Think of Rule 504 as the SEC’s "small business fast-track" exemption. It is specifically designed to let early-stage startups, local businesses, and real estate projects raise relatively modest amounts of seed capital without drowning in federal paperwork.
The SEC rules lay out exactly how a Rule 504 fundraise operates:
1. The Capital Cap
You can raise a maximum of $10 million within any rolling 12-month period. If you launch a 504 offering and raise $10 million, you have to wait a full year from your first sale before you can use the 504 exemption again.
2. Who Can Invest?
Unlike Rule 506(c), which strictly locks out regular investors, Rule 504 allows you to take money from anyone. You can sell to an unlimited number of:
- Accredited investors (wealthy/institutional investors)
- Non-accredited investors (friends, family, local community members, regular everyday investors)
There is no federal requirement to verify their net worth or income, and there are no caps on how much an individual non-accredited investor can contribute.
3. The Big Catch: State "Blue Sky" Laws
This is where Rule 504 gets tricky. Under Rule 506, the federal government blocks individual states from setting their own rules (this is called federal preemption). Rule 504 does not have federal preemption.
This means even though the SEC says you are exempt from federal registration, you must comply with the individual securities laws ("Blue Sky laws") of every single state where your investors live.
- If you have investors in New York, Texas, and California, you have to look at the small-offering exemptions for all three states.
- If a state requires you to register the offering or mandates a CPA audit for raises over a certain amount, you have to comply with that state's law.
4. General Solicitation (Advertising)
By default, you cannot publicly advertise or use "general solicitation" (like posting about your raise publicly on social media or pitching at public events) for a 504 raise.
However, the SEC provides an exception: you can advertise publicly if you meet one of these state-level conditions:
- You register the offering in a state that requires public filing and delivering a substantive disclosure document to investors.
- You sell exclusively to "accredited investors" under a state law exemption that permits advertising.
5. Restricted Securities
The equity or notes you sell under Rule 504 are considered "restricted securities." Investors cannot just turn around and sell their shares on a secondary market; they typically must hold them for at least 6 to 12 months before they can legally resell them.
6. Paperwork & Restrictions
- Form D: You still have to file a simple, free document called a "Form D" electronically with the SEC within 15 days of your first official sale.
- Ineligible Companies: You cannot use Rule 504 if your company is a "blank check" or shell company (a company with no specific business plan other than to merge with someone else), an investment company, or an SEC reporting company.
The Verdict on Rule 504
Rule 504 is a powerful tool if you are raising a few million dollars locally (where you only have to deal with one or two states' laws) and you want to include regular, non-accredited people without the massive legal fees of a full Rule 506(b) Private Placement Memorandum (PPM).
However, if you plan to raise money from people across the country, navigating 10 or 15 different states' Blue Sky laws usually becomes so expensive and legally complicated that founders switch to a Rule 506(b) or 506(c) instead.