Rule 506(b) of Regulation D is used as a safe harbor for the private offering exemption explained in the Securities Act Section 4(a)(2). Businesses that utilize this exemption can raise funds in an unlimited amount. To ensure that a company is complying with the exemption, it must abide by the following requirements:
1. The business is not permitted to use advertising or general solicitation to market securities.
2. Companies must determine the type of information they are going to give to accredited investors – however, it must not violate the antifraud prohibitions outlined by federal securities laws. Companies must provide non-accredited investors with disclosure documents that are usually the same as those used in registered offerings. Any information the company provides to accredited investors must also be made available to non-accredited investors.
3. The company may offer its securities per Rule 506(b) of Regulation D to a limitless number of accredited investors and a maximum of 35 non-accredited investors. All non-accredited investors, either with the purchase representative or alone, must be “sophisticated.”
4. The requirements for financial statements are equivalent to those for Rule 505
5. Companies must remain accessible to answer questions from prospective buyers
6. Purchasers receive securities that cannot be sold per year without registration. These are referred to as restricted securities.
Of course, companies that use Rule 506(b) of Regulation D are not required to register their securities or file reports with the SEC. However, they must file Form D after they sell their securities. This form includes the addresses and names of the owners of the company and stock promoters.
Be sure to check with your state securities regulator to determine if they have additional information about the particular company and the owners behind it. As well, ask whether your state regulator has authorized the offering to be sold in your state.
As explained previously, companies may remain within the exemptions provided under Rule 506(b) as long as they abide by the requirements mentioned above. By following these terms, you can successfully take advantage of the exemption and raise the funds you need for your business.
