Regulation D: Rule 504 Exemption

While reviewing documents related to a private placement engagement, you may see references to Regulation D (sometimes referred to as “Reg. D”). Regulation D consists of three SEC rules – Rules 504, 505, and 506 – that issuers often rely on to sell securities in unregistered offerings. Each rule has specific requirements that the issuer must meet. SEC Rule 504, for example, provides an exemption from the registration requirements of the federal securities laws.

Under Rule 504, some companies may be exempt from the normal registration requirements when they offer and sell up to $1 million of their securities in any 12-month period. A company can use this exemption as long as

The exemption also generally doesn’t allow companies to solicit or advertise their securities to the public. Purchasers receive “restricted” securities, which they may not sell without registration or applicable exemption.

However, companies are allowed to solicit or advertise their securities to the public, and to sell securities that aren’t restricted, if they meet one of the following requirements:

  • The company registers the offering exclusively in a state (or states) that requires a publicly filed registration statement and delivery of a substantive disclosure document to investors;
  • The company registers and sells the offering in a state that requires registration and disclosure delivery. The company also sells in a state without those requirements. This is permissible as long as the company delivers the disclosure documents required by the state where the offering is registered to all purchasers (including those in the state that has no such requirements); or
  • The company sells exclusively according to state law exemptions that permit general solicitation and advertising as long as the company only sells to “accredited investors”.

Companies should take care to provide sufficient information to investors, even if making a private sale where there are no specific disclosure delivery requirements, to avoid violating the antifraud provisions of the securities laws. Any information a company provides to investors must be free of false or misleading statements. Additionally, a company must not exclude information if the omission makes what is provided to investors false or misleading.

A company relying on the  Rule 504 exemption does not need to register its offering of securities with the SEC, but it does need to electronically file “Form D” with the SEC after first selling its securities. Form D is a notice that includes the names and addresses of the company’s promoters, executive officers and directors, and some detail about the offering. Form D contains minimal information about the company otherwise.

 

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