How Regulation D Rule 506 Governs Private Offerings and Form D

Regulation D is a set of Securities and Exchange Commission rules that govern limited offers and sales of securities without registration under the Securities Act of 1933. Rule 506 is one of its exemptions, and it is the subject of this explainer. Under Rule 506, offers and sales that meet its conditions are treated as not involving a public offering under section 4(a)(2).

Rule 506 has two paths, 506(b) and 506(c). The choice governs how the offering may be marketed, who may buy and what the company must collect before a sale. Both paths must also meet Rule 501 and Rule 502; under 506(c), only parts (a) and (d) of Rule 502 apply. Each path also carries a notice filing with the SEC after the first sale.

Two Paths Under Rule 506

Rule 506(b) is subject to a limit on the manner of the offering. The company may sell to an unlimited number of accredited investors and to no more than 35 purchasers who are not accredited in any 90-calendar-day period.

Each non-accredited buyer, alone or with a purchaser representative, must have enough financial and business knowledge to weigh the investment’s merits and risks. Alternatively, the issuer may reasonably believe, immediately before the sale, that the buyer has that knowledge. That standard applies to each buyer who is not accredited, not to the offering as a whole.

The 35-purchaser count covers purchasers in offerings made under the rule, measured over any 90-calendar-day period.

Rule 506(c) is not subject to that limit on the manner of the offering. Under Rule 506(c), every purchaser must be an accredited investor, and the company must take reasonable steps to verify that status.

Form D Deadline
Under 17 CFR 230.503, an issuer relying on Rule 506 must file a Form D no later than 15 calendar days after the first sale of securities in the offering.

Accredited Investor Tests for Individuals

The individual tests are set out in Rule 501, which both paths of Rule 506 must meet.

An individual qualifies on net worth above $1,000,000, alone or with a spouse or spousal equivalent. The primary residence is excluded as an asset. Debt secured by that home is also excluded as a liability, up to the home’s estimated fair market value at the time of sale. Any debt above that value counts.

If the secured debt grew within the 60 days before the sale, the increase counts as a liability, unless it came from acquiring the home.

The income test is individual income above $200,000 in each of the two most recent years, or joint income above $300,000 with a spouse or spousal equivalent in those years. The person must also reasonably expect to reach the same level in the current year.

A third route is a professional credential. The SEC designates qualifying certifications by order, after notice and public comment, and posts the recognized ones on its website. In weighing a credential, the SEC considers whether it comes from an examination run by a self-regulatory or industry body, or from an accredited educational institution. It also considers whether the examination reliably tests securities knowledge, and whether the credential can be independently verified.

Verifying Buyers Under Rule 506(c)

Under Rule 506(c), the issuer must take reasonable steps to verify that each purchaser is accredited.

One method is reviewing IRS forms that report income for the two most recent years, together with a written representation that the investor reasonably expects to reach the income level needed to qualify in the current year. Another is reviewing asset and liability documents dated within the prior three months, together with a written representation.

A third method is obtaining written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney or a certified public accountant. The rule also allows a written representation at the time of sale for a person the issuer previously verified, for five years from that verification, if the issuer is not aware of contrary information.

The rule lists separate methods for income, for assets and liabilities, and for written confirmation from certain professionals. The list is not exclusive, so other reasonable steps remain available to the issuer.

Form D Within 15 Days of the First Sale

Under 17 CFR 230.503, an issuer relying on Rule 506 must file a Form D notice no later than 15 calendar days after the first sale of securities in the offering.

If the 15th day falls on a Saturday, Sunday or holiday, the due date is the first business day after it. The count uses calendar days, so weekends and holidays are included in the 15 days.

If the offering is still continuing, an amendment is due annually, on or before the first anniversary of the original filing or of the most recent amendment.

Form D must be filed electronically through EDGAR, and a person the issuer has authorized must sign it. Issuers may amend a Form D at any time. They must amend as soon as practicable to correct material mistakes or to reflect certain changes in the information provided.

Under Rule 506(c), every purchaser must be an accredited investor, and the company must take reasonable steps to verify that status.

Bad Actor Checks and Earlier Event Disclosure

Under Rule 506(d), the exemption is unavailable if the issuer or certain covered persons have a disqualifying event. The covered persons named in the rule include directors, executive officers, beneficial owners of 20% or more of the voting equity, promoters and paid solicitors. The list also reaches predecessors and affiliated issuers.

Disqualifying events include certain felonies or misdemeanors within ten years (five years for issuers), certain court orders within five years, and certain SEC or state orders.

Under Rule 506(e), the issuer must disclose to each purchaser any event that occurred before September 23, 2013 and would have triggered disqualification. The disclosure applies to events from that earlier period, not to later ones. It must be a written description given a reasonable time before sale.

Convictions and orders that occurred before September 23, 2013 are excepted from disqualification under Rule 506(d). They remain subject to the Rule 506(e) disclosure. A late disclosure does not bar reliance on the exemption if the issuer did not know, and with reasonable care could not have known, of the undisclosed matters.

Order of Steps From Offer to Filing

The path choice decides whether the offering is subject to the limit on manner of offering, and under 506(c) what proof of accredited status the company must collect. The investor tests decide who may buy. Under Rule 506(d), the bad actor review applies to the issuer and its covered persons, and a disqualifying event makes the exemption unavailable for a sale.

The Form D clock runs from the first sale. The notice is due 15 calendar days later, and any annual amendment is due on or before the first anniversary of the original filing or the most recent amendment while the offering continues.

The Rule 506(e) disclosure must be given a reasonable time before sale, so it falls before the first sale that starts the Form D clock.

For a brand choosing between the two paths, the rule text sets the purchaser cap and the sophistication standard under 506(b), against the verification duty and the absence of a limit on the manner of offering under 506(c).