Some advantages of Rule 506(b) include:

  • Rule 506(b) is a widely used exemption so investors, issuers, placement agents, and lawyers are familiar with it;
  • This exemption is available to public companies;
  • The amount of capital that can be raised is not capped;
  • State registration and qualification are preempted;
  • Offerings are not limited to the state where the issuer has its principal place of business and is doing business;
  • No line item disclosures are required unless sales are made to unaccredited investors (Rule 506(b) offerings are rarely structured to do so); and,
  • “Bad actor” disqualifications apply.

Some disadvantages of Rule 506(b) are:

  • General solicitation and advertising is not permitted;
  • Non-accredited investors are limited to 35.

Yes, as long as the conditions of Rule 506(c) are satisfied with respect to all sales of securities in the offering. To the extent the issuer already filed a Form D indicating its reliance on Rule 506(b), it must amend the Form D to indicate its reliance on Rule 506(c) instead, as that decision represents a change in the information provided in the previously-filed Form D.

Purchasers in a Rule 506(b) offering receive “restricted securities.”

“Restricted securities” are previously-issued securities held by security holders that are not freely tradable. The Securities Act, Rule 144, identifies what offerings produce restricted securities. After such a transaction, the security holders can only resell the securities into the market by using an effective registration statement under the Securities Act or a valid exemption from registration for the resale, such as Rule 144.

While the SEC regulates and enforces the federal securities laws, each state has its own securities regulator who enforces what are known as “blue sky” laws. If a company is selling securities, it must comply with both federal regulations and state securities laws and regulations in the states where securities are offered and sold (typically, the states where offerees and investors are based).

Under the Securities Act, if a company’s offering qualifies for certain exemptions from registration, that offering is not required to be registered or qualified by state securities regulators. Even if the offering is made under one of those exemptions, the states still have authority to investigate and bring enforcement actions for fraud, impose state notice filing requirements, and collect state fees. The failure to file, or pay filing fees regarding, any such materials may cause state securities regulators to suspend the offer or sale of securities within their jurisdiction. Companies should contact state securities regulators in the states in which they intend to offer or sell securities for further guidance on compliance with state law requirements.