Rule 506c - Securities Exemption
Broadest Securities Registration Exemption
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What is a Rule 506 exemption?
Rule 506 of Regulation D allows for two exemptions of securities issuances. The statutory authority for a Rule 506 is pursuant to Section 4(a)(2) of the 33 Act. Rule 506 exemptions are the most commonly employed exemptions to securities registration.
Next Article: Restricted Securities and Rule 144 Back to: SECURITIES LAW
What is a Rule 506(c) Exemption?
The JumpStart our Businesses Act of 2013 (JOBs Act) made extensive changes to the securities registration exemption regime. As a result, it allowed the SEC to develop Rule 506(c) exemption with the following characteristics:
Issuer Protections - Rule 506(c) applies to issuers to the same extent as Rule 506(b).
Dollar Limits - The exemption allows an issuer to raise an unlimited amount of funds.
Purchaser Requirements - The most daunting requirement of Rule 506(c) offerings is the requirement that the issuer verify that each purchaser of securities is accredited. An issuer who fails to exercise reasonable care in making this determination risks losing the exemption. The standard for judging an issuers reasonable efforts to make this determination is uncertain. The SEC identified four primary methods of verifying that an individual is an accredited investor, including:
Annual Income - The issuer may examine proof of the purchasers income, such as IRS filings from the last two tax years.
Note: This may require a certification by the issuer that they expect to sustain the previous years earnings.
Net Worth - The issuer may examine bank statements, brokerage statements and other statements of securities holdings, certificates of deposit, tax assessment, or appraisal reports, and consumer reports from a national agency, or obtain a written representation that purchaser has disclosed all liabilities.
Professional Certification - The issuer may receive a written representation from a registered broker-dealer or investment advisor, licensed attorney, or CPA that such person has taken reasonable steps to verify that the purchaser is an accredited investor as of the last three months.
Written Verification - If the prospective purchaser is a previously verified accredited purchaser, a written verification that such person is still accredited.
Restricted Securities - The shares received by the investor under the exemption are restricted.
General Solicitation - The rule allows for general solicitation in an issuance where all purchasers are accredited investors and the issuer takes reasonable care to determine that each investor is accredited.
Private Placement Memorandum - Before consummating a sale, the issuer must provide the purchaser with adequate disclosures under Regulation D.
State Regulation - Rule 506(c) are covered securities that are exempt from state regulation.
Why do you think Congress felt the need to provides for a specific exemption to accredited investors that also allows for general solicitation? Do you feel that the ability to generally solicit purchasers of securities undermines the purpose of public disclosure? Why or why not?
ABC Corp is a wildly successful startup company that is growing by 300% per year. ABC needs about $100 million in investment capital reach its growth goals for the next 18 months. In a brief letter, can you summarize the benefits and drawbacks of seeking an exemption from securities registration under Rule 506? Specifically focus on the differences between rules 506(b) & 506(c).
- Securities Law (Intro)
- What are Securities Laws?
- What is a Security?
- What qualifies as an Investment contract?
- What are the primary federal securities laws?
- What are the regulatory goals of security laws?
- What is the Securities and Exchange Commission?
- What is an Initial Public Offering?
- What is a Direct Public Offering?
- What is Crowdfunding?
- Securities Act of 1933
- What is an Offer to Sell securities?
- Who are the parties regulated in an offer to sell securities?
- What are the primary disclosure documents required in an offer to sell securities?
- Forward Looking
- Red Herring Prospectus (Securities) Definition
- Registration of Securities
- What is an issuer allowed to do at each stage of the registration process?
- How are issuers classified for purposes of the registration and offering process?
- What is an issuer allowed to do during the Pre-filing Period?
- What are the limitations on the issuer during the Post-filing, Waiting Period?
- What is an issuer allowed to do during the Post-Effective Period?
- What is an Emerging-Growth Company?
- What type of information must an issuer disclose?
- What laws govern the mechanics of disclosure in a securities offering?
- Deficiency Letter (Securities Law)
- Registration Exemptions Securities Act of 1933
- What are Exempt Securities and Exempt Transactions?
- What are Restricted Securities?
- Section 3(a)?
- Section 3(b)?
- What is a Rule 147 Exemption?
- What is a Section 4(a) Exemption?
- Section 4(a)(5)?
- What is a Regulation A Exemption?
- What are Regulation D Exemptions?
- What is a Rule 504 Exemption?
- What is a Rule 505 Exemption?
- What is a Rule 506(b) Exemption?
- What is a Rule 506(c) Exemption?
- What is Rule 502(d) and the Rule 144 Safe Harbor?
- Rule 144a
- What are the disclosure requirements for companies employing an exemption?
- What is the requirement to file Form D?
- What is the effect of failing to register an offering under Section 5?
- Liability Under the Securities and Exchange Act of 1933
- What is civil liability under Section 11 of the 33 Act?
- What is civil liability under Section 12 of the 33 Act?
- What are defenses available to charges under Sections 11 and 12?
- What is civil liability under Section 17 of the 33 Act?
- What is potential criminal liability under the 33 Act?
- The Security Exchange Act of 1934
- When must an issuer register pursuant to the 34 Act?
- What disclosures are required of reporting companies under the 34 Act?
- What is liability under Section 10(b) and Rule 10(b)(5)?
- What is insider trading under Rule 10(b)(5)?
- What damages are available under Section 10 and Rule 10(b)(5)?
- What is insider trading under Section 14 of the 34 Act?
- What is liability under Section 16 of the 34 Act?
- What is liability under Section 18 of the 34 Act?
- What is criminal liability under the 34 Act?
- Liability under the Securities Enforcement Remedies Act?
- Blue Sky Laws State Securities Laws
- What are Blue Sky Laws?
- When is an issuer required to comply with state securities laws?
- What are the registration requirements under state law?
- What is Coordinated Registration under state law?