Effective capital raising is essential for businesses seeking to grow, and one of the most commonly used frameworks for this is Rule 506. Part of Regulation D, Rule 506 offers two major exemptions – 506(b) and 506(c) – that allow companies to raise capital without registering with the SEC. These exemptions provide flexibility for companies seeking to attract investors while complying with federal securities laws.
Raising Capital Under Rule 506(b)
Rule 506(b) allows businesses to raise unlimited capital from an unlimited number of accredited investors and up to 35 non-accredited but sophisticated investors. This exemption is highly appealing to startups and small businesses because it offers a streamlined process, making it easier to access much-needed capital. Companies that use Rule 506(b) are not allowed to solicit investments publicly, meaning they must depend on pre-existing relationships and direct outreach to prospective investors. This restriction helps ensure only those investors who understand the risks and possess sufficient financial knowledge and cushion can participate in the offering.
Importantly, while Rule 506(b) permits investments from non-accredited investors, it does require these individuals to possess sufficient financial knowledge to evaluate the risks associated with the investment. In addition, companies must provide investors with full disclosure about the offering to comply with anti-fraud provisions.
Capital Raising Under Rule 506(c)
Rule 506(c), introduced in 2013, expanded the options for businesses by allowing general solicitation and advertising of their investment opportunities. Under this exemption of Rule 506, companies can publicly promote their offerings to reach a broader pool of accredited investors. However, the trade-off is that all investors in a Rule 506(c) offering must be accredited investors, and issuers are required to take reasonable steps to verify that each investor fulfills the SEC’s criteria for investor accreditation.
This general solicitation feature opens up opportunities for businesses to raise capital through advertising, online platforms, and other public channels. Rule 506(c) offerings have become particularly popular in the real estate sector and with crowdfunding campaigns, where attracting a large base of accredited investors is key to success.
The flexibility offered by Rule 506 through its 506(b) and 506(c) exemptions has made it a powerful tool for businesses seeking to raise capital. Whether relying on pre-existing investor relationships or using general solicitation to reach a larger audience, Rule 506 provides a compliant pathway for businesses to fund their growth.
