Rule 506(c) FAQs | Regulation D PPMs

What are some of the advantages and disadvantages of Rule 506(c)?

Some advantages of Rule 506(c) include:

General solicitation and advertising is permitted;
The amount of capital that can be raised is not capped;
State registration and qualification is preempted;
The offering is not limited to the state where issuer has its principal place of business and is doing business; and,
No line item disclosures are required because the securities can be sold only to accredited investors.

Some disadvantages of Rule 506(c) include:

The issuer cannot sell to unaccredited investors; and,
The issuer must take “reasonable steps” to verify accredited investor status of the investors.

Does the third-party verification method in the non-exclusive list of verification methods in Rule 506(c) include written confirmations from an attorney or certified public accountant who is licensed or duly registered, as the case may be, in good standing in a foreign jurisdiction?

Yes. This method of verification is not limited to written confirmations from attorneys and certified public accountants who are licensed or registered in a jurisdiction within the United States.

An issuer takes reasonable steps to verify the accredited investor status of a purchaser and forms a reasonable belief that the purchaser is an accredited investor at the time of the sale of securities. Subsequent to the sale, it becomes known that the purchaser did not meet the financial or other criteria in the definition of “accredited investor” at the time of sale. Assuming that the other conditions of Rule 506(c) were met, is the exemption available to the issuer for the offer and sale to the purchaser?

Yes. An issuer does not lose the ability to rely on Rule 506(c) for an offering if a person who does not meet the criteria for any category of accredited investor purchases securities in the offering, so long as the issuer took reasonable steps to verify that the purchaser was an accredited investor and had a reasonable belief that such purchaser was an accredited investor at the time of the sale of securities.

If an issuer commenced an offering intending to rely upon Rule 506(c) but did not rely upon any form of general solicitation in connection with the offering, may the issuer subsequently determine to rely upon Rule 506(b) for the offering?

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.

Can securities issued in a private offering under Rule 506(c) be freely traded?

Purchasers in a Rule 506(c) 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.

Do state law requirements apply to my Rule 506(c) offering?

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.