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The Myth of Free Trading Stock in a Rule 504 Placement

In almost every case, no matter what people tell you, Rule 504 Placements do not create free trading stock

The following is the most misunderstood, and probably the most abused, aspect of Rule 504:

To qualify for exemption under this Rule 504, offers and sales must satisfy the terms and conditions of Rule 501 and Rule 502 (a), (c) and (d), except that the provisions of Rule 502 (c) [prohibiting general advertising and solicitation] and (d) [resale limitations] do not apply to offers and sales of securities under this Rule 504 that are made in one of the following manners:
  • Exclusively in one or more states that provide for the registration of the securities, and require the public filing and delivery to investors of a substantive disclosure document before sale, and are made in accordance with those state provisions.
  • In one or more states that have no provision for the registration of the securities or the public filing or delivery of a disclosure document before sale, if the securities have been registered in at least one state that provides for such registration, public filing and delivery before sale, offers and sales are made in that state in accordance with such provisions, and the disclosure document is delivered before sale to all purchasers (including those in the states that have no such procedure).
  • Exclusively according to state law exemptions from registration that permit general solicitation and general advertising so long as sales are made only to "accredited investors" as defined in Rule 501.
Everyone fell in love with 504.  They though, "Under certain circumstances, the stock can be free trading, unlike any other stock sold in any other kind of Private Placement."

Everyone conveniently forgot:

  • Because of merit review, every state except Nevada is impossible to clear a registration statement filed in the state, making free trading stock impossible to obtain.
  • Every state that has an accredited only investor offering exemption has changed their law to make stock sold under the state exemption restricted, making free trading stock impossible to obtain. This last point has been routinely ignored by numerous 504 scam artists.
  • People continue to talk about using a “Texas 504,” “Minnesota 504,” or “[Insert name of any other state] 504” still being available to create alleged free trading stock. Avoid these people. They are wrong. For example, Texas, the 504 most often cited by these people, has the following statement in their all Accredited Investor exemption:
Investment intent; resales. The issuer reasonably believes that all purchasers are purchasing for investment and not with the view to or for sale in connection with a distribution of the security. Any resale of a security sold in reliance on this [all Accredited Investor] exemption within 12 months of sale shall be presumed to be with a view to distribution and not for investment, except a resale pursuant to a registration statement effective under the Texas Securities Act, §7, or to an accredited investor pursuant to an exemption available under the Texas Securities Act or Board rules. This means the stock sold under this exemption may not be resold for 12 months. Thus, although the stock is free trading under Rule 504, it is not free trading under Texas law and thus may not be deemed free trading for a FINRA 211 filing or any other purpose.
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