of the offering. Rule 504 deals with offerings up to $1 Million; Rule 505 deals with offerings up to $5 Million; and Rule 506 deals with offerings unlimited in size.
By far the most used safe harbor is Rule 506, which allows offerings to accredited investors without limit and to up to 35 non-accredited investors. An “accredited investor” is an individual (i) whose net worth or joint net worth with a spouse exceeds $1 million at the time of the purchase, excluding the value of a primary residence, or (ii) whose annual income exceeded $200,000 (or $300,000 jointly with a spouse) during the last two years with a reasonable expectation of the same income in the current year.