| Rule 504
This rule is considered by many as the perfect answer for the
company just starting out that needs to raise less than $1 million
but cannot afford to go through the whole SEC registration process.
Rule 504 offers such companies an alternative:
An exemption to raise up to $1 million, with no disclosure
criteria
The total offering amount under Rule 504 can be
up to $1 million in a 12-month period, less the aggregate offering
of all securities sold within 12 months before the start of the
offering. So, if a company has raised $100,000 in private money in
the 12 months preceding qualification under this rule, it can still
raise an additional $900,000.
Few general solicitation and resale restrictions
Generally, under Rule 504 there are no specific
disclosure requirements, unless the state of issue imposes them.
Theoretically, an issuer can have a purchaser sign a subscription
agreement and purchase stock without any information about the
company being disclosed.
Regardless of the amount of disclosure the issuer
is willing to provide, Rule 504 does not dismiss the issuer from
federal requirements, nor is there an exemption from fraud
provisions, including the areas of material omissions or
misstatements. The penalties for noncompliance are severe, including
monetary fines and mandatory jail sentences.
Rule 504 allows the issuer to generally solicit,
or advertise, for subscribers to an offering. Some states have been
quite lenient in allowing it. However, in practice, very few issuers
have advertised their offerings in newspapers or through other
common media as was expected.
No limit as to the number or type of investors
Rule 504 is the only rule under D that permits an
unlimited number of investors.
Regulation A Offerings
Under Regulation A, a company may also publicly
offer its securities without registration under the 1933 Act.
Instead, an offering statement (Form 1-A) is filed and "qualified"
with the SEC. A principal attraction of “A” is that only two years
of financial statements are required and they may be unaudited if
audited information is not readily available. The limit of an A
offering is $5 million in any 12 month period. Also, Form 1-A has
been revised to allow the optional use of a "user-friendly" question
and answer form.
Small Company Offering Registration (SCOR)
Form U-7, the basic registration/information form
used in the Small Corporate Offering Registration (SCOR) was adopted
by the Securities and Exchange Commission in 1992. In some states,
this is called Uniform Limited Offering Registration or ULOR. It
allows a company to raise up to $1 million by selling securities.
The disclosure statement (Form U-7) is considerably less complicated
than standard disclosure forms and is constructed in question and
answer form; the SCOR/ULOR process is considered by many to be the
simplest paper-work process used to complete an exempted offering
ever.
The major drawback to the exempted processes is
the complexity of the regulations, and the courts have shown a
willingness to rule against the entrepreneur in their
interpretations. The entrepreneur should not proceed without first
seeking the advice of qualified legal counsel to determine the best
form of exemption to apply for.
John B. Vinturella, Ph.D. has
almost 40 years experience as a management and strategic consultant,
entrepreneur, author, and college professor. For 20 of those years,
Dr. Vinturella was owner/president of a distribution company that he
founded. He is a principal in business opportunity sites
jbv.com and
muddledconcept.com, and maintains
business and political blogs.
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Formalizing
Equity Investment