Securities Act, Section 5. The Securities Act also provides that the foregoing restriction is not applicable to transactions by persons other than an issuer, underwriter, or dealer, nor to transactions by an issuer not involving a public offering. These laws have the effect generally of requiring a company to register its stock or other securities with the Securities and Exchange Commission prior to offer or sale in interstate commerce unless the transaction or securities themselves are exempt from the registration requirement. Most states have a similar requirement. Such a public offering would be made by means of a registration statement and prospectus filed with and reviewed by the Securities and Exchange Commission.
Registration is generally a lengthy and expensive undertaking.
Offers and sales not involving a public offering are exempt from registration under Federal securities laws, and most states have comparable exemptions. Case law and rulings under Federal securities laws provide some guidance as to what specific transactions may constitute private placements. Although Rule 504 may seem attractive because of these three items, its major drawback is that some states do not have a comparable rule. This means that although your transaction may be exempt from Federal securities registration if it complies with Rule 504, there may not be a comparable exemption under state laws and you may end up having to register the securities in each state in which they are offered or sold. Thus, depending on the states in which you propose to offer securities, you may not be able to take efficient advantage of Rule 504.