Rule 506 of Regulation D includes two separate exemptions from registering securities offerings issuers may use. This Rule is used by companies to raise an unlimited amount of capital.
According to Rule 506(b), Section 4(a)2, investors must fulfill certain requirements to qualify under the exemption.
Qualified Purchasers
Under Rule 506(b), a company may offer its securities for sale to an unlimited number of accredited investors in addition to a maximum of 35 other buyers. Any investor who is non-accredited either alone or with a buyer rep must have financial and business sophistication. This means they must possess certain knowledge and experience in these matters that gives them the capability to weigh the risks and benefits of any potential investment opportunity.
Restriction on General Solicitation
A company may not engage in general solicitation or advertising to market securities under Rule 506(b).
Answering Prospective Investors’ Questions
Also, under Rule 506(b), the company must make itself available to respond to potential investors’ questions.
Under Rule 506(c), a business may generally advertise and solicit an offering and maintain compliance with the Rule’s exemption requirements as long as:
• All investors in the offering are accredited, and
• The company conducts “reasonable steps” to confirm the accredited status of the investors, which may involve having a qualified third-party review tax return, W-2s, credit reports, bank and brokerage statements, and other related documents.
Required Disclosures to Accredited Investors
Companies offering securities must determine the type of information to give to accredited investors, provided what they supply does not violate federal security law anti-fraud statutes. For example, the information companies provide to purchasers must not include misleading or false statements. This includes holding back information if the exclusion causes the information provided to be misleading or false.
Under Rule 506 of Regulation D, companies must give non-accredited investors disclosure papers that are essentially the same as the documents used in Regulation A offerings. These documents include financial statements that may require an accountant’s audit or certification in some cases. The information a company provides to accredited investors must also be provided to non-accredited investors.
Filing Form D
Under Rule 506, purchasers of securities receive restricted securities which may not be sold for either six months or a year at a minimum without having them registered. Companies complying with either Rule 506(b) or Rule 506(c) are not required to register their offerings with the SEC. Instead, they must file “Form D” once they sell their initial securities. This form is to be filed electronically and is short notice to the SEC that includes the addresses and names of the company’s executive officers, promoters, and directors, along with some info about the securities offering.
As seen from the above information about Rule 506 of Regulation D, investors have various obligations under the 506(b) and 506(c) exemptions to benefit from what these Rules offer.