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Regulatory and Compliance
Regulation D Rule 506(b) vs. Regulation D Rule 506(c)
 Jul 20, 2023
We often get asked what the difference is between Regulation D Rule 506(b) and Rule 506(c) offerings and marketing / solicitation of the different offerings.

Before we dive into Rule 506(b) and Rule 506(c), let’s take a quick look at Regulation D itself.

Regulation D was adopted by the SEC in 1982 to provide certain exemptions to issuers from the registration requirements listed in the Securities Act of 1933.

Included in Regulation D are two exceptions to the general requirement securities registration, known as 506(b) and 506(c).

Ultimately, the best exemption for your company, depends on the circumstances around your fundraise, including how much you want to raise, the your professional network and your track record.

Here's a summary of the key points for each exemption:

Rule 506(b):

Defining Feature: Allows companies to raise an unlimited amount of money without publicly advertising or soliciting investments for the fund.

Investor Eligibility: Permits raising money from an unlimited number of accredited investors and up to 35 non-accredited investors who receive additional disclosure documents.

Benefits: Not subject to state blue-sky laws, simplified verification process for accredited investors, and no need to file burdensome disclosure documents for accredited investors.

Limitations: Prohibits public advertising and crowdfunding campaigns; requires providing disclosure documents to non-accredited investors.

Rule 506(c):

Defining Feature: Allows companies to perform general solicitation and advertising without limitations on the amount of capital raised.

Investor Eligibility: Limited to accredited investors; the issuer must take "reasonable steps to verify" their accreditation status.

Benefits: Not subject to state blue-sky laws, allows public marketing to a broader investor base, enabling solicitation through various channels.

Limitations: Requires thorough verification of investor accreditation, which can be time-consuming and may deter some investors from sharing sensitive information.

Established firms with a robust network of accredited investors may prefer Rule 506(b) to avoid additional compliance costs and regulatory risks. On the other hand, emerging company's seeking a broader investor base or lacking established networks may find Rule 506(c) more appealing.

We have put together a comparison chart that sums up the key differences between Rule 506(b) vs. Rule 506(c).
 
Reg D Rule 506(b) Rule 506(c)
Eligible Investors
  • Up to 35 non-accredited investors permitted
  • No limits on accredited investors
  • Accredited investors only
Verifying of Accredited Investors
  • Accredited investors typically self-certify accredited status through an investor questionnaire
  • Issuers must take reasonable steps to “verify” accredited status
Dollar Limit
  • No limit on amount raised
  • No limit on how much an investor can invest
  • No limit on amount raised
  • No limit on how much an investor can invest
# Shareholders and Registration under 34 Act
  • Registration required if 2,000 holders of record of equity securities or 500 non-accredited holders
  • Registration required if 2,000 holders of record of equity securities
Advertising
  • Limited marketing directly to known investors without “general solicitation” (pre-existing relationship)
  • No internet solicitation
  • Online intermediaries may be used
  • No limitations on solicitation,
  • Can be marketed over the internet, advertisements and social media
Eligible Issuers
  • Both SEC registered and private companies can use exemption (U.S. and foreign)
  • Both SEC registered and private companies can use exemption (U.S. and foreign)
Filing Requirement
  • File Form D with SEC not later than 15 days after first sale
  • File Form D before use of general solicitation
Restrictions on Resale
  • Restricted securities
  • Restricted securities
Blue Sky Exemption
  • No need to comply with state blue sky laws
  • No need to comply with state blue sky laws
SEC Review
  • No SEC review
  • No SEC review
Ongoing  Disclosure
  • None
  • None
“Bad Actor” Rules
  • Offering cannot be made if “Bad Actor” involved
  • Issuer must take “reasonable care” to exclude Bad Actors
  • Offering cannot be made if “Bad Actor” involved
  • Issuer must take “reasonable care” to exclude Bad Actors
 
 

Three Important Distinctions between Regulation D Rule 506(b) and Regulation D Rule 506(c):
 
  1. If all the investors are accredited, there is no difference between Rule 506(b) and Rule 506(c). If there is even one non-accredited investor in a Rule 506(b) offering the issuer must provide a lot more information.
     
  2. In a Rule 506(b) offering you can advertise only the brand, however in a Rule 506(c) offering you can advertise the deal.

    An issuer undertaking a 506(b) offering can use their website to attract investors who sign up and go through a know your customer process following SEC guidelines.

    This involves having the investor complete questionnaires, speaking with the investor on the phone a couple times, learning about his or her experience and knowledge investing – in essence developing a relationship. Then, and only then, can should the issuer show the investor actual investments.

    In contrast, a website offering investments under Rule 506(c) can show actual investments to everyone visiting the website.
     
  3. In a Rule 506(b) offering, the issuer may take the investor’s word that he, she, or it is accredited, unless the issuer has reason to believe the investor is not being truthful.  In a Rule 506(c) offering, the issuer must take reasonable steps to verify that every investor is accredited.

    The Securities and Exchange Commission’s regulations allow an issuer to rely on primary documents from an investor like tax returns, brokerage statements, or W-2s, but they also allow the issuer to rely on a letter from the investor’s lawyer, accountant or broker. 
     
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