Following up on last week’s post on the origin of Rule 506(c), I’d like to speak to one of the most common questions I receive regarding publicly advertised 506(c) offerings from issuers, their counsel, and investors. How is it different from Rule 506(b)?
The chart below covers a few of the differences between 506(b) and 506(c) offerings. I appended commonly asked questions as well.
Please note that this is not legal advice. You should consult with your own attorney before conducting a 506(b) or 506(c) offering. Securities regulations (and interpretations regarding such regulations) are subject to change.
| 506(b) Offering | 506(c) Offering | |
|---|---|---|
| Communications with Investors | Companies may not advertise their security offering. Generally, companies may approach potential investors if there is a substantive, pre-existing relationship. | General advertising permitted. Companies may advertise via social media, email, or offline. No substantive, pre-existing relationship with potential investors required. |
| Eligible investors | Accredited investors and up to 35 non-accredited investors who meet sophistication requirements. | Only accredited investors. |
| Accreditation Process | Self-certification via a questionnaire is the general standard. | Companies must take reasonable steps to verify accredited investor status. Self-certification via a questionnaire is not permissible. The SEC issued examples of reasonable steps for verification. Based on the SEC’s guidance, CircleUp developed efficient processes to complete both 506b and 506c accreditation. |
| Offering size | No limit on offering size. | No limit on offering size. |
| Disclosure | Companies must decide on what information to provide to accredited investors, but that information must not violate antifraud prohibitions. If non-accredited investors are included, companies must provide those investors with disclosure documents that are generally the same as those used in registered offerings. If a company provides information to accredited investors, it must make that information available to non-accredited investors as well. Companies must be available to answer questions from potential investors. | Companies must decide on what information to provide to accredited investors, but that information must not violate antifraud prohibitions. Companies must be available to answer questions from potential investors. |
| Filing Requirements | Companies must file a Form D. | Companies must file a Form D. |
| Intermediaries | Not required. If used, the intermediary must be a registered broker-dealer or exempt from broker-dealer registration. Fundme Securities LLC, a wholly owned subsidiary of CircleUp Network, Inc., is a registered broker-dealer | Not required. If used, the intermediary must be a registered broker-dealer or exempt from broker-dealer registration. Fundme Securities LLC, a wholly owned subsidiary of CircleUp Network, Inc., is a registered broker-dealer |
1. Can I raise under 506(b) and 506(c) concurrently?
A. From the SEC: “We are of the view that an issuer will not be permitted to check both boxes at the same time for the same offering. We remind issuers that once a general solicitation has been made to the purchasers in the offering,142 an issuer is precluded from making a claim of reliance on Rule 506(b), which remains subject to the prohibition against general.” Source : Page 46 of Proposed Rules [PDF]
2. If I commence an offering intending to rely on Rule 506(c) but do not engage in any form of general solicitation in connection with the offering, may I subsequently determine to rely on Rule 506(b) for the offering?
A. From the SEC: “Yes, as long as the conditions of Rule 506(b) have been satisfied with respect to all sales of securities that have occurred in the offering. To the extent the issuer already filed a Form D indicating its reliance on Rule 506(c), it must amend the Form D to indicate its reliance on Rule 506(b) instead, as that decision represents a change in the information provided in the previously-filed Form D.” Source: SEC.gov, Question 260.11
3. How does CircleUp handle investor accreditation?
A. CircleUp has developed internal processes to complete accreditation for both 506b and 506c offerings. For 506b offerings, we follow generally used practices regarding a questionaire combined with personal information provided by the investor. For 506c, we take reasonable steps to verify the information provided to us by the investor. As a broker dealer, we can provide issuers a certification letter affirming that steps to verify were taken for each potential investor. All of our accreditation procedures have been reviewed internally and considered by outside counsel.
Have additional questions?
Let us know in the discussion section below. We can’t offer legal advice to you, but we would be happy to answer questions regarding the process of raising money on CircleUp.
ABOUT THE AUTHOR:
Lucas joins CircleUp from Electronic Arts Inc. where he was Senior eCommerce Counsel and Lead Counsel for the Pogo Label. As Senior eCommerce Counsel, Lucas directed eCommerce policy, provided counseling regarding direct-to-consumer initiatives, and led a global eCommerce legal group to support online business initiatives. Before joining Electronic Arts Inc., Lucas was a patent and complex commercial litigation attorney at Farella Braun + Martel, LLP. Lucas received his JD from Stanford Law School and a BS in Genetics from the University of California, Davis.