SEC Rule 504 Lawyers & Attorneys

Registering securities with the SEC can be an overwhelming undertaking for new companies, and many startups don’t want all the information required in such disclosures to be made public. That’s why most startups and private companies sell shares under some of the registration exemptions provided for within SEC rules. Reg D offerings are a popular option.

Regulation D provides three exemptions to the SEC’s registration requirements -- and SEC Rule 504 is one of them. While not as commonly used as the exemptions provided for in Rule 505 and Rule 506, Rule 504 includes very few guidelines regarding who can participate, which makes Rule 504 offerings useful for early stage startups raising seed capital. If you are considering pursuing a securities offering under the Rule 504 exemption, a startup lawyer or a securities lawyer from the Priori network can help you evaluate whether the exemption meets your company’s capital raising needs.

Understanding the SEC Rule 504 Exemption

Most securities have to be registered with the SEC, but Regulation D provides three exemptions from federal registration. SEC Rule 504 provides the first of these three exemptions.

Defining Rule 504 of Regulation D

Under Rule 504 of Regulation D, any company other than a “blank check” company can sell up to $1,000,000 of restricted securities in a given year to investors without filing the disclosures and reports otherwise required by the Securities Exchange Act of 1934. This amount is cumulative, and it includes any securities sold under other exemptions in the cumulation.

Unlike other Reg D exemptions, Rule 504 does not regulate the identity of the investors to whom the securities are syndicated -- i.e., both accredited and non-accredited investors may participate so long as the value of securities syndicated remains under the $1 million cap during the 12-month period. It’s important to note, however, that Rule 504 does not exempt companies from additional registration requirements that may be apply pursuant to the applicable state blue sky laws.

Conditions Under Which Solicitation Is Allowed

Generally, Reg D offerings are not permitted to include general solicitation; however, under Rule 504, general solicitation is allowed under three circumstances:

  • The offering is registered in the state where the investor lives;

  • The company has registered the offering in another state and provides all investors with the disclosure documents relevant to that registration; and

  • All purchasers are accredited investors as defined in Rule 501.

When It Is Used

Rule 504 is known as the seed capital exemption, because most companies who take advantage of it are early-stage startups soliciting relatively small amounts of seed capital. In practice, this exemption is rarely used, because most companies do not want to be limited to raising under $1 million over a year. Also, because Rule 504 requires companies to comply with all blue sky laws in each state in which the purchasers reside, the compliance requirements can sometimes become overwhelming for companies in cases in which investors are located in multiple states.

Form D

Within 15 days of selling securities under SEC Rule 504, the company must notify the SEC by filing Form D. This form includes certain baseline information about the transaction, including the company’s promoters, executive officers, and directors and some details about the offering. All Form D filings are inputted into the EDGAR database, which is available to the public.

FAQ

When should my company consider taking advantage of the Rule 504 exemption?

Any time you are raising only a very limited amount of funds, such as for seed capital, Reg D offerings under the Rule 504 exemption are potentially an option. If you are not sure if a Rule 504 offering is the right option for your company, it can help to speak with a securities lawyer or a startup lawyer.

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