SEC Rule 504

Overview and Regulatory Purpose

The Securities Act's registration framework imposes uniform disclosure and review requirements across all public offerings regardless of size, resulting in a structure whose compliance costs are broadly independent of offering proceeds. For an issuer seeking to raise $10 million or less — the population of small businesses, startup companies, and emerging growth enterprises that constitute the primary constituency for Rule 504 — the fixed cost of a full registered offering is prohibitively large relative to anticipated proceeds. Regulation D's Rule 506 exemptions are available to those issuers but impose their own constraints: the general solicitation prohibition of Rule 506(b) limits the issuer's ability to reach investors broadly, and the accredited investor verification requirements of Rule 506(c) impose due diligence burdens that may be disproportionate for very small offerings.

Rule 504 addresses this gap by providing a lighter-touch exemption designed for the seed capital and small regional offering market. The rule conditions its availability on compliance with state securities law registration and disclosure requirements rather than on federal accredited investor verification, recognising that the state blue sky regulatory infrastructure provides investor protection that substitutes for the federal registration framework in the small offering context. This state-law-reliant design reflects a deliberate federal-state division of labour: the Commission provides the federal exemption from registration, and state securities regulators provide the disclosure review and investor protection oversight that the exemption's availability depends upon.

Statutory Authority and Rulemaking History

Rule 504 derives its statutory authority from Section 3(b)(1) of the Securities Act of 1933, which authorises the Commission to exempt by rule classes of securities from the Act's registration requirements where the aggregate amount at which any such issue is offered to the public does not exceed such amount as the Commission shall specify, subject to such conditions as the Commission shall prescribe as necessary or appropriate in the public interest and for the protection of investors. Section 3(b)(1) provides a specific exemptive grant for small offerings, and Rule 504 is the implementing rule that gives that grant operative content.

Rule 504 was originally adopted in 1982 as part of the Regulation D rulemaking package, Securities Act Release No. 33-6389, at a ceiling of $500,000. The ceiling was raised to $1 million in 1988. Between 1992 and 2016, Rule 504 operated with a $1 million aggregate offering price ceiling and without mandatory bad actor disqualification provisions — a combination that made the rule a frequent vector for microcap fraud, as promoters could conduct unregistered offerings to unlimited numbers of any investors without any disclosure requirements and without the bad actor disqualification that applied under Rule 506.

The Commission's November 2016 amendment — Securities Act Release No. 33-10238, effective January 20, 2017 — was the most comprehensive reform of Rule 504 since its original adoption. The 2016 amendments raised the ceiling from $1 million to $5 million, incorporated bad actor disqualification provisions by cross-reference to Rule 506(d), and required pre-sale disclosure of prior bad actor events that occurred before the disqualification provisions' effective date. The ceiling was raised again to $10 million in the February 2017 amendment, Securities Act Release No. 33-10280, effective May 22, 2017, which absorbed the repealed Rule 505 into the Rule 504 framework and raised the offering ceiling to its current $10 million level. The January 14, 2021 amendment, part of the Exempt Offering Framework rulemaking, made further adjustments consistent with the broader harmonisation of the exempt offering framework. The eCFR confirms January 14, 2021 as the date of the most recent amendment to Rule 504, with no subsequent changes through June 2026.

Key Provisions and Operative Requirements

Rule 504(a) establishes the issuer eligibility conditions. The exemption is available to an issuer that is not: subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act; an investment company as defined in the Investment Company Act of 1940; or a development stage company that has no specific business plan or purpose, or whose business plan is to engage in a merger or acquisition with an unidentified company or companies. The Exchange Act reporting company exclusion reflects the Commission's determination that companies already subject to the ongoing disclosure obligations of the Exchange Act have access to the registered offering framework and should not simultaneously rely on Rule 504's simplified exemption for unregistered capital raises. The investment company exclusion reflects those entities' distinct regulatory framework under the Investment Company Act. The blank check company exclusion — targeting development stage companies with no specific business plan or merger candidates — addresses the historical misuse of Rule 504 by shell company promoters who used the exemption to create and distribute large quantities of unregistered securities into the microcap market.

Rule 504(b)(1) establishes the general conditions applicable to Rule 504 offerings. Offers and sales under Rule 504 must satisfy the terms and conditions of Rules 502(a) and 502(d) — meaning the integration analysis of Rule 152 and the resale restriction conditions of Rule 502(d) apply. The general solicitation prohibition of Rule 502(c) and the information requirements of Rule 502(b) are not generally required conditions of Rule 504 — but they apply except to the extent that the offering is conducted under the specific provisions of Rule 504(b)(1)(i), (ii), or (iii).

Rule 504(b)(1)(i) provides the first circumstance in which securities may be issued without resale restrictions and with general solicitation. Where the offering is registered exclusively in one or more states that provide for the registration of the securities and require the public filing and delivery of a substantive disclosure document to investors before sale, the issuer may use general solicitation and issue freely tradable securities. This condition ensures that where state registration provides a disclosure document reviewed by state securities regulators and delivered to every investor before the sale, the federal general solicitation prohibition and resale restriction requirements are unnecessary — the state regulatory process provides the investor protection that federal restrictions are designed to deliver.

Rule 504(b)(1)(ii) provides the second circumstance for freely tradable unrestricted securities. Where registration and sale takes place in one or more states that require substantive disclosure document delivery before sale, and the offering is also made in states that do not impose that requirement, the issuer may sell in the non-requiring states without state-level disclosure — provided it delivers the disclosure document mandated by the requiring state to all purchasers in both the requiring and non-requiring states before the sale. This provision accommodates multi-state offerings where the issuer uses the most demanding state's disclosure standard as the universal baseline, enabling cross-state capital formation without triggering each state's distinct requirements individually.

Rule 504(b)(1)(iii) provides the third circumstance permitting general solicitation and freely tradable securities. Where securities are sold exclusively under state law exemptions that permit general solicitation and general advertising, provided that sales are made only to accredited investors as defined in Rule 501(a). This provision permits Rule 504 offerings to proceed without state registration or state-mandated disclosure delivery, relying instead on the accredited investor standard as the investor protection condition — combining Rule 504's federal exemption with a state exemption that permits general solicitation to accredited investors.

Rule 504(b)(2) establishes the aggregate offering price limitation. The aggregate offering price for an offering of securities under Rule 504, together with all other offerings in the same 12-month period under Rule 504, shall not exceed $10,000,000. This limitation is calculated on a rolling 12-month basis, and the instruction to Rule 504(b)(2) confirms that failure of a particular transaction to meet the $10 million limitation does not affect the availability of Rule 504 for earlier transactions in the same period that complied with the ceiling — the failed transaction loses the exemption on its own while earlier compliant transactions retain their exempt status.

Rule 504(b)(3) establishes the bad actor disqualification conditions by cross-reference to Rule 506(d)'s disqualification framework. The Rule 504 exemption is unavailable for any offering in which a covered person — including the issuer's principals, promoters, compensated solicitors, and certain other persons — has experienced a disqualifying event. The disqualifying events include Commission enforcement orders, court injunctions arising from securities law violations, criminal convictions, certain final regulatory orders, and other specified adverse legal and regulatory outcomes within the specified lookback periods. An instruction to Rule 504(b)(3) requires that issuers furnish to each purchaser, a reasonable time prior to sale, a written description of any matters that would have triggered disqualification under the bad actor rules but occurred before January 20, 2017 — the effective date of the bad actor provisions' application to Rule 504. This disclosure obligation for pre-2017 events ensures that investors receive information about covered persons' prior adverse histories even where those histories predate the disqualification provision's operative date.

Scope of Application

Rule 504 applies to all issuers satisfying the eligibility conditions of Rule 504(a) — non-reporting, non-investment company issuers that are not development stage blank check companies. The rule imposes no limit on the number of purchasers, no investor accreditation requirement except in the Rule 504(b)(1)(iii) general solicitation context, and no mandatory information delivery obligation to any category of investor. These absences are the defining practical features distinguishing Rule 504 from Rule 506(b): a Rule 504 issuer may sell to any number of any investors without preparing or delivering a formal disclosure document, provided it operates within the $10 million ceiling and complies with the applicable state securities law requirements determined by which of the three Rule 504(b)(1) pathways it follows.

The resale restriction condition of Rule 502(d) applies to Rule 504 offerings that do not qualify under Rules 504(b)(1)(i), (ii), or (iii) for freely tradable securities — meaning that in the default case, securities acquired in a Rule 504 offering are restricted securities subject to the resale limitations of Rule 144. Only where the offering is conducted through one of the three specified pathways — state registration with disclosure delivery, multi-state disclosure delivery, or accredited-investor-only offerings under a state exemption permitting general solicitation — are the securities freely tradable without resale restriction legends.

Relationship to Related Rules and Regulations

Rule 504 is integrated into the Regulation D framework through its cross-references to Rules 502(a) and 502(d) as mandatory conditions, and to Rule 506(d) for bad actor disqualification. The rule's relationship with Rule 501 is definitional — the accredited investor concept of Rule 504(b)(1)(iii) draws directly on Rule 501(a)'s definition for its investor eligibility condition. Rule 503's Form D filing obligation applies to Rule 504 offerings — issuers must file a Form D notice within 15 calendar days of the first sale regardless of which pathway under Rule 504(b)(1) they follow.

Rule 504's relationship with state securities law is structural rather than cross-referential. The rule's availability of freely tradable securities and general solicitation depends on the issuer's compliance with the applicable state securities law framework — either state registration with disclosure delivery or a state exemption permitting general solicitation to accredited investors. This means that Rule 504 practitioners must conduct a state-by-state analysis of the applicable blue sky requirements before structuring the offering, since the federal exemption's practical scope depends on the intersection of federal and state requirements.

The May 2026 Registered Offering Reform proposal does not address Rule 504 directly. The INVEST Act's capital formation provisions, which passed the House in December 2025 and remain before the Senate, address the exempt offering framework broadly but do not contain provisions specifically amending Rule 504's $10 million ceiling or eligibility conditions.

Amendment History and Regulatory Evolution

Rule 504's amendment history tracks the Commission's progressive response to the rule's historical misuse in microcap fraud and its evolution toward a legitimate small business capital formation tool. The original 1982 rule's $500,000 ceiling and absence of bad actor or resale restriction provisions made it, in the Commission's own assessment, a vehicle for fraudulent unregistered distributions in the microcap market during the 1990s. The 1999 amendments introduced resale restrictions and state disclosure requirements as conditions for freely tradable securities, beginning the rule's transformation into a state-registration-anchored exemption. The 2016 and 2017 amendments completed that transformation by incorporating bad actor disqualification, raising the ceiling to $10 million, and explicitly conditioning the freely tradable and general solicitation features on state registration or state exemption compliance.

The 2021 amendment harmonised Rule 504 with the broader exempt offering framework modernisation without altering the rule's substantive architecture. Since 2021, Rule 504 has operated as a stable, well-defined exemption for small non-reporting company offerings, with its $10 million ceiling, state-law-conditioned flexibility, and bad actor disqualification provisions providing a workable framework that substantially reduces the microcap fraud concerns that characterised the rule's earlier history.

Enforcement Context and SEC Action Patterns

The Commission's enforcement history with Rule 504 reflects both the rule's historical misuse and its post-2017 improved compliance landscape. Prior to the 2016 bad actor amendments, Rule 504 was frequently identified by the Division of Enforcement as a mechanism for conducting fraudulent unregistered distributions — promoters used the rule's absence of investor eligibility requirements and resale restrictions to create and distribute large volumes of unregistered microcap securities to retail investors without any meaningful disclosure. The Commission brought numerous enforcement actions under Section 5 of the Securities Act against issuers and broker-dealers that facilitated these distributions, treating the transactions as unregistered public distributions rather than legitimate Rule 504 exempt offerings.

Since the 2017 amendments, enforcement actions specifically targeting Rule 504 structural violations — as distinct from fraud in the underlying offering — have been less frequent, reflecting the improved design of the rule's investor protection conditions. The bad actor disqualification provisions have effectively excluded the most problematic categories of repeat offender from the Rule 504 framework, and the state registration and disclosure delivery conditions provide a meaningful investor protection floor for freely tradable offerings.

The Office of Examinations has included review of broker-dealer participation in Rule 504 offerings — particularly the adequacy of due diligence on issuer eligibility, bad actor status, and state law compliance — in its examination priorities for broker-dealers active in the small-cap private placement market. FINRA has issued guidance confirming that broker-dealers acting as placement agents in Rule 504 offerings must conduct the same category of reasonable basis suitability and due diligence analysis as in any other private placement transaction.

Examination Relevance and Key Takeaways

Rule 504 is examined at the Series 7 and SIE levels in the context of the Regulation D offering framework and the specific features distinguishing the three Regulation D exemptions from each other.

Candidates should understand the $10 million aggregate 12-month offering ceiling, the issuer eligibility exclusions for Exchange Act reporting companies, investment companies, and blank check development stage companies, and the critical distinction between the three pathways under Rule 504(b)(1) that determine whether securities are freely tradable and whether general solicitation is permitted.

The contrast between Rule 504 and Rule 506(b) is consistently examined: Rule 504 has no limit on the number of purchasers, no accredited investor requirement except in the Rule 504(b)(1)(iii) context, no mandatory federal information delivery obligation, and a $10 million ceiling — while Rule 506(b) has no ceiling, limits non-accredited investors to 35 sophisticated purchasers, imposes information requirements for non-accredited investors, and prohibits general solicitation. The bad actor disqualification provisions applying to Rule 504 by cross-reference to Rule 506(d) are relevant examination content at the Series 65 level.

The key points to retain are these. Rule 504 provides an exemption from Securities Act registration for offers and sales of up to $10 million in any 12-month period by non-reporting, non-investment company issuers that are not blank check development stage companies.

The rule imposes no investor accreditation requirement in most circumstances, no limit on the number of purchasers, and no mandatory federal disclosure delivery obligation. Securities are restricted in the default case but are freely tradable and general solicitation is permitted where the offering is state-registered with disclosure delivery, where a multi-state disclosure delivery protocol is followed, or where the offering is made exclusively under a state exemption permitting general solicitation to accredited investors only. Bad actor disqualification applies by cross-reference to Rule 506(d), with pre-2017 prior bad actor events requiring written pre-sale disclosure to purchasers.

The Rule 152 integration framework and Rule 502(d) resale restrictions apply as mandatory conditions. Rule 503's Form D filing obligation requires a notice within 15 calendar days of the first sale. Rule 504 was last amended January 14, 2021 and no pending rulemaking proposes changes to its substantive framework through June 2026.