Under federal securities laws, a company looking to raise money by selling securities must register with the Securities and Exchange Commission (SEC) or qualify for an exemption. Rule 504 is one of those exemptions.
Rule 504 is one of the exemptions under Regulation D that allows a company to raise money without registering with the SEC. Other exemptions under Regulation D include Rules 506(b) and 506(c).
Rule 506 focuses primarily on raising money from accredited investors, with Rule 506(b) limiting companies from seeking companies from more than 35 non-accredited investors, and with Rule 506(c) prohibiting companies from raising money from non-accredited investors altogether.
Although companies can raise money from non-accredited investors under Rule 506(b), the investors must meet certain sophistication requirements. In addition, a company using Rule 506(b) is required to disclose extensive information, similar to what is required in a Regulation A+ offering or a registered offering. Given Rule 506(b)’s disclosure requirements for selling to even a single non-accredited investor, many companies relying on the Rule 506(b) exemption avoid non-accredited investors.
Unlike Rule 506(b), Rule 504 allows you to raise up to $5 million from both accredited and non-accredited investors without any mandatory disclosure requirements. That being said, you you still have to disclose information if not doing so would make your offer fraudulent or misleading. You also have to comply with the state securities laws in all states where you are conducting your offering, but it is an option to consider if you want to raise money from non-accredited investors without having to provide extensive disclosures.
Like all offerings under the exemptions to the securities laws, there are pros and cons to Rule 504. So, it's important to know what your options are and find the right one for you before you dive into structuring your offering.
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This article is provided for informational purposes only and should not be construed as legal advice. Read our disclaimer here.