By: Heidi Abdul, Corporate Consultant and Auxana member

Unlimited funding. Unlimited investors. Safe harbor. SEC filing exemptions. Electronic filing. These are just a few of the reasons you’d want to take place in a Reg D offering. If you’re in the entrepreneurial world, you’ve probably heard the term ‘Reg D offering’ tossed around. And even though it’s a commonly-used phrase when it comes to funding opportunities, it’s a little misleading because most people aren’t talking about the entirety of Regulation D. They’re referring to the specific, and frequently used exemption, Rule 506(b), for private offerings, also referred to as a “private placement.”

If you’re considering a private offering, understanding the nuances and requirements of Rule 506(b) is critical before making any funding plan decisions. Preparation from the start will save you significant time and money throughout your Reg D offering. This blog series gives you a jumpstart in that preparation by highlighting the benefits of Reg D offerings under Rule 506(b) as well as some restrictions and nuances of compliance.


Rule 506(b) is widely known as the private offering safe harbor because it provides specific standards that companies and investors follow to raise an unlimited amount of money to an unlimited amount of accredited investors while remaining exempt from SEC securities registration. This safe harbor aspect is why people gravitate towards Reg D offerings, but there are many other benefits business owners and investors get from using Rule 506(b), most notably the familiarity and amount of funding involved with this type of offering.

When you first talk about big funding opportunities, a lot of people tend to think IPOs and are surprised when they learn Rule 506(b) offerings actually involve substantially more money than public offerings. The Office of the Advocate for Small Business Capital Formation (OASB) reported $1.4 trillion in funding was raised under Rule 506(b) for the 2019 fiscal year compared to the $50 billion IPOs received and the $1.2 trillion for other public offerings. Here’s a visual from their report to help put it in perspective:

Image from Office of the Advocate for Small Business Capital Formation, Annual Report

What this graph really illustrates is how many different companies and investors use Rule 506(b) for their funding opportunities. With a median offering of $1.9 million, this is the type of funding that gives businesses a huge leap into their next stage of operations. Because the monetary amount and number of accredited investors are unlimited under 506(b), companies using Reg D offerings include small privately-held companies, emerging and growth-stage companies, and everything in between.

It’s easy to get your Reg D offering started because seasoned venture capitalists and angel investors are familiar with 506(b), the accreditation requirements, and disclosure standards, giving more assurance and ease of compliance to business owners.


The ease, familiarity, lower cost, and safe harbor benefits of Rule 506(b) make it the go-to private offering option, but not every company or potential investor can take place in a Reg D offering.

From the investment side of Rule 506(b), offerings are open to an unlimited number of accredited investors and a maximum of 35 non-accredited investors. Regardless of the type of investor, all of them must be people with whom you have a pre-existing, substantive personal or business relationship, meaning you must have sufficient information about them to evaluate their financial circumstances and sophistication when entering into the transaction. You can’t just find someone on the street and ask them to participate in a 506(b) offering – something you probably shouldn’t do with any business decision anyway.

Following the requirement that you must have pre-existing, substantive personal or business relationships with your investors, Rule 506(b) prohibits general and internet solicitation, such as crowdfunding (there are different regulations for this type of funding – more on that later on in the blog series).

From a company compliance perspective, executives need to be aware that a company is disqualified from using the 506(b) offering rules if you are what is considered abad actor’ under Reg D. If a “covered person” as defined in the rules, has been convicted or sanctioned for securities fraud and violations, the company might not qualify for Rule 506(b) offerings. And, as is the case with any securities transaction, your offering cannot violate antifraud provisions. You’ll want to engage an experienced securities attorney if you’re unsure when it comes to your potential disqualification due to bad actor and antifraud standards of Rule 506(b).

Investors are going to need accurate information about the company before finalizing the deal (just like they would for any type of business opportunity). This disclosure of information is a requirement of Rule 506(b), and how much the company discloses depends on the type of investor. Compiling this information takes time on the business’s end but ultimately helps both parties make an educated decision and ultimately protects the company. Information that’s typically provided in a 506(b) offering includes:

  • summary of offering;
  • business plan;
  • risk factors;
  • financial statements; and
  • the Accredited Investor Questionnaire.

One Rule 506(b) nuance that affects both sides of the transaction is that this type of offering involves restricted securities, meaning the securities are not freely tradable and have restrictions on resale/transfer. Because most seasoned VCs and angel investors are familiar with 506(b) offerings, this isn’t usually a roadblock for acquiring funding, but it is something you should fully understand before starting the transaction.

Navigating these requirements of a Reg D offering can seem daunting at first glance, but that’s where preparing in advance by putting together a team of trusted securities attorneys and deal consultants can make a huge difference. For most entrepreneurs and investors, Rule 506(b)’s administrative side is far outweighed by the benefits of growing a company from a seed to a sapling and a sapling to a growing tree and beyond.


DISCLAIMER: This blog does not contain or constitute legal advice and we are not a law firm nor will we provide legal advice. Auxana Inc. is not a law firm, does not provide any legal services, any legal advice, explanation, opinion, or recommendation about possible legal rights, remedies, defenses, options, or any lawyer referral services, and does not provide or participate in any legal representation.