Rule 505 was adopted by the SEC to provide small businesses more flexibility in raising capital than under Rule 504 - but without the uncertainty of determining the quality of the purchasers that generally is involved in using Rule 506. Rule 505 provides issuers a limited offering exemption for sales of securities totaling up to $5 million in any 12-month period.

Rule 505 contains certain restrictions regarding "accredited investors" and non-accredited persons. The-term "accredited investor" includes:

• Banks, insurance companies, registered investment companies, business development companies, or small business investment companies;
  
  
• Certain employee benefit plans for which investment decisions are made by a bank, insurance company, or registered investment adviser;
  
  
• Any employee benefit plan (Within the meaning of Title I of the Employee Retirement Income Security Act) with total assets in excess of $5 million;
  
  
• Charitable organizations, corporations or partnerships with assets in excess of $5 million;
  
  
• Directors, executive officers, and general partners of the issuer;
  
  
• Any entity in which all the equity owners are accredited investors;
  
  
• Natural persons with a net worth of at least $1 million;
  
  
• Any natural person with an income in excess of $200,000 in each of the two most recent years or joint income with a spouse in excess of $300,000 for those years and a reasonable expectation of the same income level in the current year; and
  
  
• Trusts with assets of at least $5 million, not formed to acquire the securities offered, and whose purchases are directed by a sophisticated person.

If the issuer sells any securities to non-accredited investors, it must furnish to all investors the same type of information as required by Regulation A. It must also furnish audited financial statements.

• If an issuer other than a limited partnership cannot obtain audited financial statements without unreasonable effort or expense, only the issuer's balance sheet (to be dated within 120 days of the start of the offering) must be audited;
  
  
• Limited partnerships unable to obtain required financial statements without unreasonable effort or expense may furnish financial statements prepared on the basis of federal income tax requirements and examined and reported on by an independent public or certified accountant in accordance with generally accepted auditing standards; and The issuer must also be available to answer questions by prospective purchasers about the issueror the offering.

Further restrictions under Rule 505 include:

• The total offering price of each issue of securities may not exceed $5 million.
  
  
• The offering may not be made by means of general solicitation or general advertising.
  
  
• The issuer may sell the securities to an unlimited number of "accredited investors" and to 35 nonaccredited persons. There are no requirements of "sophistication" or "wealth" for persons to whom the securities are sold.
  
  
• A company must take any necessary steps to ensure that the purchasers are acquiring securities for investment only, not for resale. The securities are thus "restricted" and investors must be informed that they may not be able to sell except pursuant to a registration statement or exemption from registration.
  
  
• The issuer is not required to file any offering materials with the Commission. Fifteen days after the first sale in the offering, the issuer must file a notice of sales on Form D. The notice also contains an undertaking under this Rule for the issuer to furnish the Commission, upon its staff s request, any information given to non-accredited purchasers in connection with the offering.
  
  
• Rule 505 does not provide an exemption from state securities laws.