Understanding Rules 504 and 505: Benefits and Challenges of Small Business Fundraising Exemptions

The rules under SEC’s Regulation D are vital to the private capital market. They allow companies that meet certain criteria to bypass the complex, expensive, and time-consuming registration process associated with public offerings. This benefits companies, especially small companies not yet publicly traded, and investors while protecting both parties from potential fraud.

Regulation D: Rule 504

Rule 504 allows companies to raise up to $10 million in a 12-month period through the private sale of securities. The company must still adhere to local state laws, called Blue Sky Laws, which vary from state to state. Companies must disclose the offering details to the state to remain in compliance. With Rule 504 the investors are restricted on resale and must wait a minimum of a year before selling. This rule also limits advertising so finding investors can be harder than some of the other rules.

• Rule 504 Key Benefits:
  • Exempts companies from rigorous registration processes.
  • No limit to how many investors or type (accredited or non-accredited) can be brought into the offering.
  • Allows offerings of up to $10 million within a 12-month period.
• Drawbacks of Rule 504
  • Restrictions on resale (12-month holding period).
  • Resale can only be to qualified individuals.
  • Blue Sky laws require compliance with state-specific regulations.
  • Advertising and solicitation restrictions

Regulation D: Rule 505

Rule 505 has mostly been rolled into Rule 504. It was phased out in 2016 making Rule 504 more robust and limiting the options for offerings. The specific rules of Rule 505 were that a company could only raise $5 million per a 12-month period and those securities could not be resold for six months. Under this rule, a company could have an unlimited number of accredited investors and up to 35 non-accredited investors. Like in Rule 504, there was no advertising of the offering allowed. While Rule 505 has been phased out, Rule 504 still plays an important role in private capital.

To learn more about how Rule 504 and the other Reg D rules can benefit both companies and investors, tune in to M2i’s Alternative Investments Chat podcast. It’s a great way to stay informed on the ever-evolving rules and regulations!