What is SEC Rule 506 B?

What is SEC Rule 506 B?

Rule 506(b) is a Securities and Exchange Commission (SEC) regulation that allows private placement under Regulation D and enables issuers to offer an unlimited amount in securities.

Exemption from Registration

Rule 506(b) is one of the most common methods of private placement because there is no cap on how much the issuer can offer. The issuer, however, must meet several restrictions. Securities may not be sold to more than 35 non-accredited investors. Any non-accredited investors must have sufficient knowledge in financial and business matters to be capable of evaluating an investment. The issuer must provide the non-accredited investors with certain disclosures, such as financial statements and be available to answer questions from non-accredited investors. The issuer may offer to an unlimited number of accredited investors, however, as defined in Rule 501(a) of Regulation D. Accredited investors are generally large financial institutions, such as investment banks, or high net-worth individuals.

Accredited and Non-Accredited Investors

Rule 506(b) bans general solicitation of the securities. That is, issuers may not advertise their offering to a broad audience. Investors in a Rule 506(b) offering receive restricted securities, which means investors cannot freely resell their securities. To resell their securities, investors must file a registration statement or resell under an exemption. Rule 144 provides a common exemption to reselling restricted securities, most importantly by allowing resale if the investor holds the security for a certain duration of time.

Limits on Non-Accredited Investors

The SEC offers a collection of rules under Reg D where an individual or entity can offer and sell securities without registering the transactions with the SEC. This regulation makes it easier for small businesses to raise capital without having to worry about all of the paperwork associated with regulation. Plus, the variety of rules that fall under Reg D offers several ways to achieve this exemption, making them suitable to numerous offering types. Rule 506b is one of these rules. This rule is considered a “safe harbor” according to the Securities Act. However, there are several requirements that you must meet to create a valid securities offering under Rule 506b.

No General Solicitation

Rule 506b of Reg D – Non-Accredited Investors & No Solicitation The SEC offers a collection of rules under Reg D where an individual or entity can offer and sell securities without registering the transactions with the SEC. This regulation makes it easier for small businesses to raise capital without having to worry about all of the paperwork associated with regulation. Plus, the variety of rules that fall under Reg D offers several ways to achieve this exemption, making them suitable to numerous offering types. Rule 506b is one of these rules. This rule is considered a “safe harbor” according to the Securities Act. However, there are several requirements that you must meet to create a valid securities offering under Rule 506b.

Restricted Securities

Rule 506b is part of the SEC’s Reg D that allows you to sell securities to an unlimited number of accredited investors and up to 35 non-accredited investors without registration. More, a syndicator can raise an unlimited amount of money as long as they do not publicly solicit for those funds.

[Sources: https://www.moschettilaw.com/rule-506b-of-reg-d/, https://www.yieldstreet.com/blog/article/506c-vs-506b/, https://www.law.cornell.edu/wex/rule_506]

FAQs

What is Rule 506(b)?

Rule 506(b) is a Securities and Exchange Commission (SEC) regulation that allows private placement under Regulation D and enables issuers to offer an unlimited amount in securities.

What are the key features of Rule 506(b)?

Rule 506(b) allows issuers to sell securities to both accredited and non-accredited investors without having to register the offering with the SEC. However, issuers must meet certain restrictions, such as a limit on the number of non-accredited investors and a ban on general solicitation.

Who are accredited investors under Rule 506(b)?

Accredited investors under Rule 506(b) are generally large financial institutions, such as investment banks, or high net-worth individuals. They are considered to have sufficient knowledge and experience to evaluate the investment.

What are the benefits of using Rule 506(b)?

Rule 506(b) is a popular exemption for private placements because it allows issuers to raise an unlimited amount of capital without having to register the offering with the SEC. This can save issuers significant time and expense.

What are the risks of using Rule 506(b)?

Issuers who use Rule 506(b) must be aware of the risks involved, such as the potential for fraud and the difficulty in reselling restricted securities.

What are the alternatives to Rule 506(b)?

There are several other exemptions from registration under Regulation D, such as Rule 504 and Rule 506(c). Issuers should consult with a qualified securities attorney to determine which exemption is most appropriate for their needs.

How can I comply with Rule 506(b)?

To comply with Rule 506(b), issuers must meet certain requirements, such as providing investors with adequate disclosure and taking steps to prevent general solicitation. Issuers should consult with a qualified securities attorney to ensure that they are in compliance with all applicable requirements.

What are the penalties for violating Rule 506(b)?

Issuers who violate Rule 506(b) may be subject to enforcement action by the SEC, including civil penalties and injunctions. Investors who are harmed by a violation of Rule 506(b) may also have a private right of action.