Allowing More Access to Capital?
Proposed Amendments to Rule 504 of Regulation D.
As we explained in our previous blog post on exempt offerings under Regulation D, Rule 504 of Regulation D currently provides an exemption for offerings up to $1,000,000 in a 12-month period. Although Rule 504 allows general solicitation in certain limited situations, a major downside to Rule 504 offerings is that it does not preempt state law, which often means registration and substantive disclosure requirements in compliance with applicable state law, a disproportionately expensive exercise for an offering of $1,000,000 or less. For this reason, we mentioned that Rule 504 is rarely used.
The proposed amendments seek to increase the aggregate amount of securities that may be offered and sold in a 12-month period from $1 million to $5 million and to disqualify certain bad actors (i.e., those subject to certain criminal convictions, certain court injunctions and restraining orders, and final orders of certain state and federal regulators, as well as certain SEC orders) from participation in Rule 504 offerings. The SEC says that the amendments could give state securities regulators greater flexibility to develop regional coordinated review programs for state registration process that would rely on Rule 504 at the federal level by increasing the maximum amount of capital that can be raised by issuers under such programs and by providing states with assurance that certain bad actors would be excluded from the exemptive regime at the federal level. Likewise, the SEC says that the proposed bad actor disqualification provisions, which are substantially similar to related provisions in Regulation D, Regulation A, and the new crowdfunding regulation, would create a more consistent regulatory regime that would benefit investors in Rule 504 offerings with increased protections.
The SEC says that the proposed amendments to Rule 147 and Rule 504 are intended to expand the capital raising options available to startups and small businesses. Of note, the SEC expects the proposed amendments to increase the use of the Rule 504 exemption, despite the lack of state law preemption, by facilitating intrastate and regional offerings greater than $1 million, especially in connection with state crowdfunding exemptions that may enable regional offerings. Indeed, the proposed amendments appear to be a step in the right direction in light of evolving technology and business practices, and a timely one, given the new developments in the crowdfunding area.
If you have any questions regarding the proposed rules or other securities issues not discussed here, please contact us.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC, which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064; [email protected]; or www.mcbrideattorneys.com.
 See generally 17 C.F.R. § 230.504.