The Rule 504 Exemption From Registration Requirements For Small Securities Offerings
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| Prior to offering and selling its stock to the public, a company normally must prepare and file with the Securities and Exchange Commission a detailed registration statement containing a prospectus with audited financial statements for distribution to potential purchasers and other information for review by Commission staff. However, there are exemptions from such registration requirements for certain categories of offerings that are small in value or sold to restricted categories of purchasers.
Regulation D issued by the Commission establishes three exemptions -- Rules 504, 505, and 506 -- from registration requirements under the Securities Act of 1933. Rule 504 provides an exemption from registration requirements for the sale of up to $1 million of securities in any 12-month period. The exemption is available to any company other than a "blank check" company that has no specified business and other than a company subject to reporting requirements under the Securities Exchange Act of 1934.
Rule 504 is designed to leave regulation of smaller stock offerings to the states. As with other Regulation D exemptions, a company in a Rule 504 offering may not use public solicitation such as "cold" sales calls or advertising, and the buyers of the securities receive "restricted" series stock that may not be sold without further registration or exemption. However, purchasers of stock exempted under Rule 504 may receive freely tradable securities if:
- The offering is a registered only in a state that requires a publicly-filed registration statement and delivery of a disclosure document such as an offering circular to investors;
- The company registers in states that do require registration and disclosure and in states that do not require registration and disclosure, but the company delivers required disclosure documents to all purchasers; or
- The company sells the stock only to "accredited investors." Generally, accredited investors are the directors and officers of the company issuing the stock; a bank, insurance company, or investment company; a charitable organization with assets over $5 million; or individuals with a net worth of at least $1 million or with an annual income of $200,000.
An exemption from registration requirements under Rule 504 does not exempt a company from its obligation not to engage in fraudulent conduct and not to use false or misleading statements in the sale of its securities. Copyright 2010 LexisNexis, a division of Reed Elsevier Inc. |