Understanding the Securities and Exchange Commision (SEC) regulations can help investors choose the right products when it comes to growing wealth. Two key regulations you may need to know are Reg A and Reg D. Both are regulations that deal with exemptions from SEC requirements, but they both work differently. If you haven’t heard of either term, or if you simply don’t know how each of these regulations work, use the following guide to gain a better understanding of SEC Reg A and 

Reg D.

What is SEC Reg A?

SEC Reg A is an exemption from registration requirements for a public offering of securities. The benefit of filing under this regulation is less stringent documentation requirements, which make it easier to create a public offering. This regulation also makes it possible for non-accredited investors to take advantage of offerings they might not otherwise have access to. There are two tiers to SEC Reg A; Tier 1 and Tier 2, and they each have their own set of requirements.

Tier 1

Under Tier 1, the company issuing a public offering can raise up to $20 million in a 12-month period. Of that $20 million, no more than $6 million can be raised on behalf of selling securityholders that are affiliates of the issuer. While companies using Reg A Tier 1 do not have ongoing reporting requirements, they are responsible for filing their offerings. They must go through the process of having their filings qualified by state securities regulators in every state they plan to do business. Investors in Tier 1 offerings do not need to be accredited, so you can invest in these assets without meeting stringent wealth requirements. SEC Reg A Tier 1 offerings are typically better suited for smaller companies or those doing primarily local business, as the maximum raise is significantly lower than that of Tier 2.

Tier 2

With Tier 2, companies can raise a maximum of $75 million in a 12-month period. As with Tier 1, there is a limit on how much can be raised on behalf of security holders that are affiliates of the issuers. Previous to the 2015 JOBS Act, the limit was $50 million, and this change has benefited larger companies looking to create a public offering. You may see some investments referred to as Reg A+, which refers to a Reg A Tier 2 investment that qualifies under the changes made to the SEC regulations under the JOBS Act. 

Unlike Tier 1, Tier 2 offerings do not need to be registered with or qualified by state securities regulators, which can further streamline the process of creating a public offering. Tier 2 does accept non-accredited investors, but there is a limit on how much you can invest without being accredited.

What is SEC Reg D?

Simply put, SEC Reg D is an exemption from registration requirements for private companies or entrepreneurs. It’s a smart tool for smaller companies that can’t handle the expense of a public offering but still want to raise capital and open their businesses to investors. While Reg A has its two-tiered system, Reg D comprises two rules: Rule 504 and Rule 506.

Rule 504

Rule 504 limits companies to offering and selling up to $10 million in securities in a 12-month period. There are some exceptions, but investors will typically receive a “restricted security.” This means the security can’t be sold for between 6 months and 1 year without registering them with the SEC. The company must file a Form D to create an offering under Rule 504, and it must provide accurate information to investors to help prevent them from violating anti-fraud provisions (such as selling their securities early without registering them with the SEC). General solicitation is not permitted under Rule 504, so companies can’t advertise their offerings to the public. Under Rule 504, investors do not need to be accredited to take advantage of an offering.

Rule 506

There are two subcategories of Rule 506, which are 506(b) and 506(c). Like Rule 504, investments under rule 506 are restricted securities and can’t be sold for 6 months to 1 year from their initial purchase without registering them. Both subcategories permit unlimited contributions, but there are key differences that make each one unique. 

Under Rule 506(b), companies are limited to just 35 non-accredited investors, and general solicitation to the public is prohibited. There is no limit to the number of accredited investors allowed under 506(b). Non-accredited investors must be considered sophisticated, with enough financial knowledge to understand the risks and potential outcome of their investment. They must be provided with disclosure documentation, and any documents provided to accredited investors must be shared with non-accredited investors as well.  

With Rule 506(c), all investors must be accredited, without exception. Companies are expected to take all reasonable steps to ensure the accredited status of its investors through examining tax documents and other financial statements. Unlike the other types of exemptions we’ve already discussed, Rule 506(C) does allow for general solicitation. This means companies can advertise their offerings as part of their efforts to raise capital. 

Growing Wealth: Comparing Reg A and Reg D

SEC Reg A is aimed at public offerings, while Reg D is geared toward private offerings. Both regulations make it easier for companies to raise the capital they need while still providing some oversight and potential protection for investors. There are specific filing requirements for both, and companies are required to provide financial disclosures to investors to help them stay informed. 

Non-accredited investors can take advantage of several of the regulation subcategories, though there are considerable restrictions under Reg D. Whether you’re accredited or not, a certain level of sophistication is required to fully understand the risks and rewards of both public and private offerings. As with any investment, it’s important to discuss your options with a financial advisor before making any changes to your portfolio. DiversyFund has recently introduced our Premier Offerings for accredited investors, and you can read more about them here.