PROPOSED CHANGES TO SEC RULE 504 AND RULE 147 (Part 1)
On October 30, 2015, the SEC adopted Regulation Crowdfunding (Reg CF) in its Release 33-9974. That release has received most of the attention from commentators. A companion release issued the same day, Rel. 33-9973, may ultimately prove to be more useful for capital formation by smaller busijnesses.
Release 933-9973 proposed amendments to Rules 504 and 147 “to facilitate intrastate and regional securities offerings.” (SEC Rel. 33-9973 (Oct. 30, 2015)) As compared to the 658 page Reg CF release, this was only 168 pages.
Proposed Rule 504 Amendments. The SEC proposes to amend Rule 504 to increase the maximum offering from the current $1 million to $5 million, “less the aggregate offering price for all securities sold within the twelve months before the start of and during the offering of securities under this [Rule 504], in reliance on any exemption under section 3(b)(1) [of the 1933 Act], or in violation of section 5(a) of the [1933 Act].”
The proposed Rule 504 amendments would also add a bad actor provision disqualification, relying on Rule 506(d) for the definition of a “bad actor.
The proposed rules would also update Rule 505(b)(2) to refer to section 3(b)(1) of the 1933 Act instead of its current reference to “section 3(b).” In the proposing release, the SEC also asked for comment on whether there was any continuing need for the Rule 505 exemption (which remains at $5 million) in light of the proposed offering increase to Rule 504. In seeking comments, at page 67 of the release the SEC noted that issuers relying upon Rule 505 are subject to additional requirements not required under Rule 504,such as:
- Rule 505 permits sales to no more than 35 non-accredited investors and an unlimited number of accredited investors, while Rule 504 has no such limitation;
- Rule 505 requires the delivery of a disclosure document to non-accredited investors which, like Rule 506, requires substantially the same information as included in a 1933 Act registration statement, while Rule 504 contains no mandated disclosure (although written disclosure is advisable to avoid anti-fraud requirements.
- Rule 505 disqualifies bad actors from participating by reference to the provisions of Rule 262 of Regulation A; the proposed rules would tie the Rule 504 bad actor provisions to Rule 506(d).
- Rule 505 and Rule 506 permit 1934 Act reporting companies to use the exemption from registration. Rule 504 does not.
- Securities issued under Rule 506 are “covered securities” exempt from state regulation (except filing requirements and fee payment), and thus more useful than Rule 505. Securities issued under Rules 504 and 505 are not “covered securities.”