Tweet

The Best Kept Secret In Business Funding

Written by: Ken Hollowell

Article Overview: Ken Hollowell has been assisting business owners for over 20 years with non-traditional funding. Mr. Hollowell discusses the benefits of an SEC Reg D 504 Private Placement Offering.

The Best Kept Secret In Business Funding

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 can't afford to go through the whole SEC registration process.

Until they grow to a point where they can afford it, Rule 504 offers such companies an out:
• An exemption to raise up to $1 million
• No disclosure criteria
• Few general solicitation and resale restrictions
• No limit as to the number or type of investors

Actually, Congress's original intent in 1982 for Rule 504 was to "set aside a clear and workable exemption for small issuers to be regulated by state blue sky requirements, but by the same token, to be subjected to federal anti-fraud provisions and civil liability provisions." Rule 504 exemption is provided for almost any type of organization, including corporations, partnerships, trusts, or other entities. However, it is not applicable to companies already reporting to the SEC (subject to the '34 Act) or investment companies.

You Cannot Exceed $1 Million. 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 a 504 offering. So, if a company has raised $100,000 in private money in the previous 12 months, it can still raise up to $900,000 without being accused of breaking the rules, or integration.

Generally speaking, there are no specific disclosure requirements under Rule 504 (disclosing what the company is about, what it intends to do, or who is connected with it). This means that, theoretically, an issuer can have a purchaser sign a subscription agreement and purchase stock without any information about the company being disclosed. However, the rule is dependent on the blue-sky laws of each state in which the securities are offered. This means that if a state's blue-sky rules require disclosure, it must be provided regardless of Rule 504.

Rule 504 also provides that at least $500,000 of securities must be sold pursuant to a registration under a state's securities law. Consequently, an offer must comply with the blue-sky laws of each individual state in which it is offered. In many states, this negates the effective simplicity of Rule 504 and the federal government's intent, because many states' blue-sky laws are more restrictive than Reg D.

A word of caution to the entrepreneur--regardless of the amount of disclosure the issuer is willing to provide, Rule 504 does not dismiss the issuer from the federal requirements, nor is there an exemption from the fraud provisions, including the areas of material omissions or misstatements. The penalties for noncompliance are severe, including monetary fines and mandatory jail sentences.

Number of Investors. With its limited disclosure requirements, Rule 504 also allows an issuer to sell securities to an unlimited number of investors. Theoretically, a company could raise $1 million by selling its stock at a penny a share to 100 million different investors. Obviously, the economics are not too attractive, but there's no rule that stops an issuer from selling $500 blocks of stock to 2000 investors. Rule 504 is the only rule under Reg D that permits an unlimited number of investors.

A final note on Rule 504 is that the exemption provides for sales of securities of either debt or equity. This opens the door for combinations of both via convertible debentures. By way of explanation, convertible debentures are a debt issue (debenture) that is convertible to a preferred or, most commonly, common stock at some future date, usually at a predetermined price.

Alternate Exemptions

There are several other rules and exemptions besides the Reg D exemption discussed above. They are worth looking into and are discussed below under the headings of Regulation A and the Small Corporate Offering Registration (SCOR).

As pointed out in the last section, the principal advantage of an exemption from registration is that the buy-and-sell transactions can take place as soon as the parties decide to proceed. It eliminates the necessity of preparing and filing a prospectus with the SEC, and it saves legal costs, plus accounting and registration fees.

Exemptions under the Securities Act of 1933 ('33 Act) are listed as exempted securities and exempted transactions. They can save both time and money. The only drawback is they can take a legal genius to interpret them. They're full of loopholes, and the courts have shown no qualms about ruling against the entrepreneur in their interpretations. Regardless, the end results should make them worth pursuing. But since the whole area of exemptions is so complex, the entrepreneur should not proceed without first seeking the advice of qualified legal counsel to determine the best form of exemption to apply for.

Related Articles
  Part 7: Funding Request
  We’re Sharing the biggest Secret in business funding today and why factoring of accounts receivables isn’t what you thought!
  PRN Funding Introduces Real-Time Web Communication
  What will happen to small business funding?
  UK Business Finance - The Options Available To You

Article Tags: capital, funding, ppm, private placement offering, raising capital



Related Forum Posts
Clothing Niche - Yasunori, can you dig deeper into the clothing niche? e.g. Business Casual for people 6ft and taller (men only, women only or both). Victoria Secret is big in Canada because they don't have retail Stores here and the only way to get their product in Canada is thru online purchases. They have a great Hassle-free return policy too.
seeking investors for global finance opportunity - Phoenix Global Funding, Inc. is a Global Commercial Loan Brokerage, Merchant Bank, and a Business Consulting Firm that can work on commercial deals of all sizes. Our greatest strengths are revealed through our superior internet interface and our extensive private network of lenders and equity partners with which we can service any company on the planet by having the ability to broker and coordinate mergers, acquisitions, and funding of all kinds. As a full service commercial financial conduit we also provide valuation, business management, and profitability consulting. I am offering common stock ownership in Phoenix Global Funding, Inc. It is exciting to be in a position to be able to share not only ownership but profit in this latest project. Our business plan was developed from the oldest, most reliable and the most profitable business model ever created, LENDING. This is all about what the big boys do on Wall Street everyday. We are raising US$1,000,000.00 with share prices starting at $1.00. The exit strategy is in 3 years with a minimum 3 to 1 return on capital, plus a 20% profit share annually.
Why pay a Consultant? - Consultants can bring you into contact with a Funding Source but how do you tell whether a consultant will be successful beforehand? Professional Consultants ALWAYS ask for some kind of retainer so that they can feel they're not being used by a 'chancer'. However, when raising funding, a real consultant will offer to REFUND THAT RETAINER out of the % BROKERAGE he charges, payable once he finds your Funding Source, and payable from initial disbursements. Retainers only cover part of the costs that a consultant has to pay while working on behalf of the Client. Their real wages come from the agreed upon Brokerage, received when they are successful on the Client's behalf.
Del Castienne - International Business and Project Brokers - In addition to the above, Del Castienne is an international brokerage firm specializing in various entrepreneural services. Del Castienne is more than just a brokerage, as we facilitate Private International Venture Capital for Business and Projects from Commodity Speculation Transactions, MBO, MBI, M&A, Bridging Finance, Patents, Branding, JV, Corporate Advisory Services, Business Plan Development, etc.. Del Castienne is linked to 1200 private international Venture Capital consortiums and Funding Syndicates with a funding capacity of $ 115 billion and 5000 international Investment Bankers and Business & Project Brokers. This in itself should provide you with a gateway to the best source of funding in the world. Through Del Castienne any entrepreneur can have up to a potential success rate of 25% (conditions apply) with absolutely no up front costs. Del Castienne charges a maximum of 5% commission which is far below the international standard of 10% - 12% on project value. If you are tired of running back and forth with countless dissappointments, please give us an opportunity to assist you. Our minimum Venture Capital amount is $1 million and we a Commitment Letter can be provided with in 30 days after formalities are in place and your information was received.
My entry - 1. The Best Business Books Ever: The 100 Most Influential Business Books You'll Never Have Time to Read - this is a fascinating book about the history of Business theory, and I'd recommend it to anybody. 2. The Big Book of Small Business: You Don't Have to Run Your Business by the Seat of Your Pants, by Tom Gegax. Ditto. 3. PADI: The Business of Diving Book Okay, so this book won't be of use to anyone who doesn't want to start a scuba store, but I did, and this book was of course invaluable to me in reaching that goal.


Share this article with your friends. Fund someone's dream.

Leave a comment below or share on the left and you'll help support entrepreneurs in Africa through our partnership with Kiva. Over $50,000 raised and counting - Please keep sharing! Learn more.

Tweet

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Ways to Improve Your Landing Page Conversions

The Importance of Master Data Management (MDM)

Maximum Impact Restaurant Greening

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.