Rule 504 is known as an exemption from the requirement of federal registration of a securities offering under Regulation D. In its more familiar incarnation, it is an exemption that allows a company to offer up to $1 million in a private placement (assuming state law compliance) – which means that the company cannot do general solicitation – it can only solicit investors with whom the company leaders have a pre-existing relationship.
But Rule 504 has a whole other side to it that most people don’t know about. Used in conjunction with certain state securities laws, Rule 504 can be used to make a public offering of securities (i.e. a general solicitation to the public).
If a company is making a securities offering that qualifies to use the federal Rule 504 exemption (raising up to $1 million), and the company registers the offering under the securities law of a state that requires the public filing and delivery to investors of a substantive disclosure document, that offering can be made to the public in the state where the registration was completed.
But what if you want to offer your securities in a state whose securities laws do not require the public filing and delivery to investors of a substantive disclosure document (like New York)? As long as you complete the registration process in a state that does have these requirements, you can also offer securities to the public in states that do not have this requirement as long as you deliver the disclosure document to all potential investors (assuming you comply with all of the laws of the states in which you are making the offering).
The federal Rule 504 exemption can be used in conjunction with state registration accomplished through a SCOR form. The SCOR form was developed by the North American Securities Administrators Association (the association of state securities law administrators). Most states accept the form. It is a fairly straightforward disclosure document that can be completed without much help from a lawyer.
This is a fairly simple and low cost way to legally raise money from the public! Unfortunately, this does not work in California! Watch for upcoming posts about the special case of California.