Optima Law Group Blog

Raising Private Funding From Those You Know Got Easier This Year!

A recent amendment to Federal Rule 504 of Regulation D that went into effect in January of this year allows companies to offer up to $5,000,000 in securities in a 12-month period, a big increase from the previous $1,000,000 limitation. The new amendment also subjects the issuers (the company seeking investment) of the offering to the bad actor disqualifications of Federal Rule 506.

 

Rule 504 has many benefits which include:

- Requiring less disclosures about the company to the purchaser, which can be costly and burdensome for a small business. Companies are still required to comply with antifraud regulations of federal securities laws.

- Investors do not need to be accredited (i.e. wealthy). This is important because often times start-ups acquire initial funding from friends and family.

- No limit on the number of investors, which enables many people to contribute only a relatively small amount. Let’s face it, most of our friends and family want to be able to help but they often do not have large disposable sums of money to invest, which is why this is so beneficial.

- Generally, the offering will be exempt from registration with the U.S. Securities and Exchange Commission (SEC) as long as the issuer is not a “blank check” company, does not advertise or solicit the offering to the public, the amount of the securities sold in the offering does not exceed the $5,000,000 cap, and the issuer is not disqualified pursuant to the bad actor disqualifications of Rule 506.

Although Rule 504 has many benefits such as a less rigorous disclosure requirements and the ability to source non-accredited investors, it has been very limiting in the past due to the $1,000,000 offering cap, and thus, it is often overlooked by companies who favor another exemption such as Rule 506 which has no dollar maximum. This new amendment should prove to be a valuable resource and enable start-ups and small business to have more flexibility when it comes to raising capital, while also offering increased protection to non-accredited investors due to the change in legislation which forces issuers to be subjected to the bad actor disqualifications of Rule 506.

For more information on the SEC amended Rule 504 of Regulation D under the Securities Act of 1933 please visit this website:

https://www.sec.gov/divisions/corpfin/guidance/rule504-issuer-small-entity-compliance.html

In addition to Rule 504 which is federal law, be mindful that each state involved will have its own laws and regulations that will also apply. We assist ventures comply with all applicable securities laws – on the federal and state level.