When planning your fundraising strategy, you might be wondering whether to publicly solicit and advertise your efforts. Understanding the regulatory options, particularly the differences between Rule 506(b) and Rule 506(c) of Regulation D, is crucial as they define permissible ways to reach potential investors.
What is Rule 506(b)?
Rule 506(b) of Regulation D serves as a “safe harbor” under Section 4(a)(2) of the Securities Act, designed for companies that prefer a more private approach to fundraising. Here’s what it entails:
Raise Unlimited Funds: There is no cap on how much money you can raise under this exemption.
Unlimited Number of Accredited Investors: You can accept investments from any number of accredited investors.
Up to 35 Non-Accredited Investors: These investors must be sophisticated, having enough financial knowledge to evaluate the risks.
Key Feature of 506(b):
No Public Solicitation or Advertising: Fundraising must be conducted without general solicitation or public advertising, meaning it’s typically limited to private networks and existing relationships.
What is Rule 506(c)?
Rule 506(c) allows for a more open approach, enabling public solicitation and advertising of your fundraising efforts, under specific conditions:
Broad Solicitation and Advertising Permitted: You can freely advertise your offering across various platforms, including online, print, and public events.
Exclusively Accredited Investors: Only accredited investors can participate, and their status must be verified by the issuer.
Verification of Accredited Investor Status Required: You must take reasonable steps to ensure investors meet the accredited criteria, possibly by reviewing financial documents or obtaining professional confirmations.
Choosing Between 506(b) and 506(c)
Consider the following to determine the best fit for your fundraising strategy:
Desire to Publicly Solicit and Advertise: If you want to utilize general advertising to reach potential investors, Rule 506(c) supports this approach. Rule 506(b) suits those who prefer to engage within private networks and avoid the rigor of verifying every investor’s accredited status.
Investor Network: Rule 506(c) may be advantageous if you have a broad outreach capable of attracting verified accredited investors. Conversely, Rule 506(b) is effective if your potential investor base includes knowledgeable, sophisticated individuals who might not be accredited.
Both Rule 506(b) and Rule 506(c) offer strategic advantages for different fundraising approaches. Your choice will largely depend on how you prefer to solicit and advertise your investment opportunities, along with the nature of your investor network.