Reg D Rule 504 is Ideal for Small Companies

Regulation D provides several ways for companies to raise money without officially registering with the SEC.  This saves time and money, as preparing for a public offering is very intensive.  For many smaller companies, or start ups, going public is simply not an option.  Fortunately, it’s not necessary either. More money is raised through private offerings than the stock market every year, making Reg D a truly attractive option.

There are several rules within Regulation D that you can use to raise capital including Rule 504, Rule 505, Rule 506 (b) and 506 (c). Rule 504 has been designed for smaller companies to raise capital and has several distinct benefits.  It is also referred to as a small corporate offering registration (SCOR).  When issuing a private offering under Reg D Rule 504 a company can raise up to $1 million per 12 months.

Prior to selling shares a company needs to complete the SCOR form and submit it to the various states where they plan on selling securities.  Most states accept the same form, making it extremely easy to file it.  Alabama, Florida, Delaware, Hawaii, Kentucky, and New York do not accept the standard SCOR form so if you are selling in these states you need to contact their Department of Financial Institutions to see what, if any, state forms you need to file.  The purpose of this form is to inform a state that you are selling securities there.  Once you have sold your first security you need to file a Form D with the SEC.

The disclosure requirements are extremely limited.  The amount of information you provide to potential investors is based upon what you feel is pertinent and relevant to the transaction.  By limiting the set disclosure requirements it is easier for small businesses to publish their private offerings.  It is important to note that specific states may have additional disclosure requirement and that you still have to give enough disclosures so that you cannot be accused of violating anti-fraud provisions.

Generally speaking, securities sold under Reg D Rule 504 are restricted and unable to be sold unless you register with the SEC.  There are exemptions under Reg D Rule 504 that will remove the restriction.

  • If you sell securities in a state where you also register, and follow their securities laws, than what you sell there will not be restricted.  Filling out a SCOR form and submit it that may qualify in some states.
  • If you register your offering in a state with disclosure delivery requirements, and sell in another state that doesn’t, your securities can be unrestricted so long as you follow those same disclosure delivery requirements across all states.
  • You sell exclusively according to state law exemptions, allowing for general solicitation, as long as you only solicit accredited investors.

This is a fairly easy way to sell unrestricted securities.  Simply register with one state, gain an in depth understanding of their disclosure requirements, meet them, and keep those same standards in every state.  Once the documents are prepared it will not take any additional effort to deliver them to all of your investors.  Selling unrestricted securities will eliminate or reduce any liquidity fears that a potential investor may have.  Once you are ready to raise money secure a list of accredited investors and start raising money.

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