Regulation A and Regulation D Violations.

Last Updated on: 4th August 2026, 01:33 am

Under the Securities Act, Regulation A and Regulation D are essentially safe harbors. If an entity meets the conditions to avail itself of the applicable safe harbor, then its offering of unregistered securities is exempt from Section 5’s registration requirements, although other securities-law liability may still apply. Therefore, a “Regulation D violation” is conduct that causes an entity to lose its claims to a safe harbor under Regulation D, and a “Regulation A violation” is any violation that causes an entity to lose its claims to a safe harbor under Regulation A.

What is the result of a “Regulation A violation” or a “Regulation D violation”?

If a Regulation D violation results in an entity losing its claimed exemption, then its securities offerings become unlawful unregistered offerings under Section 5 of the Securities Act. Such sales may implicate liability under Section 12(a)(1) of the Securities Act, and purchasers may be entitled to either rescission or damages.

Does “Regulation Best Interest” have anything to do with this?

Regulation Best Interest governs broker-dealers’ recommendations to retail customers. It is promulgated under Exchange Act Rule 15l-1 (or “Section 15(l)” as the SEC calls it) and not under the Securities Act. It is not a “private-offering exemption” for unregistered sales.

Does “Regulation SHO” have anything to do with this?

No. Regulation SHO, while under the Exchange Act, has nothing to do with the Securities Act’s requirements for offering private, unregistered securities.

What are Regulation A and Regulation D de facto exemptions?

A “de facto exemption” is just a case where an entity meets all of the conditions to fall within the safe harbor. The SEC does not have unfettered authority to revoke an exemption or safe-harbor status; the applicable statute and rule govern its availability and any suspension or disqualification. It also has the authority to revoke broker-dealer status, and all of these are just safe harbors, not exemptions in the constitutional sense.

What conditions must a Regulation A offering satisfy?

What are the “Two Tiers” of Regulation A?

The two tiers of Regulation A are essentially two different safe harbors. The same approach applies in both cases, with the primary differences relating to issuer requirements, investor eligibility, and fees.

Tier 1 permits issuers to sell up to $20 million worth of securities per year. Regulation A Tier 1 is relatively similar to the former Regulation A (of the “A-1” and “A-2” era), and it still requires issuer registration and qualification by the SEC.

Tier 2 permits issuers to sell up to $75 million worth of securities per year. To take advantage of Tier 2, issuers must (i) provide audited financial statements to the SEC, (ii) file ongoing reports with the SEC, including an annual report on Form 1-K, a semiannual report on Form 1-SA, and current reports on Form 1-U, and (iii) not have “bad actor” status for the securities sold. Unlike Regulation A Tier 1, Tier 2 companies are not subject to state “Blue Sky” registration requirements, although they are still subject to state antifraud laws and must file certain notices with the states.

What is the Process for Qualifying a Regulation A Offering?

To qualify a Regulation A offering, an issuer must file Form 1-A (or an amended Form 1-A) with the SEC and request qualification. After the issuer files Form 1-A, the SEC examines the form, asks questions, and (eventually) issues an order qualifying the offering. The issuer cannot begin selling the securities until the SEC issues the order qualifying the offering. Importantly, the SEC will specifically make clear that qualifying the offering is not the same as approving it, nor is it a guarantee of the issuer’s statements.

Are Tier 1 Offerings Still Subject to “Blue Sky” Registration?

Yes, as noted above. While Regulation A Tier 2 offers issuers nationwide “safe harbor” status from state “Blue Sky” registration, the same is not true for Regulation A Tier 1 issuers. However, the SEC’s preemption of “Blue Sky” registration for Regulation A Tier 2 issuers is not absolute. Even for Regulation A Tier 2 issuers, states are still permitted to (i) require notice filings and fees, and (ii) seek enforcement of state antifraud laws.

What are the “10%” Restrictions for Regulation A Tier 2 Offerings?

When securities are not listed on a regulated exchange, Regulation A Tier 2 issuers must also comply with the “10%” restrictions. The general approach is to limit a nonaccredited investor's purchase to 10% of the greater of that investor's annual income or net worth, or, for entities, 10% of the greater of annual revenue or net assets for the most recently completed fiscal year. However, Regulation A Tier 2 is a safe harbor from “Blue Sky” laws and not a private placement exemption, and its “10%” restrictions do not apply in some cases, including when the purchaser is accredited or the securities will be listed on a national securities exchange.

As a result, Regulation A Tier 2 issuers need to be careful not to violate the various other restrictions that apply to unregistered offerings of securities. For this reason, it is in the best interest of Regulation A issuers to consult with experienced securities lawyers whenever possible.

What are the Main Regulation D Exemptions?

The most common (or “main”) exemptions under Regulation D are found in Rule 504, Rule 506(b), and Rule 506(c) of the Securities Act Regulations.

How is Rule 504 Different from Rule 506?

As noted below, Rule 504 allows qualifying issuers to raise up to $10 million per year. Rule 506(b) and Rule 506(c), on the other hand, are open-ended and apply regardless of the amount of money raised. As a result, Rule 506(b) and Rule 506(c) are far more commonly used.

How Do Rule 504, Rule 506(b), and Rule 506(c) Differ?

• Under Rule 504, the first of the “main” exemptions under Regulation D, qualifying issuers are entitled to raise up to $10 million worth of securities annually (subject to additional conditions).
• Under Rule 506(b), the second of the “main” exemptions under Regulation D, issuers can seek as much capital as they need from an unlimited number of accredited investors (including broker-dealers), provided that general solicitation is not used. Issuers are also allowed to sell to no more than 35 nonaccredited investors, as long as each nonaccredited investor’s securities are “restricted” securities under the Securities Act.
• Under Rule 506(c), the third of the “main” exemptions under Regulation D, issuers can use general solicitation to seek capital. However, in order to rely on this provision of the Securities Act Regulations, issuers can only seek capital from accredited investors, and the issuer must take reasonable steps to verify that each investor is actually accredited.

Can States Require Registration for Securities Sales under Rule 506?

No. Rule 506 provides issuers nationwide “safe harbor” status from registration and “Blue Sky” laws. However, while it precludes states from requiring registration of the securities offering, the provision still preserves state authority to: (i) seek enforcement of state antifraud laws, and (ii) require issuers to file an appropriate notice with the state and pay the applicable fee.

What are the “Bad Actor” Rules?

The “bad actor” rules are found in Rule 506(d) and Rule 504(f) (among other sections). Under Rule 506(d), “bad actor” events disqualify companies from relying on the Rule 506 exemptions if certain conditions are met. These “bad actor” events include criminal convictions for various types of securities-related crimes and various sanctions imposed by the SEC and other regulatory agencies. As the bad actor rules apply to individuals as well as companies, issuers need to be careful when seeking to rely on the provisions of Regulation D.

What Qualifies as an “Accredited Investor” (or “Accredited Purchaser”)?

The term “accredited investor” (or “accredited purchaser”) has a specific legal meaning under Rule 501 of the Securities Act Regulations. For example, to be an accredited investor, an individual must have a net worth of more than $1 million (excluding their primary residence). The determination of whether an individual qualifies as an accredited investor can involve additional considerations as well.

This is the point at which most people call a lawyer. Spodek Law Group takes federal criminal defense cases nationwide from its New York and Los Angeles offices.

Can a Regulation D defect be cured or excused?

Can a Missing Form D (or a Deficient Form D) Result in a Regulation D Violation?

If an issuer fails to file Form D (or it files a deficient Form D), is the issuer’s securities offering in trouble? Generally speaking, no. If the issuer’s securities offering qualifies for a Regulation D exemption, generally speaking, the issuer’s failure to file (or its filing of a deficient) Form D does not have the effect of destroying the issuer’s Regulation D exemption. Although Form D is generally due within 15 days of the first sale under the claimed exemption, failing to meet this filing deadline is (generally speaking) not enough to destroy an issuer’s claim to a safe harbor under Regulation D.

Can Regulation D Violations Be Cured or Excused?

Generally speaking, no. This is because Rule 508, the “insignificant deviations” provision of Regulation D, provides that “insignificant deviations” made “in good faith” from requirements of Regulation D will “generally not” deny an entity the protection of a Regulation D exemption. However, Rule 508 also provides that: (i) it does not preclude the SEC from seeking enforcement based on the “deviation” from a requirement of Regulation D; (ii) it does not excuse violations of Rule 502(c)’s general-solicitation prohibition; and (iii) it only applies if the condition violated was not designed to directly protect the particular purchaser (or purchasers) seeking to enjoin the alleged offering.

What is the Effect of Filing a Deficient Form D?

If the issuer files a deficient Form D, it should promptly amend its filing. Rule 503(d) imposes this obligation on the issuer (and the issuer’s lawyers, brokers, and underwriters). If a material mistake or change necessitates an amendment, “the issuer must file an amended Form D promptly.” Rule 507 of the Securities Act Regulations provides that Rule 504, Rule 506, and Rule 507(a)(4) “shall not apply” to an issuer that is “subject to an injunction against filing” Form D, and this includes, as the SEC has found in the past, cases where Rule 507(a)(4) is inapplicable.

How Often Does the SEC Prosecute Regulation A or Regulation D Violations?

While the SEC’s enforcement division has the authority to pursue Regulation A and Regulation D violations through civil or administrative enforcement actions, it does not pursue all violations. In many cases, the SEC will seek to impose a civil penalty or other sanction, and it may also seek authorized monetary relief for harmed investors. However, in some cases, the SEC’s enforcement division will choose not to pursue enforcement under a circumstances-specific approach to enforcement. If you need a reliable answer concerning the SEC’s enforcement policy, you should speak with a knowledgeable securities lawyer.

What liability follows when an offering exemption fails?

Who Bears the Burden of Proof in Cases Involving a “Private-Offering Exemption” Under the Securities Act?

When an entity’s securities offering is “exempt” from registration under the Securities Act, it remains the entity’s responsibility to show that the offering was exempt (or “safe harbor”) under the Act. Therefore, the party claiming a private-offering exemption bears the burden of proof.

Can Unregistered Offerings of Securities Lead to Section 5 Liability?

Yes, an unregistered offering of securities that is not exempt from registration under Section 5 is an unlawful offering and can result in the imposition of liability under Section 5. However, the enforcement of Section 5 does not require the SEC to prove that the entity that sought to claim an exemption knowingly or recklessly sold unregistered securities (i.e., with the intent to deceive, manipulate, or defraud). This is because Section 5 does not require an entity’s “scienter.” Instead, under the Securities Act’s statutory framework, a “Section 5” violation, and any resulting liability under Section 5, will be based solely on (i) the entity’s failure to comply with the statutory and regulatory requirements for unregistered securities sales, and (ii) the entity’s failure to prove that the securities offering was exempt.

Can Private Purchasers Enforce Section 5 of the Securities Act?

No. Section 5 does not create a private right of action. That is, private purchasers cannot seek a remedy for a “Section 5” violation. The enforcement of Section 5 is left to the SEC’s enforcement division. However, private purchasers will have other rights to seek remedies (including rescission, damages, and other legal remedies) in various other circumstances.

How Long Do Private Purchasers Have to Pursue Rescission and Damages under Section 12(a)(1) of the Securities Act?

Under the Securities Act, Section 13 generally, “any person may bring an action for rescission under section 12(a)(1)... within one year after the violation occurred.” However, the three-year statute of limitations also applies to Section 12(a)(1) claims. Accordingly, “section 13 shall not bar an action for rescission... within one year after... violation occurred; nor shall it bar an action... within three years after the sale.”

Can Private Purchasers Tender Their Securities for Rescission Under Section 12(a)(1) of the Securities Act?

Yes. When a private-offering exemption is unavailable, the relevant parties are entitled to tender the securities for rescission under Section 12(a)(1). The option to tender the securities for rescission is available only to a purchaser who acquired the securities directly from the statutory seller, and not to subsequent owners of the unregistered securities.

Can Former Security Holders Seek Damages under Section 12(a)(1) of the Securities Act Instead of Rescission?

Yes, former security holders can seek damages under Section 12(a)(1) of the Securities Act instead of rescission (and, often, they will seek damages instead of rescission).

Is an Exempt Offering Not Subject to Federal and State Antifraud Laws?

No. All offerings of securities are subject to federal and state antifraud laws (including the Securities Exchange Act, Securities and Exchange Act, and the state securities law that applies in the relevant state), regardless of their status (exempt or otherwise) as a private offering.

What happens after regulators question an exempt offering?

What Agencies Investigate Alleged Violations?

The federal agencies (and other bodies) that investigate alleged violations of federal securities law include:

• The SEC’s Division of Enforcement. This division investigates potential federal securities-law violations.
• The U.S. Department of Justice (DOJ), sometimes working with the FBI and other federal law enforcement personnel. The DOJ prosecutes potential criminal violations of federal law.
• Various state securities regulators. These regulators investigate potential violations within their state or territory.
• FINRA (i.e., the Financial Industry Regulatory Authority). FINRA is a self-regulatory body. It has the authority to investigate violations of FINRA’s rules, particularly among its member firms and their associated persons.

What Remedies are Available to the SEC?

If the SEC determines that enforcement is warranted (and if the alleged violation is civil, not criminal), it may seek any combination of the following remedies:

• Injunctions (i.e., court orders preventing the securities violator from continuing to engage in the same unlawful conduct)
• Cease-and-desist orders (i.e., administrative enforcement actions that are effectively injunctions)
• Civil penalties (i.e., monetary sanctions)
• Disgorgement (i.e., order to pay back illegally acquired money or securities)
• Industry bars and suspensions (i.e., restrictions on participating in the securities markets)

What are the Attorney Fees for Regulation A or Regulation D Securities Defense?

There are no prescribed attorney fees for Regulation A or Regulation D securities defense. Federal law does not establish a fixed attorney fee for these cases. Instead, the fee structure will be dependent on the circumstances at hand. These circumstances include:

• The scope of the investigation
• The amount of evidence at hand (i.e., the number of documents to be reviewed or the number of witnesses to be interviewed)
• The potential of parallel civil or criminal liability
• The potential of parallel liability in state or foreign securities markets

Among other factors.

What are the Costs of Securities Defense?

Generally speaking, the costs of securities defense can range from a few thousand to many hundreds of thousands of dollars. The costs of securities defense will depend on: (i) whether there is a risk of criminal enforcement; (ii) how much of the federal government is involved; (iii) whether the inquiry is handled by the SEC’s Division of Corporation Finance (i.e., whether the inquiry relates to a filing); (iv) whether it involves an in-house investigation; (v) how much documentation and communication is at hand; (vi) whether securities are registered on an exchange; (vii) how many investors are involved; (viii) how much time has elapsed since the transaction; (ix) whether an enforcement referral is pending; (x) how much is at stake; and (xi) whether other inquiries are pending.

Which Securities Defense Firm Ranks Highest (i.e., Which Law Firm is Considered the Best)?

No regulator publishes an authoritative ranking of the most feared securities-defense litigation firms. When selecting a law firm, it is important to evaluate the firms’ track record, depth of knowledge, and availability.

As a result, securities-defense attorneys will work with their clients to develop comprehensive and customized defense strategies tailored to the unique needs of their cases.

Talk to Spodek Law Group

Every case turns on its own facts, and general information is no substitute for advice about yours. Todd Spodek, managing partner of Spodek Law Group, and the firm's attorneys defend federal criminal and white collar matters nationwide. Reach the firm at 212-300-5196.