Rule 504 Securities Registration Exemption
Rule 504 Exempion - Explained
Written by Jason Gordon
Updated at April 6th, 2023
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What is a Rule 504 small offerings exemption?
Rule 504 is a transactional exemption from registration under Regulation D for small securities offerings. The statutory authority for the rule is pursuant to Section 3(b) of the 33 Act.
Next Article: Rule 505 Securities Exemption Back to: SECURITIES LAW
What are the Requirements for a Rule 504 small offerings exemption?
The general requirements and limitations on the exemption are as follows:
Issuer Protections - The exemption is available to the original issuer. The exemption is available to any company that is not a reporting company, investment company, or a blank check company under the Securities Exchange Act.
Dollar Limits - Rule 504 allows an issuer an exemption for small offerings of shares with an aggregate annual value of up to $1 million. The issuer may not split a single offering between Rule 504 and some other exemption. Any other offerings during the previous twelve-month period, even if under another exemption, will be integrated into the Rule 504 offering.
Number of Purchasers - The issuer can make sales to an unlimited number of persons. It does not matter whether the purchasers are sophisticated or accredited investors.
Restricted Securities - Securities are restricted. Affiliates and non-affiliates of an issuer who wish to resell securities must look elsewhere for a transactional exemption.
General Solicitation - Rule 504 prohibits the issuer or anyone on the issuers behalf to "offer or sell the securities by any form of general solicitation or general advertising. Rule 504 does allow for general solicitation in the following circumstances:
- the offering is registered in the state where securities are sold, or
- the state permits general solicitation and sales are only made to accredited investors in that state, or
Note: In these situations, the securities issued pursuant to either of these provisions are not restricted.
- the state of issuance does not require registration, but the securities are registered in another state.
Note: This is a situation where the state allows the issuer to piggyback on the registration of securities in another state. The issuer must generally file an informational notice to the issuing state regarding the registration in another state.
Private Placement Memorandum - To qualify for this exception, the state law must require "the public filing and delivery to investors of a substantive disclosure document before sale." The disclosure document must disclose all material information to investors.
State Regulation - A Rule 504 exemption does not preempt state regulations of securities under such an issuance. States may still regulate the issuance.
Discussion Question
What do you think is the SECs purpose in allowing for the Rule 504 exemption? Who do you think this exemption best serves? What do you think is the greatest limitation on this exemption? Why do you think the SEC allows for exceptions to the rule against general solicitation?
Practice Question
ABC Corp is a relatively new company that is growing quickly. ABC needs about $1 million in investment capital reach its growth goals for the next 18 months. In a brief letter, can you summarize the benefits and drawbacks of seeking an exemption from securities registration under Rule 504?
Related Topics
- Securities Law (Intro)
- What are Securities Laws?
- What is a Security?
- What qualifies as an Investment contract?
- What are the primary federal securities laws?
- What are the regulatory goals of security laws?
- What is the Securities and Exchange Commission?
- What is an Initial Public Offering?
- What is a Direct Public Offering?
- What is Crowdfunding?
- Securities Act of 1933
- What is an Offer to Sell securities?
- Who are the parties regulated in an offer to sell securities?
- What are the primary disclosure documents required in an offer to sell securities?
- Forward Looking
- Red Herring Prospectus (Securities) Definition
- Registration of Securities
- What is an issuer allowed to do at each stage of the registration process?
- How are issuers classified for purposes of the registration and offering process?
- What is an issuer allowed to do during the Pre-filing Period?
- What are the limitations on the issuer during the Post-filing, Waiting Period?
- What is an issuer allowed to do during the Post-Effective Period?
- What is an Emerging-Growth Company?
- What type of information must an issuer disclose?
- What laws govern the mechanics of disclosure in a securities offering?
- Deficiency Letter (Securities Law)
- Registration Exemptions Securities Act of 1933
- What are Exempt Securities and Exempt Transactions?
- What are Restricted Securities?
- Section 3(a)?
- Section 3(b)?
- What is a Rule 147 Exemption?
- What is a Section 4(a) Exemption?
- Section 4(a)(5)?
- What is a Regulation A Exemption?
- What are Regulation D Exemptions?
- What is a Rule 504 Exemption?
- What is a Rule 505 Exemption?
- What is a Rule 506(b) Exemption?
- What is a Rule 506(c) Exemption?
- What is Rule 502(d) and the Rule 144 Safe Harbor?
- Rule 144a
- What are the disclosure requirements for companies employing an exemption?
- What is the requirement to file Form D?
- What is the effect of failing to register an offering under Section 5?
- Liability Under the Securities and Exchange Act of 1933
- What is civil liability under Section 11 of the 33 Act?
- What is civil liability under Section 12 of the 33 Act?
- What are defenses available to charges under Sections 11 and 12?
- What is civil liability under Section 17 of the 33 Act?
- What is potential criminal liability under the 33 Act?
- The Security Exchange Act of 1934
- When must an issuer register pursuant to the 34 Act?
- What disclosures are required of reporting companies under the 34 Act?
- What is liability under Section 10(b) and Rule 10(b)(5)?
- What is insider trading under Rule 10(b)(5)?
- What damages are available under Section 10 and Rule 10(b)(5)?
- What is insider trading under Section 14 of the 34 Act?
- What is liability under Section 16 of the 34 Act?
- What is liability under Section 18 of the 34 Act?
- What is criminal liability under the 34 Act?
- Liability under the Securities Enforcement Remedies Act?
- Blue Sky Laws State Securities Laws
- What are Blue Sky Laws?
- When is an issuer required to comply with state securities laws?
- What are the registration requirements under state law?
- What is Coordinated Registration under state law?
