Rule 504 Q & A l Securities Lawyer 101
What Is Rule 504?
Rule 504 of Regulation D is an exemption from the registration requirements of the Securities Act of 1933, as amended (the “1933 Act”) for certain companies when they offer and sell securities.
How Much Money Can I Raise From Investors In A 504 Offering?
The aggregate amount raised for an offering of securities under Rule 504 cannot exceed $1,000,000, less the aggregate offering price for all securities sold within the twelve months before the start of and during the offering of securities under this Rule 504, in reliance on any exemption under section 3(b), or in violation of section 5(a) of the Securities Act. The issuer can, however, issue as much stock as he likes for that $1 million: 10 shares or 10 billion; it makes no difference.
Who Can Rely Upon Rule 504 To Offer And Sell Securities?
Rule 504 is only available to an issuer of securities and therefore is not available for the re-sale of securities by a person who holds or owns a security.
Can All Issuers Use Rule 504 To Offer And Sell Securities?
The Rule 504 is only available to an issuer that is not:
♦ an SEC reporting company (i.e., the Issuer is not subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “1934 Act”);
♦ an investment company; or
♦ a “Shell Company” or “blank check company” (i.e., a development stage company that either has no specific business plan or purpose or has indicated that its business plan is to enter into a merger or acquisition with an unidentified company or companies or other entity).
Is There A Limit On The Number Of Investors In a Rule 504 Offering?
Rule 504 does not impose a limit on the number of investors who purchase an issuer’s securities.
Do I Have to Comply with Blue Sky Laws If I Conduct a 504 Offering?
Yes, issuers must still comply with the Blue Sky Laws of the states where offers and sales are made.
Does Information Have to Be Furnished to Investors in a Rule 504 Offering?
Issuers conducting Rule 504 Offerings do not have to provide specific information to investors. Rule 504 only provides an exemption from registration under the federal securities laws. It does not exempt the Issuer or its executive officers and directors from the anti-fraud provisions or the disclosure requirements of federal and state securities laws. Even though there are no specific disclosure delivery requirements, issuers should provide sufficient information to investors to avoid violating the antifraud provisions of the securities laws. This means that any information issuers provide to investors must be free from false or misleading statements. Similarly, issuers should not exclude any information if the omission makes what the issuer provides to investors false or misleading. If false and misleading information is provided to investors, either by inclusion or omission, the issuer and its executive officers and directors may be held personally liable.
What Happens If An Issuer Relies on Rule 504 And Doesn’t Comply With The Exemption?
If an issuer doesnot comply with the requirements of Rule 504 and cannot locate an alternative exemption, the offering will have been made in violation of the Federal and State securities laws. If this occurs, the investors will be able to rescind their investment and get back money back from the Issuer. In addition, the Issuer may become the subject of a State or SEC Investigation or Enforcement Action.
Are Securities Issued in 504 Offerings Free Trading?
To be able to issue free trading shares under Rule 504, the offering must be made as follows:
♦ Exclusively in one or more states that provide for the registration of the securities, and require the public filing and delivery to investors of a substantive disclosure document before sale, and are made in accordance with those state provisions.
♦ In one or more states that have no provision for the registration of the securities or the public filing or delivery of a disclosure document before sale, if the securities have been registered in at least one state that provides for such registration, public filing and delivery before sale, offers and sales are made in that state in accordance with such provisions, and the disclosure document is delivered before sale to all purchasers (including those in the states that have no such procedure); or
♦ Every state that has an accredited only investor exemption has a corresponding law that requires the securities be restricted. State statutes contain as a condition of the exemption, that investors must purchase “for investment and not with the view to or for sale in connection with a distribution of the security”…any resale of a security sold in reliance on this exemption within 12 months of sale shall be presumed to be with a view to distribution and not for investment, except a resale pursuant to a registration statement”
Can Issuers use Finders to Locate Investors in a 504 Offering?
Finders are agents hired by issuers to help sell securities. Many finders work from a list of potential investors with whom the finder has a pre-existing relationship. While the use of finders is widespread, issuers need to be aware of the potential problems that can arise from the use of finders. Individuals who do nothing more than act as finders by making introductions and who do not participate in subsequent negotiations probably will not be deemed to be an unregistered broker.The person you employ may be considered an unregistered broker rather than a finder if he:
♦ receives transaction-based compensation;
♦ is involved in negotiations;
♦ makes recommendations or discusses details concerning securities; and
♦ has previous involvement in security transactions.
Must Issuers disclose payments made to finders, registered brokers or broker dealers?
The issuer must disclose all payments that will be made to finders, brokers and broker-dealers in connection with the Offering.
Under federal law, failure of an individual to qualify as a finder gives investors rescission rights and may subject the issuer to an SEC investigation or enforcement Action. In some states, the use of a non-licensed broker-dealer or a finder could result in a violation of that State’s Blue Sky laws and loss of the securities registration exemption. It may also entail rescission rights for the investor.
The abuses surrounding the use of Rule 504 have become widespread and blatant. The SEC has brought numerous enforcement actions against attorneys who fraudulently opined that securities offered and sold in 504 offerings could be issued without a restrictive legend. Issuers seeking to conduct offerings under Rule 504 should ensure that they strictly comply with its requirements and hire qualified securities counsel to oversee the related legal and compliance issues.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
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