Rule 504 of Regulation D
Rule 504 is viewed as the optimal road for entrepreneurs seeking less than $1 million. It is good for those who cannot afford many of the costs associated with the Securities & Exchange Commission (SEC) registration process. Until the entrepreneur’s company is at a point where they can afford additional expenditures, Rule 504 offers companies some of the following needed breaks:
• An exemption to raise up to $1 million;
• No disclosure criteria;
• Few general solicitation and resale restrictions;
• No limit as to the number or type of investors (see below)
The above Rule 504 exemptions can be utilized for almost any type of organization, including corporations, partnerships, trusts, or other entities. However, it is not applicable to companies who are currently reporting to the SEC (subject to the ‘34 Act) or investment companies.
Rule 504 of Regulation D - Restrictions
Not to Exceed $1 Million. The total offering amount permitted to be procured under Rule 504 can be up to $1 million. This is the rule over a 12-month period, less the aggregate offering of all securities sold within 12 months before the start of a 504 offering. Therefore, if a company has raised $100,000 in private financing in the previous 12 months, it can still procure up to $900,000 without being accused of breaking the restrictions.
Overall, there are no specific disclosure requirements under Rule 504 (such as disclosing the company’s profile or model, and what people are involved). An investor (or purchaser), then, can sign a subscription agreement, purchase companywhile having little to no information about the company at hand. However, this is not always the standard and can vary from state to state. For instance, the rule is dependent on the blue-sky laws of each state in which the securities are offered, and many states often have various requisites. If a state’s blue-sky rules require disclosure, it must be provided regardless of Rule 504.
Rule 504 stipulates that at least $500,000 of securities must be sold pursuant to a registration under a state’s securities law. As such, an offer must comply with the blue-sky laws of each individual state in which it is offered. In many states, unfortunately for entrepreneurs, this negates the ease of Rule 504 and the federal government’s initial intent, because many states’ blue-sky laws are more restrictive than Regulation D.
Entrepreneurs beware–regardless of the amount of information one is willing to disclose: Rule 504 does not dismiss the issuer from the federal requirements. Furthermore, there is no exemption from the fraud provisions, including the areas of material omissions or misstatements. The penalties for noncompliance are severe, which can include monetary fines and jail sentences.
Number of Investors
The number of investors can vary depending on the scope and value of a project, as well as the entrepreneur’s network. Depending on the type of incorporation, as well as the state the company will conduct business, restrictions apply as to the number of individuals who are allowed to invest. However, Rule 504 allows an issuer to sell securities to an unlimited amount of investors, up to, of course, $1 million in procured financing. Rule 504 is the only rule under Regulation D that permits an unlimited number of investors.
private placement memorandums..net creates 504