Ask Securities Lawyer 101 l Rule 504 Question & Answer

Posted on June 4, 2013 by securities-lawyer-101

Ask Securities Lawer 101 Q. What Is Rule 504 of Regulation D? A. Rule 504 of Regulation D is a transactional exemption from the registration requirements of the Securities Act of 1933, as amended (the 1933 Act) for certain companies when they offer and sell securities. Q. How much money can I raise in a securities offering made in reliance upon Rule 504? 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 shareholders rely upon Rule 504 to sell 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. Who can use the Rule 504 exempton 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 my Company can raise funds from in a Rule 504 Securities Offering? A. Rule 504 does not impose a limit on the number of investors who purchase an issuers securities. Q. Do state blue sky laws apply toRule 504 securities offerings? A. Yes, issuers must still comply with the Blue Sky Laws of the states where offers and sales are made. Q. Does I have to provide investors with a private placment 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. This means that any information issuers provide to investors must be free from false or misleading statements. Similarly, companies should not exclude any information if the omission makes what the company provides to investors false or misleading. If false and misleading information is provided to investors, either by inclusion or omission, the company and its executive officers and directors may be held personally liable.

Q. What Happens If I relied on Rule 504 for my Company securities offering and I didnt comply with its requirements? A. If a company doesnot 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 State or SEC Investigation or Enforcement Action. Q. Are Securities Issued in 504 securities offerings Free Trading? A. 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 securityany 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. 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 States Blue Sky laws and loss of the securities registration exemption. It may also entail rescission rights for 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 and compliance issues.