Rule 504 Offerings – Regulation D Attorneys

RULE 504 – LIMITED CROWDFUNDING

Securities offerings under Rule 504 of Regulation D of the Securities Act may prove useful to founders of startup and small companies.  One of the most difficult times for these companies is when the company is founded. Often the founders will have limited capital with which to fund their new business. Under Rule 504,  the company can raise up to $5 million in a 12  month period without filing the offering with the SEC prior to sale. One important limitation of Rule 504 is that it is  not available to public companies subject to SEC reporting requirements.

Unlike securities sold in an offering registered with the SEC on Form S-1, companies offering securities in reliance upon Rule 504 submit an SEC filing  on Form D 15 days after the first sale of securities. Issuers must still comply with state blue sky requirements. Issuers conducting offerings under Rule 504 should follow the rules below to avoid disqualification of their offering exemption.

RULE 504 OF REGULATION D TECHNICAL REQUIREMENTS

Rule 504 provides an exemption from the SEC’s registration statement requirements if the following additional requirements are met:

• Rule 504 is only available to companies that are not subject to the SEC’s reporting requirements, investment companies, or development stage companies that have no specific business plan or intends to merge with or be acquired by an unidentified company.
• Offers and sales of the securities may be made to an unlimited number of accredited and non-accredited investors.
• Rule 504 does not impose specific disclosure requirements; however, the anti-fraud provisions of both federal and state law continue to apply.
• An offering under Rule 504 will be disqualified if certain “covered persons” are subject to disqualification.
• Like issuers using Rule 506(c) described above, issuers using Rule 504 must file a notice with the SEC on Form D within 15 days after the first sale of securities in the offering.
• State regulators may impose registration and qualification requirements in Rule 504 offerings.
• No general solicitation or general advertising can be used unless the offering is registered in a state requiring use of a substantive disclosure document or sold under state exemption for sales to accredited investors with general solicitation.
• Shares issued in a Rule 504 offering are restricted securities unless registered in a state requiring use of a substantive disclosure document or sold under state exemption for sale to accredited investors with general solicitation.

STATE REGISTRATION AND QUALIFICATION REQUIREMENTS

Unlike issuers conducting offerings under Rule 506, issuers conducting Rule 504 offerings are prohibited from using general advertising or solicitation unless the offering is conducted:

• exclusively in one or more states that require registration of the securities and distribution of disclosure documents approved by the relevant state,
• in one or more states that do not require registration of the securities, if the issuer registers the securities in at least one other state that requires registration and distribution of state-approved disclosure documents, and those documents have been delivered to all purchasers, including those purchasers in the state or states that do not require registration; or
• issued exclusively according to state law exemptions from registration of the securities that permit general advertising and solicitation so long as sales are made only to accredited investors.

Most states have adopted a uniform registration form for offerings relying on Rule 504 called SCOR (The Small Corporate Offering Registration). For issuers not engaging in general solicitation and advertising, states impose at a minimum notice filing requirements and filing fees.

DISADVANTAGES OF RULE 504

A significant disadvantage of using the Rule 504 exemption is that the issuer must comply with state securities laws and regulations in each state where the securities will be offered or sold. State securities laws have their own exemptions and registration and qualification requirements. In some states, Rule 504 offerings are subject to registration requirements and receive a full review with comments very similar to the SEC’s registration statement process. If the issuer does not comply with these requirements, its offering could be disqualified or worse, it could be subject to an enforcement action by a state securities regulator.

LIQUIDITY IN RULE 504 OFFERINGS

Shares issued in a Rule 504 offering are restricted securities unless registered in a state requiring use of a substantive disclosure document or sold under state exemption for sale to accredited investors with general solicitation. In practice, there are no states that provide for unrestricted securities to be issued in offerings made to accredited investors through the use of general solicitation and advertising.  Further, state registration provisions are comparable to the process of filing a registration statement under the Securities Act and/or qualification of Form 1-A in Regulation A offerings.  As such, under almost all circumstances, investors in a 504 receive restricted securities and as such, investors will not have liquidity for their shares unless the resale of their shares is registered pursuant to Tier 2 of Regulation A or Form S-1 or an exemption or safe harbor is available for the resale.

Issuers who do not comply with Rule 504’s requirements could be subject to federal or state enforcement action and investors in the offering could have rescission rights.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.gopublic101.com. 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 and compliance 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. For more information about going public with Form S-1, Form F-1 and Regulation A Securities Offerings, Rule 506 and Regulation CF crowdfunding,  sponsoring market makers and Form 211,  dual listings and foreign issuer listings and public company SEC reporting requirements, please contact Hamilton & Associates Law Group.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com