For Small Businesses Raising Capital, New Regulation D Amendment May Help

Posted by Eli Solomon


If you’re a small business trying to raise capital, there’s good news to report. Recent changes to the SEC’s Regulation D may make things easier for you.

Here’s an explanation of the changes.
Regulation D before the change.

Prior to these recent amendments, certain businesses could claim an exemption from registration under SEC rules 504, 505 and 506. Since registration with the SEC could be expensive, these exemption rules have been a great help to businesses in the past.
However, most small businesses have relied on rule 506 to exempt themselves from registration. Under this rule, a firm can only sell securities to accredited investors and 35 “sophisticated” non-accredited investors. By “sophisticated” the SEC means investors that have “sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment” (


In addition, securities offered under rule 506 exemptions are not allowed to be sold “to the public” through advertising or other methods of attracting large numbers of people. It has to be a “private” offering.


If a firm wanted to sell securities to non-accredited investors that didn’t fit the definition of “sophisticated”, they could rely on rule 505 instead. This rule allowed businesses to sell to “non-sophisticated” investors if it provided them with information similar to what they would have gotten in a registered offering. However, only issues of $5,000,000 or less could be exempt using rule 505.


In addition, rule 505 also prohibited the sale of exempt securities “to the public” in the same way that rule 506 does.


While both of the rules were useful, firms sometimes had to rely upon rule 504 instead. Rule 504 allowed companies to sell their shares in a public manner to an unlimited number of unaccredited investors, even “unsophisticated” ones.


However, they could only use this exemption if they were a “local” business that did 80% of their transactions in one particular state. And only if their securities were registered according to the laws in that state. In addition, rule 504 only exempted issues of $1,000,000 or less.

Regulation D after the change.
After being amended by the SEC, the new version of rule 504 now allows issues of up to $5,000,000 to be exempt from registration as long as the company is a local business. This provides small businesses that need more than $1,000,000 of capital an alternative means of raising funds.
In addition, the new amendment repeals rule 505 effective May 22, 2017. Since businesses can now raise up to $5,000,000 of capital through rule 504, the SEC felt that rule 505 is no longer necessary.
If you’re a small business trying to raise capital, these changes to SEC rules may help get the funds you need.
For more information about SEC rules or to find help with local securities law filings, please contact Blue Sky Filings by calling 844-723-4537 or by filling out our online form.


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