In general, every security offering in the United States is required to be registered with the Securities and Exchange Commission (“SEC”) and applicable state securities regulators unless the offering qualifies for an exemption from registration under both federal and state laws and regulations. It is important for companies to qualify for exemptions when possible, as registration creates additional burdens.
At the federal level, one such exemption that may be available is Rule 504 of Regulation D, which generally exempts from registration the offer and sale of up to $5 million of securities in a 12-month period. One benefit of Rule 504 is that it does not restrict the number and type of investor (such as being an accredited investor). This expands the list of potential investors for a company.
Companies utilizing Rule 504 should still be aware of applicable securities laws. For instance:
- The company may not use any general solicitation or general advertising when making offers or sales of its securities.
- The company is required to make a notice filing on Form D with the SEC within 15 days of the first sale of securities.
- The company should ensure it is complying with the antifraud provisions of the federal securities laws.
- Rule 504 offerings are subject to the disqualification provisions found in Rule 506 of Regulation D. The “bad actor” disqualification provisions disqualify offerings from relying on Rule 504 if the issuer or other “covered persons” have experienced a disqualifying event, such as being convicted of violations of specified laws.
- As mentioned above, a company must also still comply with state securities laws and regulations in the states in which securities are offered or sold.
If securities laws are not complied with, the company could be required to refund the offering proceeds to the investors with interest (even if the proceeds have been spent). Furthermore, the company’s officers who are involved in the offering may be personally liable for the return of the investors’ investment.
If you have any questions or want to discuss raising capital via Rule 504, please contact any attorney in the BrownWinick Growth Capital practice group.