Rule 504 Reg D

Regulation D Rule 504 offers companies:

  • An exemption to raise up to $1 million.
  • No disclosure criteria.
  • Few general solicitation and resale restrictions.
  • No limit as to the number or type of investors.

Rule 504 is considered by many as the perfect answer for the company just starting out OR one that needs to raise less than $1 million.

You Cannot Exceed $1 Million.
The total offering amount under Regulation D Rule 504 can be up to $1 million in a 12-month period, less the aggregate offering of all securities sold within 12 months before the start of a 504 offering. So, if a company has raised $100,000 in private money in the previous 12 months, it can still raise up to $900,000 without being accused of breaking the rules, or “integration.”

Generally speaking, Federal Rule 504 is the simplest Reg D document to fill out.
It does require the submission of Form D to the SEC and the rule is dependent on the blue-sky laws of each state in which the securities are offered. This means that if a state’s blue-sky rules require disclosure, it must be provided regardless of Federal Rule 504.

A word of caution to the entrepreneur.
Regardless of the amount of disclosure the issuer is willing to provide, Rule 504 does not dismiss the issuer from the federal requirements, nor is there an exemption from the fraud provisions, including the areas of material omissions or misstatements. The penalties for noncompliance are severe, including monetary fines and mandatory jail sentences.

Number of Investors.
With its limited disclosure requirements, Rule 504 also allows an issuer to sell securities to an unlimited number of investors. Theoretically, a company could raise $1 million by selling its stock at a penny a share to 100 million different investors. Obviously, the administrative economics are not too attractive, but there’s no rule that stops an issuer from selling $500 blocks of stock to 2000 investors. Rule 504 is the only rule under Reg D that permits an unlimited number of investors.

The Rule 504 exemption provides for sales of securities of either debt or equity.
This opens the door for combinations of both via convertible debentures. By way of explanation, convertible debentures are a debt issue (debenture) that is convertible to a preferred or, most commonly, common stock at some future date. Rule 504 does not require audited financial statements.

Rule 504 exemption is provided for almost any type of organization, including corporations, LLCs, partnerships, trusts, or other entities.


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