Rule 506 of Regulation D is an SEC exemption that allows companies to offer securities privately, without registering with the SEC. It enables issuers to raise an unlimited amount of capital through private placements. Rule 506 has two main sub-sections, 506(b) and 506(c), each with different requirements for offering securities.

 

Rule 506(b):

 

• First adopted by the SEC in 1982

• Allows issuers to sell to an unlimited number of accredited investors and up to 35 non-accredited investors.

• Requires non-accredited investors to be "sophisticated," meaning they have sufficient knowledge and experience in financial and business matters to evaluate the risks.

• Does not allow general solicitation or advertising.

 

Rule 506(c):

 

• First passed by the SEC and took effect in September 2013

• Allows issuers to use general solicitation and advertising when offering securities to accredited investors only.

• Requires issuers to take reasonable steps to verify that all investors are accredited.

• Does not allow non-accredited investors.

 

Key Differences and Common Features:

 

• General Solicitation: 506(c) allows general solicitation and advertising, while 506(b) does not.

• Accredited Investor: Both rules primarily focus on accredited investors, who are generally defined as having a minimum net worth or income.

• Verification: 506(c) requires reasonable steps to verify accredited investor status, while 506(b) allows investors to self-certify.

• Disclosure: While 506(b) requires disclosure to non-accredited investors, 506(c) has fewer disclosure requirements for accredited investors.

• Form D: Both 506(b) and 506(c) require issuers to file a Form D with the SEC.

• Restricted Securities: Investors in Rule 506 offerings receive restricted securities, meaning they cannot be sold freely in the secondary market