Deep Dive into Regulation D; Part 3 Rule 504
Choosing the most suitable securities exemption demands a great deal of foresight, planning, and research; it is not something to be taken lightly. The designated SEC exemption becomes the basis of growth funding for the company. Each rule has its benefits and caveats that effect how the firm raises capital. In addition to this, state registration via the state of formation, as well as the home state of an investor client is required by the *state regulatory agencies -- most of whom have their own set of regulatory overlays to follow. Furthermore, these exemption rules cannot easily be "doubled up" as there are strict restraints related to "integration".
Knowledge is the key to choosing the appropriate fundraising vehicle.
Regulation D Rule 504 is one of the exemptions from registration under the U.S. Securities Act of 1933, allowing certain companies to offer and sell securities without having to register with the SEC. Rule 504 is designed to make it easier for smaller companies to raise limited amounts of capital while providing some flexibility to both the issuer and investors.
Key Aspects of Regulation D Rule 504:
1. Offering Limit:
- Rule 504 allows a company to raise up to $10 million in a 12-month period (this cap was increased from the previous limit of $5 million in 2017 to make the rule more useful for smaller businesses seeking capital).
2. Eligible Issuers:
- Rule 504 is available only to certain types of companies. It excludes companies such as:
- Public companies (i.e., companies subject to the reporting requirements of the Securities Exchange Act of 1934).
- Investment companies (including hedge funds and mutual funds).
- Development stage companies without a specific business plan or that have indicated their business plan is to engage in a merger or acquisition with an unidentified company (also known as blank check companies).
3. General Solicitation and Advertising:
- Under certain conditions, issuers can use general solicitation and advertising to market their securities. However, this is typically allowed only if:
- The offering is registered under state securities laws (*blue sky laws), or
- The securities are sold exclusively to accredited investors under a state law exemption that allows for the public offering.
4. Purchaser Restrictions:
- Unlike Rule 506(b) and Rule 506(c) under Regulation D, Rule 504 does not impose restrictions on the number or type of investors. The securities can be sold to both accredited and non-accredited investors.
- However, if the company engages in general solicitation, they may be required to comply with additional state-level requirements.
5. No Specific Disclosure Requirements:
- Rule 504 does not mandate specific disclosure requirements (unlike Rule 506(b), which has disclosure obligations for sales to non-accredited investors).
- However, companies should provide sufficient information to investors to avoid any anti-fraud liability under federal or state law.
6. Restricted Securities:
- Typically, securities sold under Rule 504 are restricted, meaning they cannot be freely traded without registration or an applicable exemption. However, if the offering complies with state law that permits general solicitation and sales to non-accredited investors, the securities may be non-restricted (freely tradable).
7. State Compliance:
领英推荐
- Companies using Rule 504 must also comply with state securities laws (*known as “blue sky” laws), and each state has its own requirements for filing and offering securities (the overlays mentioned above).
8. Resale Limitations:
- Securities sold under Rule 504 typically cannot be resold without registration or an exemption from registration, unless the state allows otherwise.
Summary
Rule 504 of Regulation D is a valuable tool for smaller companies looking to raise capital without undergoing a full SEC registration process. It offers a cap on the amount that can be raised ($10 million), allows some flexibility with respect to investor types and general solicitation, and provides some relief from strict disclosure requirements. However, companies must carefully navigate both federal and state laws to remain compliant.
This rule is often used for small private offerings, allowing firms to tap into accredited and non-accredited investors in a relatively cost-effective and time-efficient manner.
*What are Blue Sky Laws?
State Blue Sky laws are regulations enacted by individual states to protect investors from fraud in the sale of securities. Here’s a simple description:
Key Points of Blue Sky Laws:
Overall, Blue Sky laws help create a safer investment environment by regulating how securities are offered and sold at the state level.
Structuring Your Capital Raise
Navigating the formation of your offering can be daunting and expensive -- some law firms and startup incubators charge between $50,000 - $350,000+ depending on which exemption your company files. As investors in companies ourselves, we {Poplar Equity Group} believe these costs are entirely unnecessary, and even unwise for a startup venture to be accumulating that much debt -- before you've taken on any capital!
We put our heads together and created a better way. If you've been considering raising capital for your business in a structured, compliant manner, we want to help. Send me a message and let's get to work!
Your best days are ahead! ??
-Blake E. Robbins
Reg CF, Reg D 506(B), Reg D 506(C), Reg A+ Reg S, Equity Crowdfunding, Capital Raising, startup, angel capital, venture capital, private equity hedge funds
#regulationD #sec #privateequity #hedgefund #compliance #investment #growth #angelcapital #venturecapital #realestate #profitability #506b #506c #jobsact #crowdfunding #regulationA #offering #blueskylaws #generalpartner #limitedpartner #IRR #business #liquidity #financing #accreditedinvestor #generalsolicitation #liquidity #equity #legal