Rule 506(b) is one of the safe harbor rules under Regulation D of the SEC regulations that permits the sale of securities without SEC registration of those securities. There are benefits and restrictions to Rule 506(b).
Some of the requirements and limitations of Rule 506(b) include:
1. Investor Limitations
Under Rule 506(b), you may raise unlimited funds from an unlimited number of accredited investors and a maximum of 35 non-accredited investors. The non-accredited investors must possess a sufficient degree of sophistication as a result of help from an investment advisor or their own knowledge in order to participate.
2. No General Solicitation
Rule 506(b) forbids any businesses using this exemption to participate in any type of general solicitation, marketing, or advertising of its securities. Under this Rule, issuers must also have a prior existing substantive relationship with prospective investors.
3. Sufficient Information Disclosure
Every issuer using Rule 506(b) must reveal pertinent information to any investor who expresses interest in purchasing securities. Issuers must remain aware of and follow all state and federal laws pertaining to these requirements, which includes supplying accurate information with no omissions. Additional disclosure requirements apply if non-accredited investors are included in the securities offering.
4. Commitment to Availability
Issuing securities for purchase under Rule 506(b) obliges the issuer to remain available to answer any questions from potential investors.
Benefits of Rule 506(B) Offering
There are two major advantages to offering securities under Rule 506(b) that are not available under Rule 506(c). They are:
- You are not required to provide verification for the status of your investors, even though it is wise to screen your investors as to their accredited investor status through the means of an accredited investor questionnaire. On the other hand Rule 506(c) requires you to perform “reasonable steps” to ensure the accredited status of all investors.
- You may include some (35 max) non-accredited investors in your offering. This provides you with a broader group of potential investors, something which gives Rule 506(b) great appeal for crowdfunding or syndication activities.
Issuing securities under Rule 506(b) may be the ideal option for your company if you already have a substantive relationship with the potential investors interested in your offering and you intend to raise a substantial amount of funds. Under this Rule, you have a crowdfunding opportunity that must be treated with care by ensuring your investors (other than the 35 non-accredited investors) qualify as accredited investors and based on your prior existing substantive relationship with your investors, whether accredited or non-accredited.
