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» What You Need to Know About Rule 504 of Reg D

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Last Updated on January 22, 2020 by John Fischer

Regulation D is an exemption from the registration requirements in the Securities and Exchange Act of 1933.  It allows companies to raise capital through a private offering without completing a full registration with the SEC and going public.  Private offerings have been an essential component of our economy, enabling companies to raise capital for growth and operations.  It has been so successful that private placement memorandums have raised up to four times the amount of capital raised through IPO’s.

Under Reg D their are several rules: Rule 504, Rule 505, and Rule 506.  Each one has similar requirements with different limits placed on investors and capital raised.  Before issuing a private offering it is important for a company to look at each rule in order to determine which will meet the desired objectives.  We have written a lot on Rule 505 and Rule 506 so people interested in learning more can see our previous posts.  Today we would like to focus specifically on Rule 504.

Rule 504 is more commonly known among the business community, in part because it is the first rule listed and many businesses don’t go further into analyzing if it is the correct rule to be under.

Here is what you need to know about Rule 504 under Reg D:

  • You can sell up to $1,000,000 in securities during a 12 month period.  Make sure that you won’t need more funds if you issue a private offering under Rule 504.  You don’t want to have a successful capital raise, need more money, and be stuck waiting for the clock to expire.
  • You can’t advertise to the general public.  If you want to use general solicitation you can now do so under Rule 506c.
  • These are restricted securities meaning an investor cannot sell them with registration or an applicable exemption.
  • Provide information in order to avoid an anti-fraud laws.  This means giving investors disclosures of risk factors and company data.
  • File a Form D after selling your first security.  If you want to have general solicitation and use Rule 506c you need to file this form before you start advertising the offering.

If you want to sell unrestricted securities their are exemptions under Rule 504 of Reg D that allow you to do so.

  • You can register the private offering exclusively in states that require a publically filed registration statement and giving investors substantial disclosure documents.
  • You can sell to unrestricted securities to additional investors in states that do not require a publically filed registration statement as long as you give those investors the same detailed disclosure documents.
  • You sell only to accredited investors following all other SEC and state laws.

Reg D enables companies to raise money for the things they need.  Whether it is expansion capital, operating funds, real estate etc. – private offerings are the viable solution for raising funds.  With three Reg D rules to choose from make sure you select the correct one and only use Rule 504 if you are certain that you will not need more than $1 million within one year.

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