Rule 504 and 505 Offerings
Federal Regulation D actually contains provisions for three types of limited offerings in Rules 504, 505, and 506. Rule 504 contains an exemption for an offering up to $1,000,000 in securities by an issuer during any twelve month period. No specific disclosures are required, but the company is still subject to the antifraud rules. In addition, purchasers do not have to meet any sophistication test and there is no limitation on the number of purchasers. Rule 504 also allows a limited solicitation of investors; however,
Most states do not permit solicitation without first registering the offering in the state so the relaxation of this solicitation rules at the federal level is of little practical use.
While no specific disclosures are required under Rule 504, it is better practice to provide full disclosure to investors to avoid later misunderstandings. Unlike Rule 505 and 506, for which states adopted similar rules, the states did not adopt rules similar to Rule 504—so the exemption at the state level is of limited use unless the company files a full state registration or uses a SCOR offering. Typically, a Rule 504 offering would, in the absence of a state registration or SCOR compliance, have to rely on limited state exemptions, such as the ten or under rule, found in most state blue sky statutes.
Rule 505 offerings are limited to $5,000,000 in any twelve-month period. A disclosure document is required if you sell to any nonaccredited investors and you are required to provide financial statements to investors. You are also limited to thirty-five nonaccredited investors and an unlimited number of accredited investors, but there are no defined purchaser qualifications.
While there are no qualifications required for purchasers under Rule 505, it is the best practice to ensure that all nonaccredited purchasers meet the qualifications established under federal Regulation D—that they have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the prospective investment.
When the National Securities Market Improvement Act came along in 1996, Rule 506 became the dominant and preferred choice among companies offering securities under an exemption from registration because of the standardized disclosure standards and uniform notice filing procedures, and Rule 504 and 505 offerings declined because their perceived advantages were outweighed by their disadvantages.
Most states have adopted a shortened registration form for limited offerings being registered at the state level called the Small Corporate Offering Registration form (SCOR). The SCOR offering is the response of the states to the federal Rule 504 offering.
A SCOR offering, which is conducted pursuant to Rule 504 at the federal level, allows companies to raise up to one million dollars by selling securities to the general public, and the disclosure and registration requirements are encompassed in one document, Form U-7, in a question-and - answer format. The offering price for securities in a SCOR offering must be at least $5.00 per share, which precludes most small companies from conducting a SCOR offering.
/ Figure 5.3: STATES ADOPTING SCOR REGISTRATION
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The following states have either adopted the SCOR registration program or recognize and accept Form U-7 filings under a state offering exemption.
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To conduct a SCOR offering, an issuer must obtain the approval of each state where it intends to selles securities, which is sometimes a lengthy process. To alleviate some of this burden, some states have banded together into regional review groups, in which one state will take the lead on reviewing a SCOR offering and the rest of the states in the region acknowledge the lead state's approval once it is granted. In addition, Alabama, Nebraska, and New York have not adopted the SCOR offering.
The use of SCOR offerings has not been as widespread as was intended. This may be because of the lack of uniformity in the states' review processes. SCOR was designed to create a simplification of the small issue registration process, but the disclosure requirements of the Form U-7 and review process belies that admirable goal. Any registration of a SCOR offering requires a review by one or more state securities administrators, which increases the time and effort it takes for an issuer to make an offering.
QUICK Tip
Put Form U-7 to Work for You: While the promise of simplified state registrations under SCOR may not have lived up to their intended potential, the Form U-7 SCOR offering form is an excellent checklist and guide for reference when drafting a disclosure document for any offering of securities.
