What Is the Issuer Exemption in Securities Law?

Federal law requires every offer or sale of a security to be registered with the Securities and Exchange Commission unless the offering qualifies for an exemption. The main securities registration exemptions are Rule 506(b) and Rule 506(c) under Regulation D, Regulation A’s two tiers, Rule 504, Regulation Crowdfunding, and the intrastate exemptions under Rules 147 and 147A. Each has its own raise limit, investor eligibility rules, marketing restrictions, and filing requirements, and choosing the wrong one can expose a company to investor rescission claims and SEC enforcement.¹

Rule 506 Private Placements

Rule 506 of Regulation D is the most heavily used exemption. It lets a company raise an unlimited amount of money without SEC qualification and without a cap on the number of accredited investors who can participate.² Securities sold under Rule 506 are “restricted,” so buyers cannot freely resell them on the open market. The rule comes in two variants, and the choice between them shapes marketing and who can buy in.

Rule 506(b): No Public Marketing

Rule 506(b) is the traditional private placement. The company cannot use general solicitation or advertising. No public posts, no mass emails to strangers, no television spots. Deals happen through existing relationships and referral networks.³ A company can sell to an unlimited number of accredited investors plus up to 35 non-accredited investors, and every non-accredited buyer must be financially sophisticated enough to evaluate the risks of the investment.²

The issuer only needs a “reasonable belief” that each purchaser meets the accredited investor standard, which in practice often means collecting a self-certification questionnaire. That lighter verification process is one of the main reasons 506(b) remains the default for most private fundraising rounds.

Rule 506(c): Public Marketing Allowed

Rule 506(c) opens the door to general solicitation. A company can advertise the offering on its website, on social media, or through any other public channel. The price for that freedom: every single purchaser must be an accredited investor, and the company must take reasonable steps to verify their status rather than relying on self-certification.⁴ Verification methods include reviewing tax returns, brokerage statements, or obtaining a written confirmation from a licensed CPA, attorney, or broker-dealer.

No non-accredited investors are permitted. That makes 506(c) less flexible than 506(b), but for companies that want broad visibility, particularly online platforms and real estate sponsors, the ability to advertise publicly is worth the tighter verification burden.

Who Counts as an Accredited Investor

Because accredited investor status is the gatekeeper for both Rule 506 variants, it helps to know exactly who qualifies. The two most common paths are financial: individual income exceeding $200,000 (or $300,000 combined with a spouse or partner) in each of the prior two years with a reasonable expectation of the same going forward, or a net worth above $1 million excluding the value of a primary residence.⁵

The definition extends beyond wealth. Holders of certain FINRA licenses, specifically the Series 7, Series 65, or Series 82, qualify on the basis of professional expertise regardless of income or net worth.⁶ Directors, executive officers, and general partners of the issuer also qualify. Entities like banks, insurance companies, and registered investment companies are accredited by default, and other entities with more than $5 million in assets can qualify as well.⁵

Regulation A: The Mini-IPO

Regulation A sits between a private placement and a full public offering. It lets a company raise money from the general public, including non-accredited investors, after filing an offering statement on Form 1-A with the SEC and getting it qualified. The process resembles a scaled-down IPO, which is why practitioners call it a “mini-IPO.”⁷ The exemption is divided into two tiers.

Tier 1

Tier 1 caps the raise at $20 million in any 12-month period.⁷ The offering must be registered or qualified with each state’s securities regulators where shares will be sold, a process known as “Blue Sky” review. That state-by-state compliance adds time and legal cost, but Tier 1 does not impose ongoing SEC reporting obligations after the offering closes.

Tier 2

Tier 2 raises the ceiling to $75 million in a 12-month period and preempts state-level registration, so the company does not need to qualify the offering in every state where it sells.⁷ That convenience comes with strings. The company must provide audited financial statements in its Form 1-A and commit to ongoing reporting, including annual reports, semi-annual reports, and current event reports filed with the SEC. Non-accredited investors in a Tier 2 offering face investment limits as well, though accredited investors do not.

Rule 504: Offerings Up to $10 Million

Rule 504 of Regulation D covers smaller offerings of up to $10 million in a 12-month period.⁸ Unlike Rule 506, Rule 504 does not restrict who can invest. There is no accredited investor requirement at the federal level. The company must still comply with state securities laws in every state where it offers or sells, and certain companies are ineligible, including SEC-reporting companies, investment companies, and blank-check companies with no specific business plan.

Rule 504 does not preempt state registration, so the company may need to register or qualify the offering under each relevant state’s Blue Sky laws. Whether general solicitation is permitted depends on compliance with state-level rules rather than a blanket federal allowance. This exemption works best for smaller companies doing local or regional raises who can navigate the state compliance landscape.

Regulation Crowdfunding

Regulation Crowdfunding (Reg CF) lets a company raise up to $5 million in a 12-month period from both accredited and non-accredited investors.⁹ Every transaction must happen through an SEC-registered intermediary, either a broker-dealer or a registered funding portal, and nowhere else.¹⁰ The company cannot collect money directly from investors outside the platform.

Non-accredited investors face caps on how much they can invest across all Reg CF offerings in a 12-month period. If either annual income or net worth is below $124,000, the limit is the greater of $2,500 or 5% of the higher of annual income or net worth. If both figures are at or above $124,000, the limit rises to 10% of the greater of the two, up to a maximum of $124,000.¹¹ These limits are adjusted periodically for inflation.

Intrastate Offerings

The intrastate exemption under Rules 147 and 147A is designed for companies raising money within a single state. There is no cap on the amount raised, and the offering does not require a federal filing with the SEC.¹² The catch is strict geography. Every buyer must be a resident of the state where the issuer does business, and under Rule 147, offers themselves cannot reach out-of-state residents.

Rule 147A loosens two of the tightest restrictions. It allows the company to be incorporated in a different state as long as its principal place of business is in the offering state. It also permits general solicitation that out-of-state residents might see, provided that actual sales go only to in-state residents.¹³ If even one sale goes to an out-of-state person, the entire exemption can be lost. The company must still comply with the securities laws of the state where the offering takes place.

Required Filings for Each Exemption

Each exemption carries its own filing obligations, and missing them can jeopardize the exemption itself.

Rule 506 and Rule 504: file a Form D notice with the SEC within 15 calendar days after the first sale of securities. Most states also require their own Form D notice filings and charge fees that vary by jurisdiction.¹⁴
Regulation A: file a Form 1-A offering statement with the SEC. It must be reviewed and qualified before any sales begin, and Tier 2 issuers also take on ongoing periodic reporting.⁷
Regulation Crowdfunding: file a Form C offering statement with the SEC before the offering starts.¹⁵
Intrastate offerings: no federal filing is required, but the company must satisfy whatever the home state demands.

Resale Restrictions on Exempt Securities

Investors who buy securities through an exempt offering generally cannot turn around and resell them freely. Securities purchased in a Rule 506 or other Regulation D offering are restricted securities, and reselling them without registration requires compliance with Rule 144 or another resale exemption.¹⁶

Rule 144 imposes a mandatory holding period before any resale. If the issuing company files reports with the SEC (a reporting company), the holding period is six months. If the issuer is not a reporting company, the holding period extends to one year.¹⁶ After the holding period, non-affiliates of a reporting company can generally resell without further restriction. Affiliates such as officers, directors, and large shareholders face additional constraints, including volume limits, a requirement that sales happen through ordinary brokerage transactions, and a Form 144 filing obligation for larger sales. Issuers should be upfront about these restrictions in their offering documents, because illiquidity affects what investors are willing to pay.

Bad Actor Disqualification

Rule 506(d) bars companies from using the Rule 506 exemption if the issuer or any “covered person” has a disqualifying event in their background.¹⁷ Covered persons include directors, executive officers, 20%-or-greater equity holders, promoters, placement agents, and the managing members of any of those entities. The net is wide enough that a single bad actor on the team can kill the entire exemption.

Disqualifying events include:

Criminal convictions within ten years (five years for the issuer itself) for securities fraud, false SEC filings, or conduct related to the business of a broker-dealer, investment adviser, or underwriter
Court injunctions entered within the prior five years restraining the person from securities-related conduct
Final orders from state securities regulators, banking authorities, or the CFTC barring the person from the securities or banking business, or based on fraudulent or deceptive conduct within the prior ten years
SEC disciplinary orders including suspensions or bars from association with a broker-dealer or investment adviser
SEC stop orders and cease-and-desist orders related to registration statements or securities violations

Due diligence on covered persons is not optional. Before launching a Rule 506 offering, the issuer should run background checks on everyone who falls within the covered-person categories. If a disqualifying event predated the current rules (September 23, 2013), the company must disclose the event to investors before any sale rather than being barred outright.¹⁷

Integration of Back-to-Back Offerings

A company that runs multiple capital raises close together risks having the SEC treat them as a single offering, a concept called integration. If two offerings get integrated, the combined deal may fail the conditions of the exemption the company was relying on. A 506(b) offering followed quickly by a 506(c) offering, for example, could be treated as one general-solicitation offering where non-accredited investors participated, blowing the 506(c) requirement that all buyers be accredited.

Rule 152 provides a framework and safe harbors to manage this risk. The most straightforward safe harbor: if the first offering terminates or completes at least 30 days before the second offering begins, the two are generally not integrated.¹⁸ When the first offering involved general solicitation, the company must also reasonably believe that it did not solicit any investor in the second offering through the marketing used in the first, or that it had a substantive relationship with each such investor before the second offering began.

What Happens When an Exemption Fails

Selling securities without valid registration or an exemption is a violation of Section 5 of the Securities Act. The SEC can bring civil enforcement actions resulting in financial penalties, and in severe cases, the Department of Justice can pursue criminal charges that carry potential prison time.¹⁹

From the issuer’s perspective, the most immediate threat is often investor rescission rights. Under Section 12(a)(1) of the Securities Act, any buyer of an unregistered security that should have been registered can demand their money back. The company must return the purchase price plus interest. When an offering raised millions and the exemption is lost, rescission can be an existential event for a startup. The statute of limitations for a federal rescission claim is generally one year from the date of the sale.

A failed exemption can also trigger bad actor disqualification, cutting off the company and its principals from using Rule 506 for future raises.¹⁹ A late Form D filing or sloppy accredited investor verification can unravel an offering after the fact, which is why so much of exemption compliance comes down to administrative discipline that looks minor until it isn’t.

1
U.S. Securities and Exchange Commission. Exempt Offerings
2
U.S. Securities and Exchange Commission. Private Placements – Rule 506(b)
3
Investor.gov. Rule 506 of Regulation D
4
Securities and Exchange Commission. General Solicitation – Rule 506(c)
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Securities and Exchange Commission. Accredited Investors
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U.S. Securities and Exchange Commission. Order Designating Certain Professional Licenses as Qualifying Natural Persons as Accredited Investors
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U.S. Securities and Exchange Commission. Regulation A
8
U.S. Securities and Exchange Commission. Exemption for Limited Offerings Not Exceeding $10 Million – Rule 504 of Regulation D
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U.S. Securities and Exchange Commission. Regulation Crowdfunding
10
eCFR. 17 CFR Part 227 – Regulation Crowdfunding, General Rules and Regulations
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eCFR. 17 CFR 227.100 – Crowdfunding Exemption and Requirements
12
Securities and Exchange Commission. Intrastate Offerings
13
eCFR. 17 CFR 230.147A – Intrastate Sales Exemption
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eCFR. 17 CFR 239.500 – Form D, Notice of Sales of Securities Under Regulation D
15
eCFR. 17 CFR 227.203 – Filing Requirements and Form
16
U.S. Securities and Exchange Commission. Rule 144 – Selling Restricted and Control Securities
17
eCFR. 17 CFR 230.506 – Exemption for Limited Offers and Sales Without Regard to Dollar Amount of Offering
18
U.S. Securities and Exchange Commission. Integration
19
SEC.gov. Consequences of Noncompliance