It is now widely understood that EB-5 capital raises involve securities that must be registered with the Securities Exchange Commission (SEC) unless the securities are offered pursuant to a valid securities exemption. At the federal level, EB-5 capital raises have generally relied upon two primary securities exemptions: Rule 506 of Regulation D and Regulation S. Each has its benefits, but is not without drawbacks. This article explores the emergence of Rule 504 of Regulation D as another possible securities exemption for smaller EB-5 capital raises.
Rule 506 of Regulation D
While Regulation D historically consisted of three primary exemptions, the most commonly used exemption by far was Rule 506. One reason for this is that Rule 506 has no limit on the amount of capital that can be raised under that exemption while the two other Reg D exemptions were historically limited to maximum raises of $1,000,000 under Rule 504 or $5,000,000 under Rule 505. Another reason is that of the Regulation D exemptions, only Rule 506 allows for preemption of state securities laws with respect to registration of securities. In other words, companies offering securities under the exemption afforded by Rule 506 are also generally exempted from registration under the various state blue sky laws.
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