Regulation D: Rule 504

Entrepreneurs, startups, and small businesses alike often share a common struggle when beginning their venture, securing funds. Unfortunately, without the capital necessary to finance operations, the ambitions of the venture will be limited to the capital resources on hand. In response to this struggle, the Securities and Exchange Commission (the “SEC”) has provided Rule 504 of Regulation D of the Securities Act of 1933 (the “33 Act”). Rule 504, along with other Regulation D rules, help alleviate some of the financial pressures for companies looking raising money for their business venture.

Currently, Rule 504 provides an exemption to the security regulations otherwise provided by the 33 Act and allows companies to sell of up to $5 million of securities in any 12-month period. The amounts raised through the sale of the securities may be used for general capital purposes to operate the business, as well as specific transactions involving a merger or acquisition.

Though the SEC promotes and encourages economic activity and ventures, generally, not all companies are permitted to utilize the Rule 504 exemption. Companies prohibited from using the Rule 504 exemption include: companies that are already 33 Act reporting companies; investment companies; companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition within an unidentified company; and companies that are disqualified under Rule 504’s “bad actor” disqualification provisions. 

While the SEC’s provision of Rule 504 is intended to assist companies and business ventures secure capital, it does not abandon their duty to protect consumers and maintain the integrity of the marketplace. To help achieve this goal, the SEC includes a few limitations for those who pursue a Rule 504 offering. First, neither the issuer nor any of its agents may offer or sell the securities through any form of general solicitation or general advertising, including any print media, broadcasts, publicly held seminars or conferences, and mass mailings or internet messages. Second, the securities may not be resold for at least 1-year following the date of purchase or without first being properly registered under the 33 Act. Lastly, the securities shall not be offered or sold in conjunction with another offering that would otherwise jeopardize the Rule 504 exemption.

Surprisingly, unlike other exemptions to the 33 Act, Rule 504 does not require any particular disclosures to investors or potential purchasers. These disclosures require companies to provide specific documents and forms to allow non-accredited investors to be informed on key issues. These documents can include: financial statements, as required by the 33 Act for offerings up to $2 million, or Form S-1 for offerings between $2 million and $5 million; non-financial statement information, such as the disclosures found in Form 1-A if the issuer qualifies to use Regulation A, or Part I of Form S-1 if the issuer does not qualify to use Regulation A; and, business combinations and exchange offers, which require issuers to submit a Form S-4 registration statement. 

Those looking to begin a new company or business venture may want to explore Regulation D offerings. Here, there are many options available that will help the company or business venture secure the capital needed to achieve the identified objectives. Knowing key characteristics, goals, needs, and objectives of the company or business venture will help determine which rule provided by Regulation D would best serve these ambitions.

Disclaimer: The information contained in this post is for general information and educational purposes only. The application and impact of laws can vary widely based on the specific facts involved. Given the changing nature of laws, rules and regulations, and the inherent hazards of electronic communication, there may be delays, omissions or inaccuracies in information contained in this publication. Accordingly, the information on this post is provided with the understanding that the author and publishers are not herein engaged in rendering legal, accounting, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. Before making any decision or taking any action, you should consult a professional.

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