Regulatory Update (2026):
Substantial Changes to Rule 504 Offering Limits. When looking at the historical evolution of Regulation D safe harbors, issuers should note that the SEC officially increased the aggregate offering ceiling for Rule 504 from $5 million to $10 million in a 12-month period. This change dramatically increases the utility of Rule 504 for regional or multi-state capital raises. Furthermore, please note that Rule 505 was completely repealed by the SEC. Any historical table or text referencing Rule 505 must be treated as obsolete; issuers seeking a mid-tier exemption must look to the expanded Rule 504 or utilize the uncapped provisions of Rule 506
Need to structure a compliant transfer? Small changes in your operating agreement can inadvertently cross the line into securities law. Contact Rosten Law directly to review your specific transaction.
Private placements and the business owner who does not want to go public
You have now consulted with your small business attorney and to your surprise the attorney has advised you as a small business owner that selling limited liability company (LLC) membership interests may be subject to the federal securities laws.
Related article: Selling Interests in an LLC: Securities Considerations
Selling a piece of your limited liability company, even if it is a small business, may put you on the radar of the Securities and Exchange Commission (SEC). However, it is a highly fact-specific inquiry: under the Supreme Court’s Howey test, an LLC interest is generally deemed a “security” only if the investor expects to derive profits solely from the operational efforts of others. If the buyer exerts significant control over the business, it may not be a security at all. But if it does cross that threshold, it doesn’t mean that you have to go public. “Going public” for those not in the know basically means that you have to register the securities with the SEC. Think big bucks for your securities lawyers and investment bankers. The SEC provides this succinct guidance: “Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption.
Related article: Investors for Startups: Terms of Engagement
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Registration vs. exemption (the basic rule)
The framework is straightforward: if you have a security, and please refer back to our article on whether an LLC interest may be considered a security, then you either have to register with the SEC or you must meet an exemption. If you fall within an exemption to the securities laws, you do not need to register the securities. Just to hammer home the point, the SEC succinctly states: “If a small business is offering and selling securities, even if to just one person, the offer and sale of the securities must either be registered with the SEC or conducted in accordance with one of the many registration exemptions under the Securities Act.”
As a small business owner, if the membership interests may be considered securities, you are looking for an exemption as you do not want the risk of substantial fines from the SEC and possibly worse yet, you do not want the purchaser to try to rescind or undo the purchase of the membership interests.
Related article: Selling a Small Business: Not as Easy as you Thought
Private placement exemptions: non-public offerings and section 4(a)(2)
A principal exemption is the private placement exemption under Section 4(a)(2) of the Securities Act of 1933 for transactions by an issuer not involving any public offering. The courts have provided varying interpretations of the language in the 1933 Act that “transactions by an issuer not involving any public offering” are not subject to registration. So a private offering is a non-public offering. That seems obvious, but where things get tricky is what makes an offering “private.” Part of this problem arises from the Securities Act of 1933 not actually defining the difference between a public offering and a private offering. In practice, issuers commonly focus on limiting the offering to appropriate offerees and ensuring that offerees have (or can obtain) meaningful information about the issuer and the investment, including risk disclosure and access to records.
Crucial Judicial Threshold: While financial sophistication is an important guiding principle, judicial precedents (such as Newby v. Enron Corp.) establish that the governing fact and true touchstone of Section 4(a)(2) is whether the offerees have direct access to the same category of information that a formal registration statement would disclose. Relying on Section 4(a)(2) outside of the formal safe harbors carries significant risk; if an issuer cannot prove that every offeree had direct access to registration-statement-type information, the exemption may fail—regardless of how wealthy or sophisticated the investors are.
Regulation D safe harbors (why most issuers use them)
To reduce uncertainty, issuers often rely on Regulation D safe harbors. A safe harbor means you get rid of the uncertainty by taking your ship into the protected waters of a safe harbor: if you meet the requirements and comply, you are good to go. The company can conduct limited offerings and sales of securities without registration. The non-exclusive part means that you still may be exempt from registration but you may have a hard time proving it and may be subject to SEC scrutiny. In short, you want to fall within one of the safe harbors of Regulation D.
Regulation D is described as non-exclusive meaning an issuer might still claim Section 4(a)(2) even if it does not meet a safe harbor, but the safe harbor provides clearer compliance criteria.
The rules under Regulation D depend on several factors, including whether the investor is sophisticated or should be sophisticated enough to make a decision, how much is involved in the offering, and over what period of time, and whether you have to prepare a private placement memorandum (PPM).
Accredited investors under a separate category of protection
There are varying standards of protection depending on the sophistication of the investor. The rules make a distinction between “accredited investors” and those who are not accredited investors.
Many Regulation D pathways turn on whether purchasers are accredited investors. Common accredited investor categories include:
1. High-Net-Worth Individuals: Natural persons whose individual net worth (or joint net worth with a spouse or spousal equivalent) exceeds $1,000,000, excluding the value of their primary residence.
2. High-Income Individuals: Natural persons with an individual income exceeding $200,000 (or $300,000 jointly with a spouse or spousal equivalent) in each of the two most recent years, with a reasonable expectation of reaching the same level in the current year.
3. Credentialed Professionals: Natural persons holding specified professional certifications, licenses, or credentials in good standing recognized by the SEC (such as the Series 7, Series 65, or Series 82 licenses).
4. Substantial Entities: Corporations, partnerships, LLCs, business trusts, or tax-exempt organizations with total assets or investments exceeding $5,000,000, provided they were not formed for the specific purpose of acquiring the securities offered.
5. Fund Insiders and Wealth Offices: “Knowledgeable employees” of certain private funds, as well as “family offices” (and their “family clients”) that maintain over $5,000,000 in assets under management and are directed by a sophisticated professional.
An accredited investor can also be a bank, a savings and loan association, or any other similar institution—regardless of whether they are acting in an individual or fiduciary capacity. Similarly, an accredited investor can be a registered investment broker or dealer, or it can be a registered investment company. Basically, accredited investors are people or institutions who may suffer a limited amount of economic harm from their investments, or at least they understand the economic harm that they might incur from investments.
Besides accredited investors, a purchaser can be any group of individuals that could be treated as one unit. For example, relatives of a purchaser sharing the same primary residence would be treated as one purchaser. Similarly, a corporation or partnership would be treated as one purchaser so long as that organization both exists for the specific purpose of acquiring the securities offered and is not an accredited investor. (In which case, each beneficial owner of securities or interests in the entity is treated as a separate purchaser for all provisions of Regulation D.)
Some of the exemptions allow the company to sell securities to non-accredited investors, but that doesn’t mean you can sell your membership interests to some poor schmo on the street corner. Even non-accredited investors must have some sophistication in investments. According to the SEC discussion on Rule 506, they must “have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.”
If you have an LLC and you do not want to go public but want to sell LLC membership interests, you can avoid registration if you comply with the rules and meet the requirements of one of the exemptions. Then, generally, you file what is known as a Form D. However, it is vital to remember that filing a Form D is merely a procedural component of an exemption strategy; issuers must meticulously satisfy and document all substantive conditions of the chosen exemption to maintain compliance.
Federal exemptions under Regulation D
The modern Regulation D framework relies primarily on Rule 504 and Rules 506(b) and 506(c). Notably, the SEC officially repealed Rule 505, rendering it entirely obsolete because historical updates raised the capital thresholds of Rule 504.
The following table gives a general summary comparing each of the rules. There are more restrictions but this gives a quick snapshot.
| Rule 504 | Rule 506(b) | Rule 506(c) | |
| Maximum amount | $10 million | No limit | No limit |
| Duration | 12 months | No limit | No limit |
| Soliciting | No general solicitation to the public, unless specific state exemptions apply. | No general solicitation to the public. Only preexisting substantive contacts | Broad general solicitation and advertising allowed |
| Disclosures | None federally required but “sufficient information to avoid violating the antifraud provisions” | None required for accredited investors. If NAI, then extensive historical registration-type disclosures required | None federally required but subject to standard antifraud liability |
| Accredited | No limit | No limit | No limit |
| Non accredited (NAI) | No limit | 35 (must be sophisticated and receive extensive disclosures) | Not allowed |
| State/Fed | Must be exempt under state law in every state of investors | Federal preemption of substantive registration (State notice/fee rules still apply) | Federal preemption of substantive registration (State notice/fee rules still apply) |
| Other | Not a blank check company; Subject to “Bad Actor” disqualification. | Restricted securities; cannot be sold for 1 year without registration | Restricted securities; Issuer must take “reasonable steps” to verify accreditation. |
- Rule 504
Under this exemption, securities do not need to be registered if they are part of an offering not exceeding $10 million within a 12-month period. This represents a significant expansion from the original $1 million limit, making it a viable alternative for regional capital raises. The issuer, however, cannot be an investment company. A company that has no specific business plan or purpose, or one that only has a business plan to engage in a merger with or acquisition of an unidentified company is not eligible to use this exemption. Rule 504 does not require federal registration, but unlike Rule 506, it does not enjoy federal preemption, meaning substantive registration or qualification is required in every state in which there are investors. Furthermore, Rule 504 offerings are subject to strict “bad actor” disqualification provisions.
- Rule 506
The vast majority of companies that sell securities rely on Rule 506. A major advantage of Rule 506 is that it “preempts” state laws so the company does not have to register in various states. However, this preemption applies only to substantive registration requirements. States retain complete statutory authority to mandate notice filings, require copies of Form D, and collect filing fees. Crucially, state regulators can suspend the offering or sale of securities within their borders if an issuer fails to comply with these local procedural notice requirements.
Rule 506(b): The traditional approach to Rule 506 allows an unlimited number of accredited investors, along with up to 35 non-accredited investors. If you are selling a security under 506(b), the investors may self-certify their accreditation status, provided the issuer has a “reasonable belief” they qualify and does not engage in general solicitation.
Rule 506(c): This pathway requires the company to take active, objective “reasonable steps” to verify an investor’s accredited status before they are permitted to invest. Verification is a facts-and-circumstances assessment where the issuer must review documentation—such as tax returns, W-2s, brokerage statements, or professional confirmation letters—and evaluate parameters like the nature of the purchaser and the terms of the offering. As a tradeoff for this higher compliance and documentation lift, Rule 506(c) allows for broad general solicitation and public advertising.
The “Bad Actor” disqualification bar
A critical component missing from older private placement strategies is the “Bad Actor” disqualification standard under Rule 506(d) (and similarly applied to Rule 504). An issuer is completely barred from relying on these safe harbors if the company, its predecessors, its directors, executive officers, general partners, or 20% beneficial owners have experienced a “disqualifying event.” These events include criminal convictions, court injunctions, or administrative cease-and-desist orders linked to securities fraud or regulatory violations. Conducting background checks on covered persons is an absolute necessity before initiating an offering.
Other private placement exemptions
If your sale of membership interests or stock does not fall within one of the exemptions, you may still be exempt under the general exclusion of non-public offerings under Section 4(a)(2) of the 1933 Act. The problem here is that you can no longer take cover in the safe harbor of Regulation D and there is no certainty until you get a knock on the door by the SEC. Consequently, you should try to structure your transaction to fall within one of the Regulation D exemptions.
If you want to have a private offering, then you should of course avoid using any general advertising or solicitation such as through the Internet. You should keep the number of offerees as small as possible. If you limit the offering to friends and family or sophisticated investors with whom you may have a pre-existing relationship, then you are more likely to escape from being deemed to be holding a public offering. And for any offering, it is good practice to disclose as much information as you have about the offering, remembering that access to registration-statement-type information is the vital element required by courts.
State exemptions
In addition to the federal exemptions, there are also state exemptions. Section 3(a)(11) allows an exemption from registration for “any security which is part of an issue offered and sold only to persons resident within a single state by an issuer which is a resident and doing business within such state.” Ultimately, exemptions vary from state to state and the company must ensure that it has complied with all state regulations.
UPDATED: May 20, 2026