What Rule 506(c) Means to Your Business

SEC Rule 506(c) gives securities issuers the right to generally advertise and solicit investors while remaining a private offering. Rule 506 is actually a safe harbor for the private offering exemption defined by Section 4(a)(2) of the Securities Act. A company that complies with the requirements of Rule 506 can be reasonably assured that it is within the Section 4(a)(2) exemption.

Satisfying Rule 506 Exemptions

It’s worth discussing Rule 506(b) as it is a predecessor to Rule 506(c). Under the Rule 506(b) exemption various requirements are imposed.

First, the company cannot market securities by advertising or through general solicitation.

Second, the business can sell securities to as many accredited investors as it wants but only up to 35 non-accredited investors.

Third, securities issuers decide what information to share with accredited investors, but must give non-accredited investors disclosure documents similar to the documents published for registered offerings. Fourth, the securities issuer must be available to respond to potential investor questions.

Fifth, the business must meet Rule 505 financial statement requirements.

The Improved Rule 506(c)

Rule 506(c) improves on Rule 506(b) by giving securities issuers the right to advertise and solicit for an offering, thus exempting the company from the first requirement for Rule 506(b) listed above. However, in contrast with the second requirement for Rule 506(b) listed above, all investors participating in the offering must all be accredited investors, and the business takes reasonable steps to verify investors are accredited. Because of the ability to generally solicit, many believe that Rule 506(c) will be the way most companies raise capital in the future.

It is important to follow federal law and SEC rules and regulations concerning private offerings. While the intent is to give securities issuers the freedom to raise private capital to stimulate economic activity, the SEC is just as interested in minimizing the potential for fraud. If Rule 506(c) is to become the future of capital raising, issuers should learn how to use general solicitation techniques to find accredited investors and properly verify that they are accredited investors.