Rule 505 of Regulation D

Rule 505 of Regulation D allows offerings up to - and not to exceed - $5 million  during the preceding 12 month period (under Rule 504, Rule 505 or Section 3 of the act). The exemptions Rule 505 of Regulation D limits the number of non-Accredited investors a company is allowed to have but has no investor sophistication standards. Rule 505 requires various disclosures similar to that required for Rule 506 offerings, under $7.5 million and has various rules and regulations different from Rule 504 and Rule 506.

Selling Securities: Various Rules for Reg D 505

• The company can only offer and sell up to $5 million of its securities in any 12 month period;

• The company  can sell to an unlimited number of Accredited Investors and up to 35 non-Accredited Investors, similar to Rule 506;

• The company  must let the purchasers (investors) know that they are receiving “Restricted Securities”, and that these securities cannot be sold for at least one year without their registration; and

• The company cannot use general solicitation or advertising (publicly) to sell the securities.

Rule 505 of Regulation D allows the company to decide what information to divulge to Accredited Investors. Again, like Rule 504 of Regulation D, this information supplied to prospective investors must not violate the antifraud prohibitions of the federal securities laws. However, the company must provide non-Accredited Investors the necessary disclosure documents. Any information submitted to Accredited Investors must also be supplied to prospective non-Accredited Investors, and answers to needed questions by both Accredited and non-Accredited Investors should be provided as well.

Rule 505 of Regulation D has many requirements, particularly for the disclosure of a company’s financial statements, including, but not limited to:

• The company’s financial statements need to be certified by an independent public accountant, i.e. the company must have audited financials;

• If the company (other than a limited partnership) cannot obtain the needed audited financial statements without “unreasonable effort or expense”, then only the balance sheet is mandatory to be audited. This audit must be dated within 120 days of the start of the offering; and

• If the company is a limited partnership and is unable to acquire the necessary financial statements without “unreasonable effort or expense”, they may furnish audited financial statements that were prepared under the federal income tax laws.

Rule 505: Exemption for Limited Offers & Sales of Securities Not to Exceed $5,000,000

According to the Securities and Exchange Commission (SEC), Rule 505 of Regulation D permits a company to sell its securities (stocks, bonds etc.) that are not restricted, if one of the following criteria  is realized:

• The company  selling its securities registers the offering exclusively in one state, or multiple states, that do require a publicly filed registration statement as well as the delivery of a detailed document full of company disclosures that would go to investors;

• The company registers and sells the offering (preferably in the form of an Offering Memorandum) in a state that requires registration as well as disclosure delivery.

• Additionally, if the company sells in a state (or multiple states) without those requirements, as long as the company delivers the disclosure documents required by the state where the company registered the offering to all purchasers (i.e. investors, including those in the state that has no such requirements) they may be able to transfer the securities; or

• The company sells exclusively according to state law exemptions. These state laws must also permit general solicitation and advertising (not in the public sense of the word), so long as the company sells only to Accredited Investors, as defined in the Registration Act.

A company seeking to sell its securities or stock should provide sufficient, detailed information to prospective investors in order to avoid violating the antifraud provisions of the securities laws. In failing to adhere to the antifraud provisions of the security laws, the SEC can impose fines or other forms of punishment.

All information provided to prospective investors must be not including false or misleading statements. Additionally, a company should not exclude any relevant information from their offering, as this too can be construed as criminal.

Links to current versions of SEC Rules, Regulations, and Schedules can now be found on the following web pages with the Securities and Exchange Commission (SEC), which direct users to the Electronic Code of Federal Regulations.

• Division of Corporation Finance: Rules, Regulations and Schedules under the Securities Act, Exchange Act and Trust Indenture Act



• Rules and Regulations for the Securities and Exchange Commission and Major Securities Laws: Securities and Exchange Commission Rules and Regulations

Rule 504, 505, 506 encompass the specifics of raising money under Reg D.

• Rule 504 is generally relevant to securities sales up to $1 million. Rule 504 is maintained to be the most beneficial to the entrepreneur.


• Rule 505 applies to securities offerings from $1 million to $5 million.

The Securities Lawyer's Deskbook, published by the University of Cincinatti College of Law, Rule 505 of Regulation D: General Rules and Regulations promulgated under the Securities Act of 1933.


• Rule 506 is for securities offerings exceeding $5 million.

Rule 505 of Regulation D – The Middle Path
For virtually all entrepreneurs, the most efficient mechanism to procure equity financing under an exemption is through the use of Regulation D (Reg D), which is a limited offer and sale of their company's stock, or securities, without registration under the Federal Securities Act of 1933. A positive outcome by complying with Regulation D is that it provides the company’s officers and directors an insurance policy of sorts regarding disclosure. See U.S. Securities and Exchange Commission: Rule 505 of Regulation D

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