Except in limited circumstances, purchasers of securities offered pursuant to Rule 504 receive “restricted securities,” meaning that the securities cannot be sold for at least six months or a year without registering them.
Some advantages of Rule 504 include:
- The offering cap was increased to $10 million from $5 million (less the aggregate offering price for all securities sold within the 12 months before the start of and during the offering of securities under Rule 504, in violation of section 5(a) of the Securities Act);
- Unaccredited investors can purchase securities;
- There is no need to verify accredited investor status (unless issuer is relying on state law exemptions from registration that permit general solicitation and general advertising so long as sales are made only to “accredited investors”);
- The offering is not limited to the state where issuer has its principal place of business and is doing business.
A significant disadvantage of Rule 504 is:
- There is no state “Blue Sky Law” preemption, so the offering must either be registered in the state(s) in which the offering is being made or must be made under an available state registration exemption.
- As a general rule, issuers can not use general solicitation or advertising in their Rule 504 offering.
Rule 504 prohibits the issuer or anyone on the issuers behalf to “offer or sell the securities by any form of general solicitation or general advertising. Rule 504 does allow for general solicitation in the following circumstances:
- The offering is registered in the state where securities are sold, or
- The state permits general solicitation and sales are only made to accredited investors in that state, or
Note: In these situations, the securities issued pursuant to either of these provisions are not restricted.
- The state of issuance does not require registration, but the securities are registered in another state.
Note: This is a situation where the state allows the issuer to piggyback on the registration of securities in another state. The issuer must generally file an informational notice to the issuing state regarding the registration in another state.
A issuer is required to file a notice with the Commission on Form D within 15 days after the first sale of securities in the offering.
A company must comply with state securities laws and regulations in the states in which securities are offered or sold.
The following companies are not eligible to use Rule 504: (1) Exchange Act reporting companies; (2) investment companies; (3) companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies; and (4) companies that are disqualified under Rule 504’s “bad actor” disqualification provisions.