Reg D Rule 505

Rule 505 of Regulation D: What It Was and Why It Was Repealed

For many years, Rule 505 of Regulation D served as a middle ground for private securities offerings—allowing issuers to raise moderate amounts of capital while offering securities to both accredited and limited non-accredited investors. However, as of May 22, 2017, Rule 505 was repealed by the U.S. Securities and Exchange Commission (SEC), as part of a broader effort to simplify and modernize Regulation D.

This article explores what Rule 505 was, how it worked, and why it was eliminated—providing valuable insight for attorneys, fund sponsors, and financial professionals dealing with historic or legacy offerings.

What Was Rule 505?

Rule 505 of Regulation D allowed companies to raise up to $5 million within a 12-month period through the private offering of securities. The exemption permitted issuers to sell securities to:

• An unlimited number of accredited investors, and

• Up to 35 non-accredited investors, provided they were “sophisticated” (i.e., capable of evaluating the merits and risks of the investment).

Unlike Rule 504 (which allowed small offerings) and Rule 506(b) (which had no dollar limit), Rule 505 was aimed at medium-sized capital raises, providing a path to legally raise funds without full SEC registration.

Why Was Rule 505 Repealed?

The SEC repealed Rule 505 for the following reasons:

1. Underutilization:

   Very few issuers were using Rule 505, especially after the introduction of Rule 506(c) in 2013, which allowed for general solicitation in offerings limited to accredited investors.

2. Regulatory Redundancy:

   Rule 506(b) offered similar flexibility—allowing unlimited capital raising and the ability to include up to 35 non-accredited investors—making Rule 505 less attractive.

3. Investor Protection Concerns:

   The SEC sought to streamline and strengthen compliance by encouraging issuers to rely on the more robust investor protections found in Rule 506.

As a result, all capital raises that would have previously relied on Rule 505 must now use Rule 504, 506(b), or 506(c) depending on the specific goals and structure of the offering.

What Does This Mean for Advisors and Issuers?

While Rule 505 is no longer in use, legacy offerings conducted under this exemption may still be reviewed by legal teams, fund administrators, or compliance professionals. Understanding its structure is important for:

• Auditing past transactions

• Handling investor disputes

• Updating offering documents

• Educating clients about Reg D history and best practices

For new capital raises, Rule 506(b) is the most comparable and frequently used exemption—allowing unlimited accredited investors and up to 35 non-accredited investors without general solicitation.

Modern Alternatives to Rule 505

Issuers today have several superior options for private placements:

Rule 506(b)

• Unlimited capital raise

• Up to 35 non-accredited investors

• No general solicitation

• Strong investor disclosure and protection

Rule 506(c)

• Unlimited capital raise

• All investors must be verified accredited

• General solicitation allowed

• Requires income/net worth verification

Rule 504

• Raise up to $10 million

• Can include non-accredited investors

• Limited advertising, depending on state exemptions

These exemptions are all currently active and widely used for fund launches, startup raises, and real estate syndications.

Final Thoughts

While Rule 505 of Regulation D is no longer available, its history is a valuable lesson in the SEC’s evolution of private offering rules. For financial and legal professionals, being familiar with repealed rules like 505 helps provide context for compliance decisions, historical audits, and offering design.

If you’re preparing a new capital raise and need help selecting the right exemption, filing Form D, or drafting compliant offering documents, our legal-grade templates and compliance support services are here to guide you.