Differences Between Regulation D Rule 506(b) and 506(c)
- April 3rd, 2019
- Russell Weigel
- Comments Off on Differences Between Regulation D Rule 506(b) and 506(c)
What are the differences between the “friends and family rule” and the “accredited investor rule” or the “crowdfunding rule”? First, what do both rules have in common? Both rules permit an unlimited dollar amount of capital to be raised in a 12-month period and impose no limit on the number of accredited investors who may participate. Both rules require the filing of Form D with the SEC, and both rules enjoy the benefits of preemption of state securities offering compliance requirements. Both rules are subject to the “bad actor” disqualification that disallows a company from relying on the exemption from the securities offering registration requirements of the federal securities laws if one of the participants from the issuer-side of the offering has a history of certain enumerated regulatory violations or crimes. Both rules are subject to the integration limitation which requires a time barrier between offerings.
Where the rules differ:
Rule 506(b), nicknamed the friends and family rule, has been around since 1982. Rule 506(b) requires a private offering; that is, an offering that is not publicized, or generally solicited or advertised. The investors must have a pre-existing relationship with one or more company executives or directors, and if there are unaccredited investors that purchase during the offering, these investors must represent that they are sophisticated and knowledgeable in business matters and they cannot number more than 35. If there is one unaccredited investor participating in the offering, then the company is required to obtain an audited balance sheet and deliver prescribed financial information in writing to the unaccredited investor. The financial compliance requirements increase for offerings up to $2.0 million, $7.5 million, and greater.
On the other hand, Rule 506(c), nicknamed by some as the “accredited investor rule” and by others as the “crowdfunding rule”, went into effect in September 2013. Rule 506(c) does allow general solicitation and advertising of the offering provided that not one unaccredited investor participates in the offering. All investors must demonstrate to the corporate securities issuer that they are accredited investors, and the issuer must keep evidence of each investor’s accredited status on hand as proof of compliance with this exemption from registration. There is no time delay in soliciting accredited investors; issuers can solicit at any time, subject to the required dead time between offerings. Rule 506(b), in contrast, might force an issuer to develop an adequate business relationship with a potential investor and, if an offer is made to an unaccredited investor, prepare and deliver to the unaccredited investor in writing a summary of the material information previously presented to an accredited investor. Both of these circumstances might delay the ability of the issuer to commence an offering for days, weeks, or months.