Regulation D Rule 504 Securities Offering Requirements and Disclosures

Rule 504 of Regulation D of the Securities Act of 1933, as amended (the “Securities Act”) allows an issuer to raise capital of up to $5,000,000 in a 12-month.  Rule 504 allows sales to both accredited and non-accredited investors. As discussed below, unlike Rule 506(b) when sales are made to non-accredited investors in reliance upon Rule 504, there are no specified disclosure requirements. Additionally, the issuer is not required to file with the Securities & Exchange Commission (“SEC”) until 15 days after the first sale of securities in the offering.

Which Companies Can Rely on Rule 504?

Rule 504 is only available to companies that are not subject to  SEC reporting requirements under the Securities Exchange Act. Additionally, Rule 504 cannot be used by investment companies; companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies; or companies that are disqualified under Rule 504’s “bad actor” disqualification provisions.

What are the Requirements of Rule 504?

Rule 504 provides an exemption from the SEC’s registration statement requirements for eligible issues for the offer and sale of securities if the following conditions are met:

• the aggregate amount of securities sold in the Rule 504 offering must not exceed $5,000,000 in a 12-month period;
• neither the issuer nor any person acting on its behalf engages in any form of general solicitation or general advertising to offer or sell the securities;
• the issuer must comply with the Bad Actor requirements set forth in Regulation D, Rule 504;
• the securities purchased in the Rule 504 offering are restricted securities and cannot be resold by purchasers unless registered under the Securities Act or pursuant to an exemption therefrom;
• the issuer must exercise reasonable care to assure that the purchasers of the securities are not underwriters; and
• the offering is not integrated with any other offering that would render the Rule 504 exemption unavailable.

One key benefit provided by Rule 504 is that the issuer is not required to provide particular disclosures to investors in the offering, including non-accredited investors.  Despite this, issuers should keep in mind that the anti-fraud provisions continue to apply in Rule 504 offerings regardless of whether a private placement memorandum is provided to investors.

How is Rule 506(b) different than Rule 504?

Rule 506(b) permits an issuer to sell securities to up to 35 non-accredited investors and an unlimited amount of accredited investors.  An important requirement of Rule 506(b) is that if sales are made to non-accredited investors, the issuer must provide specified disclosures as set forth in Rule 502(b)(2) of Regulation D as follows:

• Financial statement Information. For offerings up to $2,000,000, the issuer is required to provide the financial statements required by Article 8 of Regulation S-X under the Securities Act (except that only the issuer’s balance sheet, which must be dated within 120 days of the start of the offering, is required to be audited); and for offerings between $2,000,000 and $5,000,000, the issuer is required to provide the audited financial statements required on a SEC Form S-1 registration statement for smaller reporting companies (unless such financial statements cannot be obtained without unreasonable effort or expense, in which case only the issuer’s balance sheet, which must be dated within 120 days of the start of the offering, is required to be audited).
• Non-financial statement information. The issuer is required to provide “the same kind of information” required in Part II of Form 1-A, if the issuer is eligible to use Regulation A, or Part I of a Form S-1 registration statement, if the issuer is not eligible to use Regulation A.
• Business combinations and exchange offers. If securities are issued in a business combination or exchange offer, the issuer must provide the expansive disclosures required to be included in a Form S-4 registration statement.

Does Rule 504 require a filing with the SEC?

Yes. A company conducting an offering under Rule 504 is required to file a notice on Form D with the SEC within 15 days after the first sale of securities in the offering.

What State Blue Sky Laws Apply to Rule 504 Offerings?

Issuers conducting securities offerings in reliance on Rule 504, must comply with state securities laws and regulations in the states in which securities are offered or sold.  Each state’s securities laws have their own registration requirements and exemptions from registration requirements.  Issuers should contact state securities regulators in the states in which they intend to offer or sell securities for further guidance on compliance with state law requirements.  Issuers may also obtain useful information on state securities law registration requirements and exemptions to registration requirements, including coordinated state review programs, by visiting the website of the North American Securities Administrators Association (NASAA) at www.nasaa.org.

This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship.  Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
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Boca Raton, Florida 33432
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