What is Regulation D 504?

Regulation D is a government program created under the Securities Act of 1933, instituted in 1982, that allows companies the ability to raise capital though the sale of equity or debt securities. The programs were designed to provide two main things – an exemption to sell securities in a private transaction without registering the securities and the appropriate structure and documentation for doing so properly. Regulation D Offerings are the practical method companies use to raise capital from individual investors.

Every privately-held company that is seeking to raise equity capital from investors should properly comply with State and Federal guidelines prior to having a securities offering in place.

If your transaction will only involve one or two investors – you will still need to provide the proper transaction structure, disclosure documentation and investment agreements necessary for raising capital. Raising capital from investors in the form of equity in your new company, of any amount requires very specific documentation in addition to what is already disclosed in your business plan. It is imperative that a company seeking capital from investors have in place a Private Placement Memorandum and a Subscription Agreement. Raising capital without these documents is nearly impossible – they are a necessity.

Reg D 504

Startup companies who wish to raise $1 million dollars or less can utilize Reg D rule 504.

Rule 504 of Regulation D (Reg D) provides an exemption from the registration requirements of the federal securities laws for some companies when they offer and sell up to $1,000,000 of their securities in any 12-month period.

A company can use this exemption so long as it is not a blank check company and does not have to file reports under the Securities Exchange Act of 1934. Also, the exemption generally does not allow companies to solicit or advertise their securities to the public, and purchasers receive "restricted" securities, meaning that they may not sell the securities without registration or an applicable exemption.

Rule 504 does allow companies to sell securities that are not restricted, if one of the following circumstances is met:

1) The company registers the offering exclusively in one or more states that require a publicly filed registration statement and delivery of a substantive disclosure document to investors;

2) A company registers and sells the offering in a state that requires registration and disclosure delivery and also sells in a state without those requirements, so long as the company delivers the disclosure documents required by the state where the company registered the offering to all purchasers (including those in the state that has no such requirements); or

3) The company sells exclusively according to state law exemptions that permit general solicitation and advertising, so long as the company sells only to "accredited investors."

Even if a company makes a private sale where there are no specific disclosure delivery requirements, a company should take care to provide sufficient information to investors to avoid violating the antifraud provisions of the securities laws. This means that any information a company provides to investors must be free from false or misleading statements. Similarly, a company should not exclude any information if the omission makes what is provided to investors false or misleading.

While companies using the Rule 504 exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what is known as a "Form D" after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company's owners and stock promoters, but contains little other information about the company.