Rule 506: the 500 Lbs. Gorilla of Regulation D

When it comes to raising capital for small businesses, Rule 506 is where all the action is.

As readers of this blog will probably know, every offering of securities must be registered or exempt from registration. Because registering an offering of securities is an expensive and time-consuming enterprise, most small businesses seek to find an exemption from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act").

In 1982, the Securities and Exchange Commission ("SEC") adopted Regulation D, which provided three rules exempting private placements of securities from the registration requirements of the Securities Act: Rule 504, Rule 505 and Rule 506.

Rule 504 provides an exemption from registration requirements for private companies offering not more than $1,000,000 of securities to an unlimited number of investors.

Rule 505 provides an exemption from registration requirements for companies offering not more than $5,000,000 of securities to not more than 35 investors and an unlimited number of accredited investors.


Rule 506 provides an exemption from registration requirements for companies offering any dollar amount of securities to not more than 35 investors, each of whom must be sophisticated, and an unlimited number of accredited investors.

So which rule get used the most in practice?  Overwhelmingly, most issuers of securities in private placements under Regulation D choose to rely on Rule 506, selling strictly to accredited investors.

Rutherford B. Campbell, Jr., a professor at the University of Kentucky, conducted a study of 27,000 Form D's filed from 2008 to 2010 which was published in the August 2011 issue of The Business Lawyer.  Professor Campbell found that 94% of all Regulation D offerings relied upon Rule 506, 1.6% relied upon Rule 505 and 4.4% relied upon Rule 504.  88.5% of the Regulation D offerings studied limited their offerings exclusively to accredited investors.  Even among offerings of $1,000,000 or less (which would therefore qualify under Rule 504), 78.6% of the issuers chose to rely upon Rule 506 rather than Rule 504.

Professor Campbell attributed the popularity of Rule 506 to the exemption such offerings enjoy from state level blue sky regulations under the National Securities Markets Improvement Act of 1996 ("NSMIA").  I agree.  

Texas's New Trademark Law

The State of Texas adopted changes to our trademark law which went effective September 1, 2012.  The trademark law has been revised to conform with the Model State Trademark Bill and to be more consistent with federal trademark law.

Here are some of the highlights of the new law:

• The initial term and each renewal term of a state trademark registration has been reduced from 10 years to 5 years.
• Trademark registrations must now be notarized and must now include 3 specimens of the trademark in use.
• The Texas Secretary of State's office must now search the database of the United States Patent and Trademark Office in addition to its own trademark database before approving an initial trademark application.  The USPTO trademark database is available here.
• Licenses and security interests of trademarks may now be recorded for notice purposes with the Secretary of State.
• Holders of registered trademarks in Texas may now recover profits earned by an infringer against the trademark as well as triple-damages if the infringer acted with actual knowledge of the trademark or in bad faith.

The new trademark law can be found in Section 16 of the Texas Business and Commerce Code.  The Secretary of State's office provides FAQ's regarding the new law here.  Texas also adopted new Trademark Administrative Rules in connection with the new law, which rules are available here.