Tradability Issues In Regulation D Rule 504 Offerings

Rule 504 ("Rule 504") of Regulation D of the Securities Act of 1933, as amended (the "Securities Act") provides an exemption from the registration requirements of the federal securities laws which allows issuers to offer and sell up to $1,000,000 of their securities in any 12-month period. Rule 504 is an exemption frequently misunderstood and misused to create illegal free trading shares. As discussed below, fraudsters attempt to make an "end run" around Rule 504 requirements by improperly relying upon state statutes in Delaware, Wyoming, New York and Texas which have been the subject of various SEC enforcement actions.

The abuses surrounding Rule 504 are so widespread that the SEC has brought numerous enforcement actions against attorneys rendering legal opinions for the issuance of free trading shares in Rule 504 offerings. In addition, DTC often refuses to accept opinions from attorneys rendering bogus opinions to issue free trading shares in reliance upon Rule 504.The Rule 504 exemption is available to issuers that are not blank check companies and that do not have to file reports with the SEC under the Securities Exchange Act of 1934. A blank check company is defined under federal securities law as a development stage company that does not have a specific business plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies.Investors in Rule 504 Offerings receive "restricted" securities, meaning the securities cannot be resold without registration or an applicable exemption. Rule 504 provides three circumstances where issuers can issue securities that are not restricted.

The reality is that issuers simply do not comply with the requirements of Rule 504 that would enable them to issue unrestricted securities. Investors and issuers that rely upon legal opinions to issue unrestricted shares in offerings made in reliance upon Rule 504 should be aware that violations involving unregistered distributions of securities to the public including those issued in 5Rule 04 offerings do not require proof of intent; meaning that reliance an opinion rendered by securities counsel is not an effective defense to these violations.

Requirements to Issue Unrestricted Securities in Rule 504 Offerings.

Unrestricted securities may be issued in a Rule 504 offering if and only if:

i. The issuer registers the offering in one or more states that require a publicly filed registration statement and delivery of a substantive disclosure document to investors; ii. The issuer registers and sells the offering in a state that requires registration and disclosure delivery and also sells in a state without those requirements, so long as the company delivers the disclosure documents required by the state where the company registered the offering to all purchasers including those in the state which has no such requirements; or iii. The company sells exclusively according to state law exemptions that permit general solicitation and advertising, so long as the company sells only to "accredited investors."

Because states make it extremely difficult to obtain clearance of a state registration statement, the requirements above are rarely ever complied with.Every single state statute that provides for an accredited investor exemption has a corresponding statute that requires the securities be "purchased for investment" which means they are held by the purchaser for twelve months prior to resale. Thus, any purchaser of securities in a 504 offering who publicly resells the securities purchased within twelve months engages in a distribution and is deemed to be an "underwriter".Stock certificates that represent shares issued in a Rule 504 offering are required to have a legend that sets forth the restrictions of transferability. Transfer agents in conjunction with their compliance procedures require an attorney's opinion before issuing free trading shares.A review of recent enforcement actions against attorneys evidences the use of bogus legal opinions in connection with Rule 504 offerings. The misuse of Rule 504 to sell "free trading" shares has become rampant and the SEC as well as the Justice Department have filed actions against the attorneys who render bogus legal opinions to remove restrictive legends.

http://www.securitieslawyer101.com/the-rule-504-myth/
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Source: http://articles.submityourarticle.com/tradability-issues-in-regulation-d-rule-504-offerings-295260

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