Under the federal securities laws, a company may not offer securities unless they have been registered with the Securities and Exchange Commission (SEC) or an exemption from registration can be used. Regulation D of the Securities Act of 1933 provides three main exemptions from the SEC’s registration requirements for certain private securities offerings. These exemptions from registration include Rule 504, Rule 505, and Rule 506. 

What are the Differences Between Rule 506(b) and Rule 506(c)?

Rule 506 has been divided into two offerings. An issuer must understand the difference between them to know which best suits your fundraising requirements. While both 506(b) and 506(c) can help smaller companies attract investors, there are still several requirements companies must satisfy, regardless of which exemption is used. 

The following are the main differences between 506(b) and 506(c):

• Eligibility of non-accredited investors — Under Rule 506(b), companies may raise funds from an unlimited number of accredited investors.  Under this exemption, an issuer may raise funds from up to 35 of whom may be non-accredited investors. Rule 506(c) does not permit companies to raise funds only from unaccredited investors. An issuer may not raise money under 506(c) from non-accredited investors. 
• Ability to engage in general solicitation and advertising — Companies that use 506(b) may not engage in general solicitation or advertising to attract investors. 506(c) allows companies to engage in general solicitation to attract investors. Steps must be taken to verify that all investors are accredited.
• Requirements for verifying accredited investors — Under both exemptions, the issuer must verify the accredited status of all investors and ensure they satisfy the criteria. However, under the 506(b) exemption, an issuer may raise funds from up to 35 non-accredited investors.

Rule 506(b) and Rule 506(c) each impact fundraising differently and it’s essential to carefully consider the pros and cons of each, based on your company’s needs. 

Pros and Cons:

Raising money under the Rule 506(b) exemption carries with that exemption many advantages. Raising money under the Rule 506(b) exemption may be more affordable than other methods since there are no SEC requirements regarding private placement memorandums or ongoing reporting. Although disclosures need not be given to accredited investors, they must still be provided to non-accredited investors. The required disclosures are typically more relaxed than those associated with other types of offerings.

One of the potential drawbacks of using Rule 506(b) is that general solicitation is prohibited with this offering. In addition, the securities issuer must ensure the investor is a “sophisticated investor.” The investor must know business matters and understand the risks associated with investments of the same kind. 

Like Rule 506(b), an issuer can raise an unlimited amount of capital using Rule 506(c). One of the biggest advantages of using Rule 506(c) is the ability to advertise the offering using any marketing channel. The investors must be accredited — Rule 506(c) imposes the additional step of verifying accredited investor status. Still, if you know that you will need to solicit investors, using Rule 506(c) might be a viable option.     

Contact an Experienced New York Securities Attorney

If your company will be raising capital, it’s important to be aware of the difference between Rule 506(b) and Rule 506(c). A knowledgeable securities attorney can best advise you regarding the pros and cons of each rule and help you determine which meets your company’s needs. Brinen & Associates is dedicated to providing strategic advice to business owners and helps ensure they remain compliant with the SEC’s complex regulations. Call (212) 330-8151 or send us a message to learn more about how we can help.