Rule 504 l OTC Pink Checklist
Rule 504 of Regulation D is a transactional exemption from the registration statement requirements of the Securities Act of 1933, as amended (the “Securities Act”) for non-reporting companies when they offer and sell securities. OTC Pink Sheet issuers often rely upon Rule 504 to offer and sell their securities.
Rule 504 is only available to an issuer of securities and therefore is not available for the re-sale of securities by a shareholder who holds or owns a security.
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” (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).
Rule 504 does not impose a limit on the number of investors who can purchase securities offered by an OTC Pink Sheet issuer.
OTC Pink Sheet Issuers must still comply with the Blue Sky Laws of the states where offers and sales are made in reliance upon Rule 504.
Issuers conducting offerings in reliance upon Rule 504 do not have to provide specified information to investors. Rule 504 only provides an exemption from registration under the federal 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 the issuer fails to do so the issuer and its executive officers and directors may be personally liable to investors in the offering. Rule 504 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.
If an OTC Pink Sheet issuer fails to comply with the requirements of Rule 504 and an alternative exemption is not available, the offering will have been made in violation of the securities laws. If this occurs, the investors will be able to rescind their purchase and get their money back from the Issuer. Further, the Issuer may become the subject of a State or SEC Investigation or Enforcement Action.
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”
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 and may be used. Brokers on the other hand are required to be registered with FINRA and the SEC.
The primary factors in determining whether a person is an unregistered broker and not a finder include:
♦ receiving transaction-based compensation;
♦ involvement in negotiations;
♦ making any recommendations or discussing details concerning securities; and
♦ previous involvement in security transactions.
The issuer must disclose payments to 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 provides investors with rescission rights and subjects the issuer to 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 and may give rise to rescission rights for the investor. The abuses surrounding the use of Rule 504 have become so widespread and blatant that the SEC has brought enforcement actions against attorneys opining that securities offered and sold in 504 offerings could be issued as “unrestricted”. 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 legal and compliance issues related to its offering.
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. For more information about going public and the rules and regulations affecting the use of Rule 144, Form 8K, crowdfunding, FINRA Rule 6490, Rule 506 private placement offerings and memorandums, Regulation A, Rule 504 offerings, SEC reporting requirements, SEC registration statements on Form S-1 , IPO’s, OTC Pink Sheet listings, Form 10 OTCBB and OTC Markets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, direct public offerings and direct public offerings please contact Hamilton and Associates at (561) 416-8956 or [email protected]. 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
Facsimile: (561) 416-2855