Rule 505 Securities Registration Exemption
Rule 505 Exemption - Explained
Written by Jason Gordon
Updated at April 6th, 2023
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What is a Rule 505 small offerings exemption?
Rule 505 of Regulation D provides a transactional exemption from registration of a securities issuance.
Next Article: Rule 506(b) Securities Exemption Back to: SECURITIES LAW
What are the Characteristics of Rule 505 small offerings exemption?
Issuer Protections - The exemption is generally available to all types of issuers (individuals, non-corporate businesses, corporations, as well as those reporting under the 34 Act) but it is not available for investment companies or for issuers that are subject to any statutory disqualification provisions, such as companies formally sanctioned by the SEC for untrue statements or omissions in securities offerings.
Dollar Limits - This exemption allows an issuer to raise up to $5 million within a 12-month period.
Purchaser Requirements - The exemption allows for sale to an unlimited number of accredited investors and up to 35 non-accredited investors.
Note: Exceeding the number of non-accredited investors can forfeit the exemption.
Restricted Securities - The securities exempted in the issuance are restricted from resale.
General Solicitation - General solicitation of purchasers is prohibited in the same manner as under a Rule 504 exemption.
Private Placement Memorandum - The issuer does not have to make specified disclosures to accredited investors, but it must make extensive disclosures to non-accredited investors. This is normally done through the private placement memorandum, a disclosure document similar in nature to the prospectus. Notably, the disclosures must include certified financial statements.
State Regulation - Rule 505 does not provide an exemption from registration of securities under state law. This is similar to a Rule 504 offering.
Discussion Question
The primary differences between a Rule 504 and 505 exemption is the dollar value of the issuance and classification of purchasers of securities. Why do you think Rule 505 separates classes of purchasers of securities into accredited and unaccredited investors?
Practice Question
ABC Corp is an established company that is steadily growing. ABC needs about $5 million in investment capital reach its growth goals for the next 18 months. In a brief letter, can you summarize the benefits and drawbacks of seeking an exemption from securities registration under Rule 505?
Related Topics
- Securities Law (Intro)
- What are Securities Laws?
- What is a Security?
- What qualifies as an Investment contract?
- What are the primary federal securities laws?
- What are the regulatory goals of security laws?
- What is the Securities and Exchange Commission?
- What is an Initial Public Offering?
- What is a Direct Public Offering?
- What is Crowdfunding?
- Securities Act of 1933
- What is an Offer to Sell securities?
- Who are the parties regulated in an offer to sell securities?
- What are the primary disclosure documents required in an offer to sell securities?
- Forward Looking
- Red Herring Prospectus (Securities) Definition
- Registration of Securities
- What is an issuer allowed to do at each stage of the registration process?
- How are issuers classified for purposes of the registration and offering process?
- What is an issuer allowed to do during the Pre-filing Period?
- What are the limitations on the issuer during the Post-filing, Waiting Period?
- What is an issuer allowed to do during the Post-Effective Period?
- What is an Emerging-Growth Company?
- What type of information must an issuer disclose?
- What laws govern the mechanics of disclosure in a securities offering?
- Deficiency Letter (Securities Law)
- Registration Exemptions Securities Act of 1933
- What are Exempt Securities and Exempt Transactions?
- What are Restricted Securities?
- Section 3(a)?
- Section 3(b)?
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- What is a Section 4(a) Exemption?
- Section 4(a)(5)?
- What is a Regulation A Exemption?
- What are Regulation D Exemptions?
- What is a Rule 504 Exemption?
- What is a Rule 505 Exemption?
- What is a Rule 506(b) Exemption?
- What is a Rule 506(c) Exemption?
- What is Rule 502(d) and the Rule 144 Safe Harbor?
- Rule 144a
- What are the disclosure requirements for companies employing an exemption?
- What is the requirement to file Form D?
- What is the effect of failing to register an offering under Section 5?
- Liability Under the Securities and Exchange Act of 1933
- What is civil liability under Section 11 of the 33 Act?
- What is civil liability under Section 12 of the 33 Act?
- What are defenses available to charges under Sections 11 and 12?
- What is civil liability under Section 17 of the 33 Act?
- What is potential criminal liability under the 33 Act?
- The Security Exchange Act of 1934
- When must an issuer register pursuant to the 34 Act?
- What disclosures are required of reporting companies under the 34 Act?
- What is liability under Section 10(b) and Rule 10(b)(5)?
- What is insider trading under Rule 10(b)(5)?
- What damages are available under Section 10 and Rule 10(b)(5)?
- What is insider trading under Section 14 of the 34 Act?
- What is liability under Section 16 of the 34 Act?
- What is liability under Section 18 of the 34 Act?
- What is criminal liability under the 34 Act?
- Liability under the Securities Enforcement Remedies Act?
- Blue Sky Laws State Securities Laws
- What are Blue Sky Laws?
- When is an issuer required to comply with state securities laws?
- What are the registration requirements under state law?
- What is Coordinated Registration under state law?