What Is the Issuer Exemption in Securities Law?

A company that wants to sell stock, notes, or other securities in the United States generally has to register the offering with the SEC — unless it qualifies for one of the securities registration exemptions built into federal law. The main options are Rule 506(b) and Rule 506(c) private placements under Regulation D, Regulation A Tier 1 and Tier 2, Rule 504, Regulation Crowdfunding, and the intrastate exemption under Rules 147 and 147A. Each has its own ceiling on how much can be raised, its own rules on who can invest and whether the deal can be advertised publicly, and its own filing requirements. Picking the wrong one, or missing a condition inside the right one, exposes the company to investor rescission claims and SEC enforcement.

Rule 506(b): Private Placements Without Advertising

Rule 506(b) of Regulation D is the most heavily used exemption in the market. A company can raise an unlimited amount of money and sell to an unlimited number of accredited investors, plus up to 35 non-accredited investors who are financially sophisticated enough to evaluate the risks.¹ The catch is no general solicitation. No public posts, no mass emails to strangers, no television spots. Deals move through existing relationships and referral networks.²

The issuer only needs a reasonable belief that each purchaser meets the accredited investor standard, which in practice often means a self-certification questionnaire. That lighter verification is a big reason 506(b) remains the default for most private rounds.

Rule 506(c): Private Placements With Public Marketing

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 is that every purchaser must be an accredited investor, and the company must take reasonable steps to verify accredited status rather than rely on self-certification.³ Acceptable verification includes reviewing tax returns and brokerage statements, or obtaining written confirmation from a licensed CPA, attorney, or broker-dealer.

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

Who Qualifies as an Accredited Investor

Accredited investor status is the gatekeeper for both flavors of Rule 506. The two most common paths are financial: individual income above $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 net worth above $1 million excluding the value of a primary residence.⁴

The definition reaches beyond wealth. Holders of certain FINRA licenses — the Series 7, Series 65, or Series 82 — qualify on professional expertise, regardless of income or net worth.⁵ Directors, executive officers, and general partners of the issuer qualify. Banks, insurance companies, and registered investment companies are accredited by default, and other entities with more than $5 million in assets qualify as well.⁴

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.⁶ The process resembles a scaled-down IPO, which is why practitioners call it a mini-IPO. The exemption comes in two tiers.

Tier 1

Tier 1 caps the raise at $20 million in any 12-month period.⁶ 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. State-by-state compliance adds time and legal cost. Tier 1 imposes no 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.⁶ That convenience comes with strings. The company must provide audited financial statements in its Form 1-A and commit to ongoing reporting, including annual, semi-annual, and current event reports filed with the SEC. Non-accredited investors in a Tier 2 offering face investment limits; accredited investors do not.

Rule 504: Offerings Up to $10 Million

Rule 504 of Regulation D covers smaller offerings, up to $10 million in a 12-month period.⁷ 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 issuers 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 state-level rules rather than a blanket federal allowance. Rule 504 works best for smaller companies doing local or regional raises where the state compliance landscape is manageable.

Regulation Crowdfunding

Regulation Crowdfunding, or Reg CF, lets a company raise up to $5 million in a 12-month period from both accredited and non-accredited investors.⁸ Every transaction has to happen through an SEC-registered intermediary — a broker-dealer or a registered funding portal — and nowhere else.⁹ Money cannot flow to the company outside the platform.

Non-accredited investors are capped 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 $124,000.¹⁰ 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 no federal filing with the SEC.¹¹ 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, provided its principal place of business is in the offering state. It also permits general solicitation that out-of-state residents might see, as long as actual sales go only to in-state residents.¹² One sale to an out-of-state person can lose the entire exemption. The company must also comply with the securities laws of the state where the offering takes place.

Required Filings for Each Exemption

Every 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. Most states require their own Form D notice filings and charge fees that vary by jurisdiction.¹³
Regulation A: File a Form 1-A offering statement with the SEC, which has to be reviewed and qualified before any sales begin. Tier 2 issuers also take on ongoing periodic reporting.⁶
Regulation Crowdfunding: File a Form C offering statement with the SEC before the offering starts.¹⁴
Intrastate Offerings: No federal filing, but the company must satisfy whatever the home state demands.

Resale Restrictions on Exempt Securities

Investors who buy through an exempt offering generally cannot turn around and resell freely. Securities purchased in a Rule 506 or other Regulation D deal are “restricted securities,” and resale without registration requires compliance with Rule 144 or another resale exemption.¹⁵

Rule 144 imposes a mandatory holding period. 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 is one year.¹⁵ After the holding period, non-affiliates of a reporting company can generally resell without further restriction. Affiliates — officers, directors, and large shareholders — face additional constraints, including volume limits and a Form 144 filing obligation for larger sales. Illiquid securities are harder to sell, so investors price the resale lockup into what they will pay, and issuers should be upfront about these restrictions in their offering documents.

Bad Actor Disqualification Under Rule 506

Rule 506(d) bars a company from using the Rule 506 exemption if the issuer or any “covered person” has a disqualifying event in their background.¹⁶ 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 one person on the team can kill the 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 in 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.¹⁶

Integration Risk Between 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 are 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.¹⁷ 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. For issuers doing repeated fundraising rounds, timing and documentation under Rule 152 is one of the quieter compliance risks that catches people off guard.

What Happens If an Exemption Fails

Selling securities without valid registration or an exemption violates 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.¹⁸

From the issuer’s side, the most immediate threat is often investor rescission. 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.¹⁸ That cascading effect is why securities lawyers spend so much time on compliance details that look purely administrative. A late Form D filing or a sloppy accredited investor verification can unravel an offering long after the money has been spent.

1
U.S. Securities and Exchange Commission. Private Placements – Rule 506(b)
2
Investor.gov. Rule 506 of Regulation D
3
Securities and Exchange Commission. General Solicitation – Rule 506(c)
4
Securities and Exchange Commission. Accredited Investors
5
U.S. Securities and Exchange Commission. Order Designating Certain Professional Licenses as Qualifying Natural Persons as Accredited Investors
6
U.S. Securities and Exchange Commission. Regulation A
7
U.S. Securities and Exchange Commission. Exemption for Limited Offerings Not Exceeding $10 Million – Rule 504 of Regulation D
8
U.S. Securities and Exchange Commission. Regulation Crowdfunding
9
eCFR. 17 CFR Part 227 – Regulation Crowdfunding, General Rules and Regulations
10
eCFR. 17 CFR 227.100 – Crowdfunding Exemption and Requirements
11
Securities and Exchange Commission. Intrastate Offerings
12
eCFR. 17 CFR 230.147A – Intrastate Sales Exemption
13
eCFR. 17 CFR 239.500 – Form D, Notice of Sales of Securities Under Regulation D
14
eCFR. 17 CFR 227.203 – Filing Requirements and Form
15
U.S. Securities and Exchange Commission. Rule 144 – Selling Restricted and Control Securities
16
eCFR. 17 CFR 230.506 – Exemption for Limited Offers and Sales Without Regard to Dollar Amount of Offering
17
U.S. Securities and Exchange Commission. Integration
18
SEC.gov. Consequences of Noncompliance