What is a Reg D 504?
Rule 504 of Reg D is an exemption by the Securities and Exchange Commission (SEC) that allows private companies to raise capital of up to $10 million over a 12-month period, without having to register their securities.
A Reg D 504 is considered a valuable option for companies who wish to raise small amounts of capital, such as startups.
Read the rest of this article to explore more about Reg D 504 and its benefits.
What are the Pros and Cons of Reg D 504?
There are various advantages and disadvantages of Reg D 504. These include the following:
Pros
- It involves a streamlined process. Since you don’t have to register the offering with the SEC, this makes the process much faster and streamlined.
- It doesn’t require continuous reporting. You won’t have to engage in ongoing reporting once the sale has been done. This is particularly appealing to startup owners who might feel overwhelmed by excessive reporting.
- It provides lower costs. This is as a result of not having to register the offering.
- It encourages a larger investor pool. You can sell securities to accredited and non-accredited investors. However, this is subject to any applicable state securities laws.
Cons
- It doesn’t preempt state “Blue Sky” laws. Companies have to ensure they are legally compliant with all securities laws in different states where they intend to sell.
- It restricts the amount of raised capital. Larger companies might want to be able to raise larger amounts of capital, which isn’t permitted.
- It’s prohibited for some companies to use. These include investment companies, companies without a specific business plan, and companies or people who are considered “bad actors” by the SEC, such as if they have a history of prior securities fraud.
What Does Rule 504 Say About Advertising?
Under Rule 504, when acquiring investors to raise capital for your business, you’re generally not allowed to advertise or solicit the offering. General solicitation refers to the following activities:
- Posting on social media about your offering.
- Placing ads in newspapers or on websites.
- Emailing your offering to a list of subscribers, some of whom you might not know (known as “email blasts”)
That said, Rule 504 does allow times when advertising and solicitation is permitted. These include the following:
- If the offering is registered in a minimum of one state with a considerable review process that includes delivery of the disclosure document to investors prior to the sale and public filing.
- The offering is conducted under state law exemptions that allow general advertising and general solicitation, as long as sales are made to accredited investors.
How Does 504 Differ From Other Reg D Offerings?
There are some important differences between Reg D 504 and other offerings, namely 506(c) and 506(b). Here’s a rundown of them:
Limits on investors
While 504 doesn’t have any restrictions on investors, meaning that they can be accredited or non-accredited, this isn’t the case for other offerings.
Rule 506(b) states that you can only use up to 35 non-accredited investors and unlimited accredited investors, while Rule 506(c) states that you’re only allowed to use accredited investors.
Capital Raised in One Year
Rule 504 has a limit on the amount of capital you can raise: $10 million within a 12-month period. By comparison, you can raise unlimited amounts under Rule 506(b) and Rule 506(c).
General Solicitation
Rule 504 doesn't generally allow you to engage in general advertising and solicitation, and the same goes for Rule 506(b). These activities are permitted under Rule 506(c).
Investor Accreditation
Under Rule 504, you don’t have to complete a specific verification process for your investors. By comparison, Rule 506(c) requires issuers to take “reasonable steps” to verify their accredited investors. For Rule 506(b), investors can engage in self-certification to make the process easier.
What Do You Need to File for Reg D 504?
If you are conducting an offering with the use of Rule 504, you’ll have to file a notice with the SEC. This is known as Form D, and it has to be completed within 15 days of the first sale of securities in the offering.
Do You Need a Lawyer for Reg D 504?
It’s not always necessary to work with a lawyer for Reg D 504, such as if you’re dealing with a small investment. However, you should consult with a lawyer if your investment is of a significant amount or you’re unsure of what’s required.
A lawyer can help you in various ways, such as by:
- Checking and ensuring everything is done correctly and according to SEC regulations.
- Helping you figure out if a Reg D 504 offering is the right choice for your business needs.
- Ensuring that you comply with all Reg D 504 rules and requirements, so you avoid penalties and investor disputes.
- Ensuring that you comply with state and federal rules and requirements, including Blue Sky laws.
Where can you find a lawyer for Reg D 504 assistance?
If you need to find a lawyer for help with Reg D 504, you can easily find a qualified one on ContractsCounsel, an online legal marketplace that connects clients with experienced lawyers who have been vetted on the platform.
Lawyers on the platform will help you to navigate all aspects of the Reg D 504 process and filing to minimize your risks and protect your assets, while ensuring you can raise the capital you require for your business.
