Before we start, this is not legal advice and we are not attorneys. With that out of the way, we hear from a lot of companies about general confusion regarding 506 (b) and 506 (c) deals. This FAQ is intended to help clear up this confusion and provide some high level information with regards to these two types of investor exemptions.
Why Do Companies Raising Private Equity Need An Exemption?
From the SEC website:
"A securities offering exempt from registration with the SEC is sometimes referred to as a private placement or an unregistered offering. Under the federal securities laws, a company may not offer or sell securities unless the offering has been registered with the SEC or an exemption from registration is available."
Because companies that approach us are often raising funds through private placement (Angel Investing, Venture Capital, etc.), we require that they claim an exemption before they are circulated to our Angel Investor Network.
Reg D 506(c)
From the SEC website:
"Rule 506(c) permits issuers to broadly solicit and generally advertise an offering, provided that:
We not only require all deals to claim an exemption, but that exemption must be Reg D 506(c) to be circulated to FI Investors. This is because we can "broadly solicit and generally advertise" 506(c) exempt deals to Accredited Investors. The down side of this is that we cannot make these deals available to Unaccredited Investors. This is simply a limitation of the law and regulatory system.
Reg D 506(b)
From the SEC website.
"Rule 506(b) of Regulation D is considered a “safe harbor” under Section 4(a)(2). It provides objective standards that a company can rely on to meet the requirements of the Section 4(a)(2) exemption. Companies conducting an offering under Rule 506(b) can raise an unlimited amount of money and can sell securities to an unlimited number of accredited investors. An offering under Rule 506(b), however, is subject to the following requirements:
Because these deals cannot be generally solicited or advertised we are not able to circulate 506(b) deals through any of our investor networks, Everyone or Accredited. 506(b) is, therefore, mostly suited for companies who are raising from people that are close to them - family, close friends, a tight network - where advertising of the offering is not necessary. 506(b) allows for both Unaccredited and Accredited investors.
Have more questions about this? We always encourage companies to speak with a securities attorney that specializes in your specific industry to get legal guidance and counseling.