As part of its program to simplify access to the capital markets, the SEC adopted the Small Business Initiatives ("SBI") in 1992. SBI, among other things, permitted a small business issuer to "test the waters" - that is, to determine whether there was a market for its securities before filing a registration statement so that, if the market didn't exist, the issuer would not be out the costs of the registration. More important to the company seeking its first infusion of risk capital was the amendment to Rule 504. The Rule, as amended, permits a small business issuer, subject to certain limitations, to obtain the benefits of registration, the ability to make a public offering of securities, without ever having to register.
Rule 504 was adopted as part of Regulation D, the private placement regulations, but SBI expanded Rule 504 far beyond its original boundaries. The Rule permits an issuer (corporation, partnership or other entity) to issue up to one million dollars in securities in any twelve-month period without registration. Unlike the other exemptions in Regulation D, a Rule 504 offering may use general solicitation and advertising; in short, a public offering. The thirty-five investor limitation, generally applicable to offerings under Regulation D, does not apply to a Rule 504 offering. As important, the securities issued are not restricted, they can be freely-traded and a market established.
The restrictions on use of the Rule are minimal. The issuer cannot be an SEC-reporting company, an investment company, or use the offering for a "blank check". The maximum amount which can be raised is one million dollars and this includes funds raised under certain other exemptions. The issuer must not be subject to certain "bad boy" provisions of the securities laws. Finally, a Form D must be filed with the SEC. While the Rule does not specify that information must be presented in any particular form, the offering is subject to all of the antifraud rules of the securities laws and an offering document making full disclosure is strongly recommended. The offering material does not have to be filed with the SEC.
SBI and Rule 504 apply at the federal level. An issuer proposing to make use of the Rule must also comply with state laws which may not have corresponding exemptions. Locally, the District of Columbia would not impose any additional requirements but both Virginia and Maryland would require a registration at the state level.
Robert A. Klein, Esq. Partner, Wickwire Gavin, PC (703-790-8750)