Rules 147 and 504, Explained: How Small Companies Raise Local Capital Without Full SEC Registration

A registered public offering can cost a small company hundreds of thousands of dollars in legal, accounting, and filing fees before it raises a single dollar. If you only need a few hundred thousand from local backers — or up to $10 million from a broader circle — that price tag would kill the raise before it starts. Two federal exemptions exist for exactly this situation: Rule 147, which lets a truly local company sell securities to residents of its own state, and Rule 504, which lets most private companies raise up to $10 million in a year with no cap on the number or type of investors. Both skip SEC registration. Neither skips the rules, and confusing one for the other is how founders accidentally run an illegal offering.

Start Here: Registration Is the Default​

Section 5 of the Securities Act of 1933 says you may not offer or sell securities unless the offering is registered with the SEC or exempt. Stock in your corporation, membership units in your LLC, convertible notes, SAFEs — all of these are securities when sold to investors. Every exemption is an exception you must fit inside completely. Miss one element and you have sold unregistered securities, which gives every buyer a right to get their money back plus interest. Read Rules 147 and 504 as checklists, not vibes.

Rule 147: The Intrastate Exemption​

Rule 147 is a safe harbor under Section 3(a)(11) of the Securities Act. The theory is simple: when a local company raises money only from people in its own state, the state regulator — not the SEC — is the right watchdog. There is no dollar cap and no federal filing. But every element of "local" must hold.

The issuer must be genuinely in-state​

To use Rule 147, the company must clear three issuer tests:

1. Organized in the state. The company must be incorporated or organized under the law of the state where the offering happens. A Delaware corporation raising money in Texas cannot use Rule 147 — though Rule 147A below fixes exactly that.
2. Principal place of business in the state. Officers and managers must actually direct and control the business from inside the state. A mailbox or registered agent does not count.
3. Doing business in the state. The company must satisfy at least one of four tests: at least 80% of gross revenue in the last six months came from in-state operations, at least 80% of assets are located in-state, at least 80% of the offering's net proceeds will be used in-state, or a majority of employees are based in-state.

Miss any of the three and the exemption is gone.

Offers and sales go to residents only​

Under Rule 147, both offers and sales must be made only to people the company reasonably believes are residents of the state. That "offers" restriction is the painful part: a public website, a social media post, or a podcast pitch that reaches out-of-state eyes can be an offer to a non-resident. Companies using Rule 147 must take reasonable steps to wall off out-of-state viewers. Get a written representation of residency from every buyer, and keep it in your records — your reasonable belief needs a paper trail.

The securities must come to rest in-state​

Buyers cannot immediately flip the shares to out-of-state purchasers. For nine months after the last sale in the offering, resales may only go to in-state residents, and the certificates or book-entry records must carry a legend stating the resale restriction. One early out-of-state resale can destroy the exemption for the whole offering, so investor documents should spell out the lock-up in plain language.

Rule 147A: the internet-age sibling​

Rule 147A, adopted in 2016, keeps the intrastate bargain but modernizes two pieces:

• Offers may cross state lines. General solicitation and public websites are allowed, as long as every actual sale goes to an in-state resident and the materials carry the required legends and disclosures.
• Out-of-state incorporation is fine. A Delaware corporation headquartered and doing business in Colorado can run a Colorado-only 147A raise.

Everything else — principal place of business, the doing-business tests, the nine-month resale limit — works the same. If your company is a Delaware entity or you want to advertise the raise online, 147A is almost always the better fit.

Rule 504: Up to $10 Million, Any Investors, Any States​

Rule 504 of Regulation D takes a different approach. Instead of limiting where investors live, it limits how much you raise: up to $10 million in any rolling 12-month period, a cap the SEC raised from $5 million in late 2020. Within that cap, there is no limit on the number of purchasers and no requirement that they be accredited — a flexibility Rule 506 offerings do not have for non-accredited buyers. There are also no federally mandated disclosure documents, though anti-fraud rules still punish lies and half-truths.

Who cannot use it​

Three categories are excluded: companies already reporting to the SEC under the Exchange Act, investment companies, and blank-check companies with no specific business plan (including SPAC-style shells formed to find a merger target). Development-stage companies with a real plan qualify. Felons and fraudsters face a separate screen, covered below.

General solicitation: mostly no, with three doors​

As a default, Rule 504 bans general solicitation and advertising — no public pitches, no open demo-day broadcasts, no "invest in our round" posts. But the ban lifts when the offering runs through state-law channels that substitute their own investor protections:

1. The offering is registered in states that require a public registration filing plus delivery of a substantive disclosure document, and sales happen only in those states.
2. The offering is sold only under state-law exemptions that permit general solicitation, and only to accredited investors.
3. The offering is sold exclusively under state-law exemptions that permit general solicitation (with accredited-investor limits where the state requires them).

Securities sold through the state-registered path come out freely tradable rather than restricted — one of the few ways small-company shares achieve that. Everywhere else, Rule 504 buyers receive restricted securities that need a registration or exemption to resell.

State law still applies — this is the part founders miss​

Unlike Rule 506, which preempts state registration, Rule 504 has no federal preemption. You must register, qualify, or find an exemption in every state where you offer or sell. A 20-state friends-and-family round means 20 blue-sky analyses. Many founders pair Rule 504 with matching state limited-offering exemptions, but the coordination work is real — budget for it before you take the first check.

File Form D within 15 days of the first sale​

Rule 504 requires a notice filing on Form D with the SEC, due within 15 days after the first sale — not the first offer, the first money in. The filing is short and done online, and most states accept a copy for their own notice purposes. Missing it does not automatically kill the federal exemption, but the SEC can bar future Regulation D use, and several states treat a missing Form D as a state violation.

Bad-Actor Disqualification Applies to Both​

Both Rule 504 and the intrastate rules carry bad-actor disqualification: if the company, its predecessors, directors, officers, 20% shareholders, promoters, or paid solicitors have a disqualifying event — securities-related criminal convictions, court injunctions, SEC disciplinary orders, and similar sanctions within the lookback periods — the exemption is unavailable unless a waiver or reasonable-care exception applies. Run the background checks before you structure the round, not after the money arrives. One undisclosed covered person with a qualifying order can unwind every sale.

How the Raise Hits Your Books​

Exemptions change your filing obligations, not your accounting. A stock sale is equity, a convertible note is debt until it converts, and offering costs are tracked separately either way. Recording the raise as plain income is the classic error — it overstates revenue and creates a phantom tax bill. A clean structure keeps the cash, the equity, and the costs in their own accounts from the first close:

2026-01-15 open Assets:Bank:Operating USD
2026-01-15 open Equity:Common-Stock USD
2026-01-15 open Expenses:Offering-Costs USD
 
2026-03-01 * "Seed round close" "Rule 504 raise, first close"
  Assets:Bank:Operating  250000.00 USD
  Equity:Common-Stock  -250000.00 USD
 
2026-03-01 * "Legal fees" "Offering documents and blue-sky filings"
  Expenses:Offering-Costs  8500.00 USD
  Assets:Bank:Operating  -8500.00 USD

That separation pays off twice: offering costs are generally capitalized against the proceeds or amortized rather than expensed like rent, and a clean equity ledger is what the next round's lawyers will ask for first. For the mechanics of structuring accounts and running reports, the documentation walks through the full workflow.

Mistakes That Unwind an Exempt Raise​

• One out-of-state sale under Rule 147. A single buyer who actually lives across the state line destroys the intrastate exemption for everyone. Verify residency in writing; do not rely on a mailing address.
• Advertising a Rule 147 offering online. Public posts are offers, and Rule 147 offers must stay in-state. If you want the internet, use 147A or fit a 504 solicitation door.
• Forgetting blue-sky compliance under 504. The federal exemption is half the job. Skipping state filings turns a clean federal raise into 20 simultaneous state violations.
• Counting the $10 million wrong. The cap aggregates all Rule 504 sales in the trailing 12 months. A $7 million close in March leaves only $3 million of headroom until the following March.
• Skipping Form D. Fifteen days from the first sale passes fast during a rolling close. Calendar it the day the round opens.
• Booking proceeds as revenue. Investment cash is equity or debt, never sales. The ledger example above is the shape to follow.

Your Pre-Launch Checklist​

Pick the exemption before you talk to investors: Rule 147 or 147A when every buyer will be an in-state resident, Rule 504 when you need out-of-state money or more than local checks can provide. Confirm the issuer tests, line up the matching state exemptions, calendar the Form D deadline, run bad-actor checks on every covered person, and open the equity and offering-cost accounts before the first wire lands. Do that, and the exemption is a checklist you completed — not a defense you are hoping for.