Regulation D (US Securities Exemption)

Regulation D is a set of rules promulgated by the Securities and Exchange Commission under the authority of Sections 3(b) and 4(a)(2) of the Securities Act of 1933. It provides safe harbor exemptions from the requirement to register securities offerings with the SEC, permitting issuers to sell securities to qualifying investors without the cost and disclosure burden of a public offering registration. For the cryptocurrency industry from roughly 2017 to 2024, Regulation D — particularly Rule 506(b) and Rule 506(c) — became the default legal structure for token sales in the United States, often structured through the Simple Agreement for Future Tokens (SAFT).

Statutory Background

The Securities Act of 1933 requires that any offer or sale of securities to the public be registered with the SEC, unless an exemption from registration is available. Registration is expensive, time-consuming, and requires extensive public disclosure. For most early-stage token issuers, full registration was neither feasible nor desirable.

Section 4(a)(2) of the Securities Act exempts from registration transactions by an issuer not involving a public offering — a private placement. Congress left it to the courts and the SEC to define the boundaries of this exemption. Regulation D, codified at 17 CFR §§ 230.500–230.508, provides a safe harbor that issuers can rely on to ensure their private placement qualifies for the exemption.

Rule 506(b)

Rule 506(b) is the traditional private placement safe harbor. Under Rule 506(b), an issuer may sell securities to an unlimited number of accredited investors and up to 35 sophisticated non-accredited investors, provided no general solicitation or general advertising is used. Accredited investors are defined primarily by wealth and income thresholds: individuals must either have net worth exceeding $1 million (excluding primary residence) or have had income exceeding $200,000 ($300,000 jointly with a spouse) in each of the two preceding years.

The prohibition on general solicitation under Rule 506(b) means that issuers may not advertise the offering publicly. They may contact investors with whom they have a pre-existing, substantive relationship. This requirement limited the practical reach of Rule 506(b) for token issuers who wanted to access a broad investor base.

Rule 506(c)

Rule 506(c) was added by the SEC in 2013 pursuant to the JOBS Act of 2012. It permits general solicitation — including public advertising of the offering — but requires that sales be made only to accredited investors, and that the issuer take reasonable steps to verify accredited investor status rather than simply relying on representations from investors.

Rule 506(c) became more popular among token issuers than 506(b) precisely because it permitted public marketing: an issuer could tweet about a token sale, host a website, and discuss the offering publicly, provided it sold only to verified accredited investors.

SAFT: Simple Agreement for Future Tokens

The SAFT (Simple Agreement for Future Tokens) was a legal structure developed by practitioners in 2017 to apply Regulation D to token sales. The SAFT was modeled on the SAFE (Simple Agreement for Future Equity), a startup financing instrument. An investor enters into a SAFT and pays consideration; in return, the issuer promises to deliver tokens to the investor at a later date when the network is launched.

The theory behind the SAFT was that at the time of investment, the tokens did not yet exist and represented an investment contract — a security — based on the investor’s expectation of profit from the issuer’s efforts to build the network. Once delivered, the tokens would be sufficiently decentralized that they would no longer be securities.

The SAFT structure enabled issuers to raise capital from accredited investors under Regulation D’s exemption while marketing to the public through a separate process. Numerous significant token projects used SAFTs during 2017-2020.

Limitations and Criticisms

Regulation D exemptions carry significant limitations that constrain their utility for token issuers seeking broad distribution.

Securities sold under Regulation D are “restricted securities” — they cannot be resold without either registration or a separate exemption. Rule 144 provides a resale safe harbor after a holding period (one year for unregistered companies), but during that period, investors cannot freely sell their tokens. This restriction is fundamentally incompatible with the liquid trading that tokens depend upon for utility and price discovery.

Regulation D also excludes retail investors who do not meet the accredited investor thresholds. A token with a genuine utility purpose may be best distributed broadly across its user base, but Regulation D’s restrictions prevent broad retail distribution.

The SEC’s position, articulated through enforcement actions beginning in 2018, was that the SAFT theory had significant flaws: many token issuers that claimed their tokens became non-securities upon launch were unable to satisfy the Howey test analysis that would establish non-security status. The SEC brought enforcement actions against several issuers who had completed SAFT raises and distributed tokens to the public, asserting that the tokens remained securities.

Regulation D remains widely used for token sales to institutional investors and remains the primary private market mechanism for US tokenized security offerings alongside Regulation S for offshore investors.