A Short Primer on the Rule 506(c) Offering

According to Rule 506(c) of Regulation D, issuers are able to advertise security offerings under certain conditions. When this Rule was implemented in 2013, it eliminated an eight-decade old prohibition against advertising and general solicitation of private placements. It is important for issuers to carry out due diligence prior to bringing on any third-party that claims to deliver services related to their Rule 506(c) offerings in order to avoid becoming disqualified for the exemption. The issuer can also avoid other potential securities violations through the exercise of proper due diligence.

Requirements for the Use of 506(c)

Although the exemption provided by 506(c) enables issuer’s to advertise their offerings, it also comes with strict requirements. Other securities laws also apply when third-party services are used to advertise a Rule 506(c) offering.

For those who do not comply with the requirements provided under Rule 506(c), there are a number of potential pitfalls. It is important to understand that only accredited investors can participate in these offerings, even though the advertisements may be broadly directed out of necessity. As opposed to what was required in the past, issuers must take “reasonable steps” to verify any investors to whom they sell securities are accredited investors.

Organizations and individuals that handle advertising for businesses issuing offerings under Rule 506(c) are obligated to follow the provisions of Section 17(b) of the Securities Act of 1933. Under this Section, advertisers are identified as publishers and are required to disclose the amount and source of the consideration received for their work in a public manner and with specificity.

No Exaggerated Claims Permitted

Advertisers need to be careful about providing honest representations about the issuer and its securities and not neglect to include the necessary facts so that honest, not misleading statements are made. Failure to do so is a failure to comply with the antifraud provisions of the SEC. SEC investigations and/or enforcement actions may occur if exaggerated claims are made about the company by investor relations firms or certain third parties.

As an issuer, it is important to hire a reputable firm when evaluating advertisers in relationship to a Rule 506(c) offering. The firm should fully understand the provisions of this Rule. The issuer should avoid promoters who fall under the bad actor disqualification category designated by the SEC. Some of the events that can be disqualifying include SEC disciplinary orders, court injunctions and restraining orders, SEC cease-and-desist orders, criminal convictions, and more.

Hopefully, the above information provided on the Rule 506 (c) offering will help you more effectively utilize this tool when advertising securities offerings.

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