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Sunday, April 26, 2015

How to Sell Shares as a Private Business - Rule 504 of the SEC

So you own a small business, and are contemplating obtaining investors? Good news -- It's possible! Bad news, you better know what the heck you're doing.

Care is required here. As a small company contemplating a Rule 504 filing under Regulation D of Security and Exchange Commission, you need to be sure you understand the rules. Generally, you want to be a corporation and not a limited liability company. No hard and fast rule, however, LLC's don't generally have shares, and usually the operating agreement reads more like a partnership than a corporation. Make sure you have a seasoned attorney review the LLC agreement BEFORE soliciting any investors. LLC vs. Corp. aside, let's take a moment to understand what Rule 504 is all about.

At a minimum, Rule 504 allows you to sell shares of your company to qualified investors (considered a "public offering") without having to file notices without the requirement of formal registration and regulation by the SEC. You are, however, still required to complete Form D (hence the name of the action: Rule 504 under Reg D) which provides certain minimal data to about the company. The SEC then enters that information into an online database accessible by any individual or organization that might want to reference or research the company. Although you are not required to file the Form D annually, each time you make a sale under a 504 offering, you SHOULD update the Form D to ensure the SEC information is current. If the information in the online database is off, you risk a fraud charge even under Rule 504. Be careful.

You qualify for a 504 filing if your company has has sold or plans to sell up $1 million in shares in a given 12 month period (hence the annual comment above), and your company is established (defined as having a clearly definable business plan, and some footprint in the market). Generally, shares sold under a 504 plan are restricted -- meaning, they cannot be resold on the open market without meeting further requirements. Those requirements are a bit complex, and generally relate to state regulations -- contact us if you need more information on that.

To find out more about 504 ops, visit the SEC website devoted to the same. It's a tad complex, but it gives a good background. See: SEC Rules for 504 filings.

If you need additional help with SEC matters, or business transactions, give me a ring! I'll be glad to discuss your individual situation, and see what steps make the most sense. Hanover Law: 703-402-2723 or

Hanover Law, PC
Offices in Fairfax, VA and Washington, DC Lili O'connell, Esq.
Abby Archer, Esq.
888 16th St., NW Ste 800
Washington, DC 20006
2751 Prosperity Ave, Ste 580
Fairfax, VA 22031
Sean R. Hanover, Esq.
Stephen Salwierak, Esq.
1-800-579-9864 Charles Hatley, Esq.

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