Differences between Rule 505 Regulation D and Rule 506 Regulation D
Contents
Rule 505 and Rule 506 of Regulation D[edit]
Regulation D of the Securities Act of 1933 provides exemptions from registration requirements for companies issuing securities.[1] Within Regulation D, Rule 505 and Rule 506 were two exemptions companies could use to raise capital through private placements. However, the U.S. Securities and Exchange Commission (SEC) repealed Rule 505, with the repeal becoming effective on May 22, 2017.[2][3] This change was made in part because amendments to other rules, such as Rule 504, made Rule 505 largely redundant.[4] Rule 506 remains an active and commonly used exemption, now separated into two distinct pathways, Rule 506(b) and Rule 506(c).[5]
A historical comparison between Rule 505 and Rule 506 shows key differences in offering limits, investor qualifications, and the scope of federal preemption over state securities laws.
Comparison Table[edit]
| Category | Historical Rule 505 | Rule 506 |
|---|---|---|
| Current Status | Repealed effective May 22, 2017[2] | Active (consists of Rule 506(b) and 506(c))[3] |
| Aggregate Offering Limit | Up to $5 million in a 12-month period[1] | No limit on the amount of capital that can be raised[5] |
| Investor Type & Limits | Unlimited accredited investors and up to 35 non-accredited investors | Unlimited accredited investors. Rule 506(b) also allows up to 35 non-accredited investors, but they must be "sophisticated".[1] Rule 506(c) is limited to accredited investors only. |
| General Solicitation | Not permitted | Not permitted under Rule 506(b). Permitted under Rule 506(c). |
| State "Blue Sky" Law Preemption | Subject to state registration and qualification requirements | Exempt from state registration as "covered securities" |
Repeal of Rule 505[edit]
The SEC repealed Rule 505 as part of an effort to modernize its rules for smaller offerings. The commission raised the offering limit of a similar exemption, Rule 504, to $5 million (later increased to $10 million) and added "bad actor" disqualification provisions, which were a key component of Rule 505.[4] These changes made Rule 504 a more viable alternative for small offerings, reducing the need for the separate Rule 505 exemption.[4] Consequently, Rule 505 was deemed obsolete and was removed.[2]
Evolution of Rule 506[edit]
Rule 506 has become the most widely used Regulation D exemption. It was expanded under the Jumpstart Our Business Startups (JOBS) Act, which led to the creation of two distinct exemptions: 506(b) and 506(c).[1]
- Rule 506(b) follows the traditional framework of Rule 506. It prohibits the use of general solicitation or advertising to market the securities. Issuers can sell to an unlimited number of accredited investors and up to 35 sophisticated non-accredited investors. For non-accredited investors, the company must provide detailed disclosures similar to those required in registered offerings.
- Rule 506(c) permits issuers to engage in general solicitation and advertising to market an offering. However, all purchasers in a Rule 506(c) offering must be accredited investors, and the issuer must take reasonable steps to verify their accredited status. Relying on self-certification is not sufficient for 506(c) offerings.
References[edit]
- ↑ 1.0 1.1 1.2 1.3 "wikipedia.org". Retrieved February 04, 2026.
- ↑ 2.0 2.1 2.2 "uidaho.edu". Retrieved February 04, 2026.
- ↑ 3.0 3.1 "sec.gov". Retrieved February 04, 2026.
- ↑ 4.0 4.1 4.2 "velawood.com". Retrieved February 04, 2026.
- ↑ 5.0 5.1 "aaronhall.com". Retrieved February 04, 2026.
