Rule 504 of Regulation D

Introduction

Section 5 of the Securities Act of 1933, as amended (the “Act”), requires that all offerings of securities be either (1) registered with the Securities and Exchange Commission (the “SEC”) or (2) exempt from registration.

Section 4(a)(2) of the Act exempts from registration transactions that are not public offerings.

The term “public offerings” is not defined in the Act.

Due in part to differing interpretations on what a “public offering” is, the SEC adopted Regulation D has a safe harbor under Section 4(a)(2).

Regulation D is a regulation promulgated under the Act that offers a safe harbor from registration.

There are 3 rules under Regulation D: Rule 504, Rule 506(a), and Rule 506(b).

Rule 504

In order to utilize Rule 504, the following must be true:

(1) the maximum size of the offering is $10 million (when combined with all securities sold under Section 3(b)(1) or in violation of Section 5(a) of the Act) per year;

(2) the issuer is a non-reporting company;

(3) there is no bad-actor disqualification; and

(4) there is no general solicitation or advertisement (unless pursuant to an exception provided by Rule 504(b)(1))

Benefits of Rule 504

Rule 504 has no limits on the number of investors that can participate.

As well, Rule 504 does not require that the investors be sophisticated or accredited.

Drawbacks of Rule 504

In addition to the limitations already mentioned, there are certain drawbacks to relying on Rule 504.

Unlike Rule 506(b) or 506(c), Rule 504 does not preempt state blue sky laws, which means that state security laws still need to be complied with.

Like Rule 506(b) and 506(c), there are resale limitations on securities offered pursuant to Rule 504.

Conclusion

The main reason to utilize Rule 504 is to not have to worry about whether the investors are sophisticated or accredited.

However, the $10 million yearly cap, the inability for reporting companies to utilize the exemption, and the prohibition against general solicitation means that Rule 504 is not suitable for every issuer.

Disclaimer

This is not legal advice and does not create an attorney-client relationship between you and the author. This article is being furnished for educational purposes only.

The author makes no warranty as to the accuracy, completeness or applicability of the information and undertakes no obligation to update the information.