Rule 506 B: Everything You Need to Know
Rule 506 b eliminates the need for people issuing securities to register if they meet certain qualifications. 3 min read
2. Advantages of Rule 506 B
3. Information About Form D
4. What You Should Know Before Investing
5. Difference Between Rule 506 B and 506 C
Updated October 29, 2020:
Rule 506 b eliminates the need for people issuing securities to register if they meet certain qualifications.
What is Rule 506 B?
Under rule 506 b, issuers of securities are exempt from the registration requirements of the Securities Act for unlimited size offerings. However, to qualify under this rule, the securities that are being offered can only be bought by accredited investors and no more than thirty-five unaccredited investors. These unaccredited investors must also meet certain requirements, such being an officer of the company that is offering the securities.
In addition, the issuer is not allowed to solicit the securities, and they must reasonably believe that the investors purchasing the securities are accredited or are unaccredited investors who meet sophistication requirements.
Advantages of Rule 506 B
There are a variety of advantages to qualifying under rule 506 b. In particular, this rule allows the inclusion of unaccredited investors in offerings. Securities issuers that use rule 506 c may lose accredited investors because of the need to provide verification. With rule 506 b, no verification is necessary.
Information About Form D
Companies that qualify for rule 506 b are not required to report to the Securities Exchange Commission (SEC) and also will not need to register their securities. However, after their first securities have been sold, these companies are required to file Form D. This form is used to list basic information about the company:
- The addresses of the company's owners.
- Names of the company's owners.
- Names of the stock promoters.
What You Should Know Before Investing
It's important to do your due diligence before investing any of your money in a company that makes offerings under rule 506 b or c. In particular, you should contact the SEC to ask whether the company you are thinking about investing in has filed Form D. You should be wary of investing in a company that has not filed this form, as it may mean that they are not complying with the securities laws laid out by the federal government.
It's also a good idea to contact the securities regulator in your state to see if they can provide you any information about the company, including information about the owners. You should also ask your state's regulator if they have cleared the offering that you are thinking about purchasing.
Difference Between Rule 506 B and 506 C
One of the biggest differences between 506 b and 506 c offerings is how the companies are allowed to sell securities. For example, advertising is strictly prohibited for 506 b offerings. However, if the company has an existing relationship with an investor, they are allowed to approach these investors about the offering. On the other hand, 506 c offerings can be advertised however the company wishes, and no investor relationship is required.
Only accredited investors are allowed to purchase 506 c offerings. 506 b offerings can include up to thirty-five unaccredited investors as long as they fulfill certain sophistication requirements. Companies that have more than 2000 investors, or more than 500 unaccredited investors, must report based on the rules of the Exchange Act.
With 506 b offerings, companies will certify that an investor is accredited using a questionnaire. As you might imagine, this can pose a problem, as is there is nothing preventing an unaccredited investor from lying to the company about their certification. 506 c offerings have much stricter accreditation requirements. Companies making these offerings must be very careful to make sure that their investors are accredited. Self-certification is not allowed.
There are no limits to the size of offerings for either 506 b or 506 c companies. 506 c rules do not require disclosure.
With 506 b offerings, there is no requirement to disclose information as long as all of the investors are accredited. However, if the offering includes unaccredited investors, the company must provide the investors with a large amount of information about the offering. Both types of companies are required to file Form D, and this form must be filed in every state in which the company has an investor.
Neither 506 b nor 506 c companies require intermediaries when making offerings. However, if the companies choose to use an intermediary, this person must be registered as a broker-dealer or possess an exemption.
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