Regulation D has been around for some time now. Basically, Regulation D provides us with a "safe harbor," providing details that allow for compliance with the private placement exemption of the Securities Act of 1933; Section 4(2). A private placement exemption is a legal way to offer an investment without registering the offering with the securities regulators such as the Securities and Exchange Commission and/or a state securities regulatory agency, such as the Department of Corporations in California or the Texas Securities Board.
Regulation D contains 3 categories of offerings, Rule 504 applies to private offerings not to exceed $1 million in any consecutive 12 month period. Rule 505 applies to offerings up to $5 million. Rule 506 does not have an offering amount limitation. However, those offered a Rule 506 investment must be "sophisticated." Use of this term doesn't apply to a person's taste in wine or attire, but rather to their investment experience and acumen.
The big advantage to Rule 506 offerings came about with the passage of the National Securities Markets Improvement Act of 1996 ("NSMIA"). Rule 506 offerings are subject to federal, but not state, substantive regulations and laws. To put it another way, state securities laws are "pre-empted" by federal law under Rule 506. Instead of complying with a potential myriad of differing state regulations and laws, the offering company can focus on federal regulations and laws instead.
States can require certain information about a Rule 506 offering for informational purposes. These are usually called NSMIA notifications and include filing a "Form D," which is the federal securities sale notice, and often a Form U-2, which appoints a state agency in a state to serve as agent for service of process in matters involving the out-of-state offering entity. Filing fees vary from nothing, to nominal amounts to hundreds of dollars. There is no federal filing fee. However, issuing companies must file Form Ds electronically, involving a fee to access the federal filing system (EDGAR).
States can also investigate securities fraud within their jurisdiction, regardless of whether Rule 506 has been relied upon by the offering company. States are still the primary licensors of securities sales people and broker/dealers. Sales methods of offering entities are often challenged by the state agencies; citing the payment of illegal commissions to unlicensed personnel.
Rule 506, in summary, is utilized by many offering companies as the simplest method for offering a private placement securities offering in excess of $1 million (in any consecutive 12 month period). Federal pre-emption of state securities laws is the main reason for this simplicity.