Rule 504 of Regulation D

Rule 504 of Regulation D is considered by many authorities in the private placement world to be the most ideal Offering Memorandum to create, although not suitable for all companies. For various reasons Rule 504 is the most commonly used Regulation D (Reg D) exemption.  For many companies, Rule 504 provides an exemption from the registration requirements of the federal securities laws when they offer and sell up to $1,000,000 of their securities (i.e. stocks) in any 12-month period. Additionally, Rule 504 has no prescribed disclosure requirements and has no limit on the number of purchasers (i.e. investors). Significantly as well, no investor sophistication standards are required, such as the requirements for Rule 505 and Rule 506 where the type of investors is limited to Accredited Investors and 35 non-Accredited Investors.

Rule 504 generally does not permit companies to solicit or advertise to the public that the company is selling securities.  Purchasers (investors) receive what is known as “Restricted Securities”, and may not sell the securities without registration or an applicable exemption.

Selling Securities: Regulations for a Reg D 504

According to the Securities and Exchange Commission (SEC), Rule 504 of Regulation D permits a company to sell its securities (stocks, bonds etc.) that are not restricted, if one of the following criteria  is realized:

• The company  selling its securities registers the offering exclusively in one state, or multiple states, that do require a publicly filed registration statement as well as the delivery of a detailed document full of company disclosures that would go to investors;

• The company registers and sells the offering (preferably in the form of an Offering Memorandum) in a state that requires registration as well as disclosure delivery.

• Additionally, if the company sells in a state (or multiple states) without those requirements, as long as the company delivers the disclosure documents required by the state where the company registered the offering to all purchasers (i.e. investors, including those in the state that has no such requirements) they may be able to transfer the securities; or

• The company sells exclusively according to state law exemptions. These state laws must also permit general solicitation and advertising (not in the public sense of the word), so long as the company sells only to Accredited Investors, as defined in the Registration Act.

A company seeking to sell its securities or stock should provide sufficient, detailed information to prospective investors in order to avoid violating the antifraud provisions of the securities laws. In failing to adhere to the antifraud provisions of the security laws, the SEC can impose fines or other forms of punishment.

All information provided to prospective investors must be not including false or misleading statements. Additionally, a company should not exclude any relevant information from their offering, as this too can be construed as criminal.

Links to current versions of SEC Rules, Regulations, and Schedules can now be found on the following web pages with the Securities and Exchange Commission (SEC), which direct users to the Electronic Code of Federal Regulations.

• Division of Corporation Finance: Rules, Regulations and Schedules under the Securities Act, Exchange Act and Trust Indenture Act



• Rules and Regulations for the Securities and Exchange Commission and Major Securities Laws: Securities and Exchange Commission Rules and Regulations

Rule 504, 505, 506 encompass the specifics of raising money under Reg D.

• Rule 504 is generally relevant to securities sales up to $1 million. Rule 504 is maintained to be the most beneficial to the entrepreneur.
  
  The Securities Lawyer's Deskbook, published by the University of Cincinatti College of Law, Rule 504 of Regulation D: General Rules and Regulations promulgated under the Securities Act of 1933.


• Rule 505 applies to securities offerings from $1 million to $5 million.


• Rule 506 is for securities offerings exceeding $5 million.

Rule 504 of Regulation D – The Ideal Road
For virtually all entrepreneurs, the most efficient mechanism to procure equity financing under an exemption is through the use of Regulation D (Reg D), which is a limited offer and sale of their company's stock, or securities, without registration under the Federal Securities Act of 1933. A positive outcome by complying with Regulation D is that it provides the company’s officers and directors an insurance policy of sorts regarding disclosure. See U.S. Securities and Exchange Commission: Rule 504 of Regulation D

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