Regulation D gives private companies a way to raise capital without the cost and delay of a full SEC registration. For smaller issuers weighing their options, two exemptions come up often: Rule 506(b) and Rule 504. Both sit under the same regulation, but they differ in offering size, investor rules, and how much room they leave for state law. Understanding those differences helps a company match the exemption to the raise it actually plans to run.
How Much You Can Raise
Rule 504 caps an offering at $10 million within any 12-month period. That figure was raised from $5 million in 2021 and works well for seed rounds, early growth capital, or a first outside raise. Rule 506(b) has no dollar limit at all, which is why it remains the most widely used private placement exemption. A company expecting to raise well beyond $10 million, or one that wants headroom for later rounds under the same framework, tends to land on Rule 506(b).
Who Can Invest
Under Rule 506(b), a company may sell to an unlimited number of accredited investors plus up to 35 non-accredited investors, and those non-accredited investors must be financially sophisticated enough to evaluate the offering. General solicitation and advertising are off the table, so the issuer needs an existing relationship with the people it approaches. Rule 504 takes a lighter federal approach. It does not set a federal accreditation or sophistication standard and does not limit the number of purchasers, which gives smaller issuers flexibility in who they bring in.
The State Law Difference
Securities sold under Rule 506(b) are treated as covered securities, so states cannot impose their own registration requirements and issuers file only a notice and fee. Rule 504 offerings are not covered, which means the company must comply with the blue sky rules of every state where it offers or sells. General solicitation is generally not allowed under Rule 504 either, unless the offering is registered in a state that requires a disclosure document or sold under a state exemption limited to accredited investors. For a multi-state raise, that patchwork can add real time and legal cost.
Disclosure and Eligibility
Rule 504 carries no federal disclosure mandate, though state law and antifraud rules still apply. Rule 506(b) requires no formal disclosure when every buyer is accredited, but the moment a non-accredited investor takes part, the issuer must hand over detailed information similar to what a registered offering would include. Many companies avoid non-accredited investors entirely under Rule 506(b) to keep the process simpler. Both exemptions carry bad actor disqualification, so felony records and certain regulatory sanctions among key people can block eligibility.
Why Investor Verification Matters
Under Rule 506(b), the issuer must hold a reasonable belief that its accredited investors qualify, and it must be able to support the sophistication of any non-accredited buyer. Under Rule 504, state accredited investor exemptions often hinge on the same question. Collecting and documenting proof of accreditation, rather than relying on a checked box, protects the exemption if the offering is ever reviewed. A clear record of who invested and on what basis is one of the simplest ways to reduce risk.
Matching the Exemption to the Raise
For a smaller raise, the choice usually comes down to size and reach. A company staying at or below $10 million, working within one or two states, and comfortable managing blue sky filings may find Rule 504 a practical fit. A company that wants a national investor base, higher limits, and federal preemption of state registration tends to choose Rule 506(b). Mapping the raise against these points early, and keeping solid investor records throughout, keeps the offering on firm ground.
