Regulation D Rule 504 vs Rule 506: Key Differences

Under Regulation D, Rule 504 and Rule 506 are the two workhorse exemptions from registration for small companies raising capital, but they differ sharply in how much money you can raise, who can invest, and how long resale is restricted—understanding which one fits your offering is essential before you start soliciting.

The Regulation D Framework

Regulation D is the SEC’s set of rules that let companies raise money without registering with the Commission. Registration is expensive, time-consuming, and requires years of audited financials and public disclosures. A small company raising $2 million or a venture-backed startup closing a Series A wants to avoid that burden. Rules 504 and 506 are the two most-used paths.

Both are “safe harbor” exemptions, meaning if you comply with the rule’s conditions—limits on amount raised, investor type, and disclosure—you do not need to register your offering. However, state securities laws (“blue sky” rules) may still apply, and if you get it wrong, the exemption is lost and you face SEC enforcement.

Rule 504: The Small-Offering Exemption

Rule 504 allows a company to raise up to $10 million in a 12-month period without registering. The most important feature: non-accredited (unsophisticated) investors may participate, subject to conditions. This opens the door to friends, family, and small retail investors who don’t meet the accredited net-worth or income tests.

Dollar Limit:
The $10 million ceiling is per company, per calendar-year rolling period. If you raised $8 million under Rule 504 in January, you have $2 million left to raise under that rule until January of the following year. After that, the clock resets.

Who Can Invest:
If the issuer relying on Rule 504 gives no general advertising (stays intrastate or uses only direct solicitation to known contacts), then anyone can buy—accredited or not. The company does not need to verify investor sophistication. This is the appeal for seed-stage or family-office fundraising.

However, if the issuer uses the “SCOR” (Small Company Offering Registration) framework or advertises generally, different rules apply, and resale restrictions become more important.

Resale Restrictions:
Rule 504 securities are “restricted” and cannot be freely resold. The holding period is typically 6 to 12 months depending on whether the offering was done intrastate (no advertising, intrastate only) or under SCOR. An investor who buys under Rule 504 cannot flip the stock the next week without getting into trouble with the SEC. Brokers will refuse to sell the shares until the restriction period lapses.

Disclosure Requirements:
Because Rule 504 allows non-accredited investors, the company must still provide disclosure—but much less than a registered offering. No audited financials are required; a financial projection or summary is usually sufficient. The bar for disclosure is low but not zero.

Rule 506: The Private-Placement Exemption

Rule 506 is broader in scope and more commonly used for substantial raises—Series A/B rounds, leveraged buyouts, and real estate syndications frequently rely on it. There is no dollar limit. The company can raise $100 million, $1 billion, or more.

No Dollar Limit:
An issuer can raise unlimited capital under Rule 506 in a single offering, and the rule places no time horizon on total raises. This makes it the go-to for growth-stage companies, institutional capital raises, and recapitalizations.

Investor Requirements:
Rule 506 comes in two flavors: 506(b) and 506(c).

Under 506(b) (the older, still widely used version), the company may have up to 35 non-accredited investors, but all non-accredited investors must be “sophisticated”—meaning they have sufficient knowledge and experience in financial and business matters to evaluate the investment. The issuer determines sophistication; there is no SEC test. Once you have even one non-accredited investor, though, you trigger a heavier disclosure burden.

Under 506(c) (added in 2012), the company may not have any non-accredited investors; everyone must be accredited. The upside: the company can use general advertising and solicit through public channels. The downside: the issuer must verify accreditation (typically net worth > $1 million or annual income > $200,000 individual / $300,000 joint).

Advertising and Solicitation:
Rule 506(b) prohibits any general advertising. Solicitation must be by direct, private means—email, calls, in-person pitch meetings. Posting on social media or taking out ads would void the exemption.

Rule 506(c) flips this: general advertising is allowed. A company can post on LinkedIn, run ads on Twitter, and take calls from strangers, so long as all buyers are verified as accredited.

Disclosure Requirements:
Under 506(b), if any non-accredited investor participates, the company must provide updated financial statements (audited if it exceeds 1,000 non-accredited investors or if it is public-company equivalent by size). If all investors are accredited, disclosure is minimal.

Under 506(c), because all investors are accredited, the disclosure standard is somewhat lighter—but companies often provide fuller disclosure anyway to attract institutional capital.

Resale Restrictions:
Rule 506 securities are restricted. There is no specific SEC holding period, but the securities are illiquid and typically cannot be resold for months or years. Secondary markets for Rule 506 securities are thin; a buyer needs to wait for another exemption (like Rule 144, if held long enough) or work through a broker-dealer willing to facilitate a private secondary sale.

Choosing Between 504 and 506

A startup raising a seed round of $1–$5 million from angels and friends typically uses Rule 504 or Rule 505 (if small enough), because both allow non-accredited investors and minimal disclosure. The company must stay under the dollar cap and respect the holding periods, but it avoids needing to sponsor a venture-capital fund or insist every investor be accredited.

A company raising a Series A from venture capitalists uses Rule 506, because VCs are accredited, there is no dollar limit, and the disclosure is richer (institutional investors demand audited numbers). Many Series A deals are done under 506(b) with all accredited investors, so general advertising is not a factor.

A company doing a “regulation crowdfunding” raise aimed at retail may eventually use Regulation Crowdfunding (a different exemption), but smaller threshold offerings sometimes use Rule 504 with limited advertising.

A mature, pre-IPO company rolling up secondary investors or issuing employee options might use Rule 506(c) specifically to allow general solicitation of accredited individuals via LinkedIn or a dedicated portal.

State Blue Sky Laws

Even if federal Regulation D exempts your offering, state securities regulators may not. Most states have “coordinated review” exemptions that piggyback on Regulation D, but a few states require their own filing or impose additional limits. Delaware, New York, and California have different rules. Issuers must typically file a Form D with the SEC and potentially with each state where offers are made.

See also