Raise $5 Million From Non-Accredited Investors Under Amended Rule 504
On October 26, 2016, the SEC adopted final rules amending Rule 504 of Regulation D under the Securities Act of 1933, as amended (the “Act”). This amendment to Rule 504 was effective January 21, 2017, and the repeal of Rule 505 (described herein) was effective May 22, 2017.
Rule 504 and Rule 505 of Regulation D historically were exemptions from registration for offerings of limited size and character. While Rule 506 allows issuers to sell an unlimited dollar amount of securities to a theoretically unlimited number of investors (as long as they are solely accredited investors), historically, Rule 505 limited offerings to $5 million in any twelve-month period. Rule 505 offerings could be sold, however, subject to restrictions on advertising (or “general solicitation”), to an unlimited number of accredited investors and up to 35 non-accredited investors. Rule 504 had a $1 million limit but there was no limit on the number of investors who could invest, regardless of their status as accredited or non-accredited. While Rule 505 included the expansive disclosure requirements of Rule 502(b) for non-accredited investors, Rule 504 did not include any specific disclosure requirements. Revised Rule 504 The amendments to Rule 504 adopted by the SEC which are now in effect increased the offering limit under Rule 504 from $1 million to $5 million. Following effectiveness of this rule, the SEC has repealed Rule 505. While the dollar limit under Rule 504 has increased, there has been no change in the number of investors permitted in a Rule 504 offering, and the rule itself places no limits on the number of investors (accredited or not). The amendments to Rule 504 also subject issuers to Rule 506(d) bad actor disqualifications, providing additional investor protection.
As a general rule, reporting under the Exchange Act is required once an issuer has 500 investors, or 2,000 if all investors are accredited. Consequently, unless some other limitation applies (such as Section 3(c)(1) of the Investment Company Act of 1940, which limits certain investment funds to 100 investors), issuers relying on Rule 504 who include non-accredited investors will be limited to 500 investors.
Rule 504 is not available to an issuer who is subject to the Exchange Act reporting requirements, investment companies, or development stage companies that either have no specific business plan or purpose or has indicated that their business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person.
Rule 504 permits public solicitation of investors only under certain circumstances. General solicitation is allowed when the offering is registered under state law or when the offering is permitted under a state law that allows general solicitation solely to accredited investors.
Coordination with State Blue Sky Laws
The Rule 504 offering exemption does not, however, preempt state blue sky laws as does Rule 506 of Regulation D. Consequently, an issuer relying on Rule 504 must identify corresponding state securities law exemptions for the states where the issuer’s investors reside.