How Rule 504 and Rule 506 Work, Where They Differ, and What the Exam Tests

Rule 504 and Rule 506 are both exemptions under Regulation D that let a company sell securities without registering the offering with the SEC. Rule 504 allows a company to raise up to $10 million in any 12-month period, while Rule 506 has no limit on the amount raised but restricts who can buy, and only Rule 506 offerings are federal covered securities exempt from state registration.

That last difference is the one the Series 65 tests most often. The exam expects you to know how much each rule allows, who can invest, whether the company can advertise, and how state securities regulators treat each offering.

This guide covers all of it, with a comparison table, a worked example, a client scenario, the exam traps candidates fall for and five practice questions with explanations. Getting ready for a January exam? Browse every FRC video playlist and find the exam topics you want to master first, with exam traps called out in every topic.

What Regulation D Is

Under Section 5 of the Securities Act of 1933, a company offering securities to the public must register the offering with the SEC unless an exemption applies. Registration is expensive and slow, so many companies, and nearly all private investment funds, raise money through exempt offerings instead.

Section 4(a)(2) of the Securities Act exempts transactions “not involving any public offering,” but it does not spell out exactly what qualifies. Regulation D, adopted by the SEC in 1982, gives companies clear conditions they can meet to rely on an exemption with confidence.

Today, Regulation D contains three main exemptions: Rule 504, Rule 506(b) and Rule 506(c). A fourth, Rule 505, was repealed in 2017, so if an answer choice mentions Rule 505 as a current exemption, it is wrong.

Where Regulation D Appears on the Series 65

The Series 65 is built around the Uniform Securities Act, the model state law that most states have adopted in some form, alongside federal securities law. Regulation D sits right where the two meet: it is a federal exemption, but it decides how much authority the states keep over an offering.

That makes it a natural exam topic. Questions test the exemptions themselves, the accredited investor rules, and whether a state can require the offering to be registered.

FRC’s Series 65 Exam Preparation course covers exempt securities, exempt transactions and the federal and state rules that sit around them, and the exam requires no sponsor. The SIE Examination Preparation course covers the primary market and private placements as part of the exam you can pass before you are hired. Every FRC course can be spread across interest-free monthly payments, so there is no reason to put your January exam off.

Rule 504: The Small Offering Exemption

Rule 504 lets a company raise up to $10 million in any 12-month period. There is no limit on the number of investors, and there are no federal requirements on who those investors must be, so non-accredited investors can participate freely.

The rule is not available to every company. Companies that already report to the SEC under the Securities Exchange Act of 1934, investment companies, and blank-check companies with no specific business plan cannot use it.

Rule 504 does not require any specific disclosure document at the federal level, but the antifraud rules still apply in full. A company that misleads investors in a Rule 504 offering can still face liability for fraud.

Advertising and Resale Under Rule 504

In general, a company relying on Rule 504 cannot use general solicitation, meaning public advertising or broad promotion to people it has no existing relationship with. The securities sold are also usually restricted, so investors cannot freely resell them.

There is an exception. If the offering is registered in a state that requires a disclosure document, or is sold under a state exemption that permits general solicitation and sales only to accredited investors, the company can advertise and the securities are not restricted.

That exception exists because Rule 504 leaves the states in charge. The federal rule is light, and state securities law does most of the regulatory work.

Rule 506(b): The Traditional Private Placement

Rule 506(b) is the most widely used exemption under Regulation D. A company can raise an unlimited amount of money and sell to an unlimited number of accredited investors.

It can also sell to up to 35 non-accredited investors, but each one must be sophisticated, meaning they have enough knowledge and experience in financial and business matters to evaluate the risks and merits of the investment, either alone or with a purchaser representative.

The key restriction is that the company cannot use general solicitation or advertising. Investors are typically reached through existing relationships, placement agents or broker-dealers who already know them.

Disclosure When Non-Accredited Investors Buy

If any non-accredited investors participate in a Rule 506(b) offering, the company must give them disclosure documents broadly comparable to what a registered offering would provide, including financial statement information. It must also make itself available to answer their questions before they buy.

If every investor is accredited, there is no specific federal disclosure requirement. In practice, most companies provide a private placement memorandum anyway, because the antifraud rules still apply and investors expect it.

This is one reason many issuers choose to sell only to accredited investors, even under Rule 506(b). Including non-accredited investors adds cost and paperwork.

Rule 506(c): General Solicitation With Verified Investors

Rule 506(c) was added in 2013, after the JOBS Act directed the SEC to allow general solicitation in certain private offerings. A company can advertise publicly, through websites, social media or events, and still raise an unlimited amount.

In exchange, every purchaser must be an accredited investor, with no exceptions. The company must also take reasonable steps to verify that each purchaser is accredited, rather than simply relying on a questionnaire.

That verification requirement is the defining feature of Rule 506(c). Under Rule 506(b), the company needs only a reasonable belief that an investor is accredited; under Rule 506(c), it must actively check.

How Verification Works Under Rule 506(c)

The rule includes several non-exclusive methods for verifying an individual. A company can review tax returns or IRS forms showing income, review bank, brokerage and credit statements showing net worth, or obtain written confirmation from a registered broker-dealer, registered investment adviser, licensed attorney or certified public accountant.

In March 2025, the SEC’s Division of Corporation Finance issued guidance that a high minimum investment can support verification. It said an issuer can generally treat the verification step as met where a natural person invests at least $200,000, or an entity at least $1 million, provided the investor confirms in writing that they are accredited and that the investment is not financed by a third party, and the issuer has no knowledge to the contrary.

That guidance made Rule 506(c) more practical for many private funds. It does not change the rule itself: every purchaser must still be accredited.

Who Counts as an Accredited Investor

The accredited investor definition sits in Rule 501 of Regulation D. An individual generally qualifies with a net worth above $1 million, excluding their primary residence, or income above $200,000 in each of the last two years, or $300,000 together with a spouse or spousal equivalent, with a reasonable expectation of the same in the current year.

Since 2020, individuals holding the Series 7, Series 65 or Series 82 licenses in good standing also qualify, regardless of wealth. Certain entities qualify too, including banks, broker-dealers, registered investment advisers, and many corporations, partnerships and trusts with more than $5 million in assets.

Directors, executive officers and general partners of the company selling the securities are also accredited for that company’s offering. Exam questions often test whether the primary residence is counted toward net worth; it is not.

Sophisticated Investors and Purchaser Representatives

Sophistication is relevant only for non-accredited investors in a Rule 506(b) offering. Accredited investors do not need to meet a separate sophistication test.

A non-accredited investor who lacks the knowledge to judge the investment alone can rely on a purchaser representative, an adviser who helps them evaluate it. The representative must disclose any material relationship with the company selling the securities.

Rule 504 has no federal sophistication requirement at all, and Rule 506(c) excludes non-accredited investors entirely, so sophistication is purely a Rule 506(b) issue.

Restricted Securities and Rule 144

Securities sold under Rule 506, and under Rule 504 unless the state exception applies, are restricted securities. Investors cannot freely resell them, because they were never registered for public sale.

Rule 144 sets out when restricted securities can be resold. If the company has been reporting to the SEC for at least 90 days, the holding period is generally six months; if it is not a reporting company, the holding period is generally one year.

That is why investors in private placements must be prepared to hold their investment for a long time. For private equity, hedge fund and venture capital funds, which raise money almost entirely under Rule 506, the fund’s own lock-up terms usually restrict withdrawals further.

Bad Actor Disqualification

Rule 506(d) disqualifies a company from relying on Rule 506 if the company or certain people connected with it, such as directors, executive officers, large shareholders or paid solicitors, have a disqualifying event. These include certain criminal convictions, court injunctions, regulatory orders and SEC disciplinary actions.

Similar bad actor provisions apply to Rule 504. The goal is to keep people with a record of securities fraud from using exemptions that come with less regulatory scrutiny.

Events that occurred before the rule took effect in 2013 do not disqualify a company, but they must be disclosed to investors.

Form D: The Notice Filing

Under both rules, the company files a notice called Form D with the SEC within 15 days after the first sale of securities. Form D is a short notice, not a registration statement, and the SEC does not review or approve the offering.

The form identifies the company, its executives and promoters, the exemption claimed and the amount being raised. It is publicly available on the SEC’s EDGAR database, which is one way investors and regulators can see who is raising money privately.

Filing Form D is not a condition of the exemption itself, but failing to file can lead to consequences, including a court order that can bar the company from using Regulation D in future.

Federal Covered Securities: Why States Treat 504 and 506 Differently

This is the most heavily tested part of the topic on the Series 65. The National Securities Markets Improvement Act of 1996, known as NSMIA, created a category called federal covered securities, which states cannot require to be registered.

Securities sold under Rule 506 are federal covered securities. A state can still require a notice filing, usually a copy of Form D, a filing fee and consent to service of process, and it keeps its full antifraud authority, but it cannot require registration or review the merits of the offering.

Securities sold under Rule 504 are not federal covered securities. The company must register the offering in each state where it sells, or find a state exemption, which is why Rule 504 offerings are often coordinated through state processes. The memory point is simple: Rule 506 is covered, Rule 504 is not.

Comparing the Rules

The table below summarizes the main differences between the three Regulation D exemptions.

Who Uses Each Rule

Rule 504 suits small, early-stage companies raising modest amounts, often from local investors, friends and family. Because it involves state registration, it is most practical when a company is selling in only one or a few states.

Rule 506(b) is the workhorse of private capital. Private equity funds, hedge funds, venture capital funds and many private companies rely on it, typically selling only to accredited investors through existing relationships.

Rule 506(c) suits companies and funds that want to market openly, for example through online platforms or public events. The trade-off is the verification process and the exclusion of every non-accredited investor.

Worked Example: Choosing an Exemption

A technology company wants to raise $25 million. It plans to promote the offering on its website and on social media, and it expects all its investors to be wealthy individuals and institutions.

Rule 504 is out immediately, because the company wants to raise more than $10 million. Rule 506(b) is also out, because the company wants to advertise publicly.

That leaves Rule 506(c). The company can advertise, raise the full $25 million and sell to accredited investors, provided it takes reasonable steps to verify each investor’s status and files Form D within 15 days of the first sale. Because the securities are federal covered securities, the states where investors live can require only notice filings, not registration.

Client Scenario: A Private Placement Recommendation

An investment adviser representative is approached by a client who has seen an online advertisement for a private real estate fund raising money under Rule 506(c). The client earns $150,000 a year, has a net worth of $1.4 million including a $600,000 home, and wants to invest $50,000.

The client is not accredited. Excluding the home, their net worth is $800,000, below the $1 million threshold, and their income is below $200,000. Unless the client holds a Series 7, Series 65 or Series 82 license in good standing or meets another accredited category, they cannot invest in a Rule 506(c) offering at all.

Even if the client did qualify, the adviser’s fiduciary duty would require a careful look at suitability, liquidity and concentration. A $50,000 restricted, illiquid investment needs to fit the client’s goals and time horizon before it is recommended.

The Exam Traps

The first trap is treating Rule 504 as a federal covered security. It is not; only Rule 506 offerings are covered, so Rule 504 offerings remain subject to state registration.

The second trap is mixing up the investor rules. Rule 506(b) allows up to 35 sophisticated non-accredited investors; Rule 506(c) allows none, and Rule 504 has no federal limit at all.

The third trap is the primary residence. It is excluded from net worth when testing accredited status, so a client whose wealth is mostly in their home may not qualify. The fourth trap is Rule 505, which was repealed in 2017 and is no longer a valid exemption.

A Memory Aid

Think of the three exemptions as small, quiet and loud. Rule 504 is small: up to $10 million, with the states in charge. Rule 506(b) is quiet: unlimited money, no advertising, and up to 35 sophisticated non-accredited investors.

Rule 506(c) is loud: unlimited money and public advertising, but only verified accredited investors. And remember the federal line: 506 is covered, 504 is not.

Practice Questions

Question one: what is the maximum a company can raise under Rule 504 in a 12-month period? The answer is $10 million.

Question two: a company wants to advertise its offering on social media and raise $50 million. Which Regulation D exemption should it use? Rule 506(c), because it permits general solicitation and has no offering limit, provided every purchaser is a verified accredited investor.

Question three: how many non-accredited investors may participate in a Rule 506(b) offering? Up to 35, and each must be sophisticated, alone or with a purchaser representative.

Question four: a state securities administrator wants to require registration of an offering made under Rule 506(b). Can it? No. Rule 506 offerings are federal covered securities under NSMIA, so the state can require only a notice filing, a fee and consent to service of process, though it keeps its antifraud authority.

Question five: when must a company file Form D for a Regulation D offering? Within 15 days after the first sale of securities.

Related Questions

Regulation D connects closely to several other Series 65 topics. FRC’s guide to fiduciary standard vs suitability standard covers the obligations an adviser carries when recommending a private placement, and the guide to what conflicts of interest an investment adviser must disclose covers what a client must be told before they invest.

To see how private funds use these exemptions in practice, FRC’s guide to private equity vs hedge funds vs venture capital explains how each type of fund is structured and who is allowed to invest.

Get Exam-Ready for January

January is when many candidates book their exams, and exempt offerings are among the most reliable marks on the Series 65 once the federal and state rules are clear. The FRC video playlists linked at the top of this guide cover every exam section, with the traps to look out for in each one.

The FRC dictionary is more than a dictionary. It is a library of explainer videos, written explanations and on-page quizzes covering the FINRA and SEC rules you are tested on, so you can open any rule and go deeper whenever a question catches you out.

Study With FRC

FRC’s programs and memberships are open to everyone. Whether you are preparing for the Series 65, the SIE or both, structured exam preparation turns topics like exempt offerings and covered securities into marks you can rely on.

FRC’s Professional Membership adds verified progress and a Digital Profile, so when you apply for roles, employers can see your exam progress and the knowledge you are building, not just read about it on a resume. If your goal is to advise clients, FRC’s guide to how to become an investment adviser representative sets out the full path.

Your Next Step

Rule 504 allows up to $10 million with the states in charge. Rule 506(b) allows unlimited capital, no advertising and up to 35 sophisticated non-accredited investors. Rule 506(c) allows advertising but only verified accredited investors, and both Rule 506 exemptions produce federal covered securities that states cannot require to be registered.

Master those three profiles and the federal covered security line, and you will be ready for every version of this question the exam can ask.