Rule 504 of Regulation D exempts from registration the offer and sale of up to $5 million of securities in a 12-month period. The SEC requires a company to file a notice on Form D for a Rule 504 offering. A company must also comply with state security laws and regulations in states where it offers and sells its securities.
Companies that are not eligible to use Rule 504 include:
- Exchange Act reporting companies;
- Investment companies;
- “Blank Check” companies; and,
- Companies that are disqualified under Rule 504’s “bad actor” disqualification status.
Our Rule 504 Offering Documents
Our SEC compliant Rule 504 Offering Documents include the PPM, Investor Questionnaire, Subscription Agreement, Form D, Jurisdictional Legends for all 50 states, Patriot Act Disclosures and more. Plus, our documents are available for your corporation or your LLC issuing either equity or debt securities.
Do the anti-fraud provisions apply?
All security transactions, even exempt transactions, are subject to the antifraud provisions of the federal securities laws. You and your company are responsible for false or misleading statements regarding your company including misstatements about the securities offered, the offering itself and whether made orally or in written statements. The government enforces the federal securities laws through criminal, civil and administrative proceedings. Private parties also can bring actions under certain securities laws. Purchasers may also be able to return their securities and obtain a refund if all exemption conditions are not met.
Do state law requirements apply?
The SEC regulates and enforces the federal securities laws. Each state has its own securities regulator who enforces the state’s “blue sky” laws. If a company is selling securities, it must comply with both federal and state security laws in the states where it offers and sells its securities. If a company uses Rule 504, the states still have authority to investigate and bring enforcement actions for fraud, to impose state notice filing requirements and to collect state fees. The failure to file, or pay filing fees may cause state security regulators to suspend the offering or sale of securities within their jurisdiction. Companies should contact state securities regulators in the states in which they intend to offer or sell securities for further guidance on to comply with state requirements. The following table illustrates which offerings are potentially subject to state registration or qualification.
|Securities Act Exemption||Under the Securities Act, is the offering potentially subject to state registration or qualification?|
|Regulation A – Tier 1||Yes|
|Regulation A – Tier 2||No|
|Rules 147 and 147A||Yes|
To locate a state securities regulator and learn more about a particular state’s securities laws, please visit the North American Securities Administrators Association (NASAA) website.
What are restricted securities?
“Restricted securities” are previously-issued securities held by security holders. Restricted securities may not be freely traded. Securities Act Rule 144(a)(3) identifies what offerings produce restricted securities. After such a transaction, the security holders can only resell the securities by using an effective registration statement or using a valid exemption, such as Rule 144.
Rule 144, a “safe harbor,” permits the resale of restricted securities under a number of conditions. These conditions include a six or a twelve month holding period. If the security holder is an affiliate, Rule 144 may limit the amount of securities that the holder may sell at one time and may also restrict the manner of sale.
How can an investor resell non-restricted securities?
An investor, not affiliated with the issuer, who wishes to sell unregistered securities must either register the transaction or receive an exemption. Section 4(a)(1) of the Securities Act is a commonly relied upon exemption. This exemption is available to any person other than an issuer, underwriter or dealer. Several exemptions, including the exemptions under Regulation D, are only available for offers and sales by an issuer of securities to initial purchasers and are not available to any affiliate of the issuer or to any person for resale of the securities.