The information below provides a brief summary of SEC Rule 506(c) which allowed, for the first time, “general solicitations” of Private Placements to Accredited Investors.
- Regulation D was established by the SEC in the 1980’s to define more specifically a manner of privately offering Securities. Most companies issuing private Securities do so by following one of the Rules within Regulation D.
- Rule 506(c) of Regulation D enables Issuers to issue an unlimited amount of Securities so long as only Accredited Investors participate in the Offering.
- Rule 506(c) of Regulation D, approved by the SEC on July 10, 2013, enabled “general solicitation” (i.e., advertising) for Regulation D Offerings where only Accredited Investors may purchase the Securities offered under 506(c). Under this Rule, the SEC must receive the Offering documents as least 15 days before the solicitation is to occur (an Advanced Form D Filing) and also notification within 15 days of the first purchase by an Investor (a Form D Filing). Not making each filing within the prescribed deadlines could result in a prohibition of the Issuer’s access to the Regulation D market for 1 year.
- Virtually any type of Security can be offered to Investors through a 506(c) Private Placement including Promissory Notes or equity interests (e.g., common stock, preferred stock or membership interest in a Limited Liability Company).
- Investors participating in a 506(c) Private Placement must complete an “Accredited Investor Questionnaire.”
- IMPORTANTLY – All Accredited Investors participating in a 506(c) Private Placement must also provide third-party verification that they qualify as an Accredited Investor. The means of verification standards is communicated to Investors by the Issuer but often involves tax returns and/or an accountant’s statement.
For the reader who wants to begin learning about the right questions to ask a Company that is seeking investments, please turn next to “7 Key Questions for Evaluating a Company.”