Ask Securities Lawyer 101 l Rule 504 Q & A
Q. How Much Money Can I Raise In A Rule 504 Offering?
A. 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.
Q. Can My Company’s Shareholders Rely Upon Rule 504 To Resell Their Securities?
A. 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.
Q. Which Companies Can Rely on Rule 504 To Offer And Sell Securities?
A. The Rule 504 is only available to a company 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).
Q. Is There A Limit On The Number Of Investors In A Rule 504 Securities Offering?
A. Rule 504 does not impose a limit on the number of investors who purchase an issuer’s Securities.
Q. Do State Blue Sky Laws Apply To Rule 504 Offering?
A. Yes, issuers must still comply with the Blue Sky Laws of the states where offers and sales are made.
Q. Do I Have To Provide Investors With A Private Placement Memorandum Or Other Information In A Rule 504 Securities Offering?
A. Companies make securities offerings under Rule 504 do not have to provide specific information to investors. It is important to remember that the anti-fraud provisions of the federal securities laws apply to Rule 504 offerings. Even though there are no specific disclosure delivery requirements, companies should provide sufficient information to investors to avoid violating the antifraud provisions of the securities laws.
Q. What Happens If I Relied On Rule 504 For My Company’ Securities Offering And I Didn’t Comply With Its Requirements?
A. If a company does not 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 Company. In addition, the Company may become the subject of a an SEC enforcement action.
Q. Are Securities Issued In 504 Securities Offerings Free Trading?
A. No. Rule 504, provides circumstances for the offer and sale of free trading shares if the issuer compliance with specific state statutes. 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”
Q. Can I Use Finders To Locate Investors In A 504 Offering?
A. 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.
Q. Do I Have To Disclose Payments Made To Finders, Registered Brokers Or Broker Dealers Who Help Me Find Investors?
A. The issuer must disclose all payments that will be made to finders, brokers and broker-dealers in connection with the Offering. Failure to do so could result in a violation of the SEC’s anti-fraud provisions.
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 could also require the issuer provide rescission to the investor.
The abuses surrounding the use of Rule 504 are widespread. 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 issues.
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
Facsimile: (561) 416-2855