The U.S. Securities and Exchange Commission (SEC) recently released its final rule regarding the amendment of Rule 504 of Regulation D under the Securities Act of 1933, otherwise known as the “seed capital” exemption. See SEC Release No. 33-7644. The SEC cited a rise in online “microcap” fraud as the impetus for the revision of Rule 504. Rule 504 was originally adopted in the early 1980s to help small businesses raise seed capital without incurring the costly regulatory burdens of larger corporations. With the advent of the Internet, however, came a wave of technological advances that enhanced U.S. capital markets and raised investor access and education to a level previously unseen in the American financial marketplace. Unfortunately, the amendment of Rule 504 is a step taken to combat the rising numbers of fraudulent schemes that have been perpetrated via the Internet.

Congress originally passed the Small Business Investment Incentive Act of 1980 in an effort to aid small businesses in the capital formation process. The SEC adopted Regulation D shortly thereafter in 1982. Regulation D was an exemption from the burdensome regulatory procedures previously required for capital formation. (See SEC Release No. 33-6389, dated March 8, 1982.) Rule 504 of Regulation D has long been known as the seed capital exemption. Rule 504 exempted offerings by nonreporting issuers without regard to: (1) the number of investors, (2) investor sophistication, or (3) requirements for accompanying disclosure documents. The aggregate-offering price, however, was not permitted to be greater than $1,000,000 during any 12-month period. Securities issued pursuant to Rule 504 also were freely tradable securities.

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