Change to Regulation D, Rule 504: A Step in the Right Direction to Help Raise Capital for Small Businesses
The SEC’s change to Rule 504 of Regulation D is an encouraging development for small businesses trying to raise capital from investors. Rule 504 provides a safe harbor for issuers seeking an exemption from registration under Section 3(b)(1) of the Securities Act of 1933. By meeting all the requirements of an exemption, issuers can avoid the time-consuming and expensive information and disclosure requirements under Rule 502 of Regulation D. Under the newly amended Rule 504, issuers can now raise up to $5 million in a 12 month period without registering their offering or having to supply the level of information required of the other safe harbors under Regulation D. The previous limit was $1 million.
Issuers can make offers under Rule 504 to an unlimited number of unaccredited and/or accredited investors. This provides small businesses even more flexibility in approaching potential investors. When offering to unaccredited investors under Rule 504, issuers are not required to supply offerees with the level of detailed information that is typically necessary to comply with other safe harbors under Regulation D. This cuts out the expenses normally associated with gathering, compiling, and distributing information to unaccredited investors under the Section 4(a)(2) exemption, for example. Of course, all issuers must still comply with all applicable anti-fraud statutes, rules and requirements.
Furthermore, issuers are permitted to reach out to potential investors through general solicitation or advertising in a Rule 504 offering. However, if general solicitation or advertising is used, the issuer must register its offering under the laws of every state where an offer is made.
Ultimately, the new Rule 504 provides a win-win scenario for small businesses seeking capital from investors. Small businesses can seek larger investments from a wider range of investors, including unaccredited investors, without incurring the significant financial burden of supplying the information required under Rule 502 of Regulation D. Put simply, it reduces the expense of the offering process while increasing the amount of capital that can be raised.