REGULATION D RULE 506

Rule 506 of Regulation D

NOTE: According to a report done by the SEC 99% of reported Regulation D offerings used Rule 506 despite the fact that two thirds of the Issuers could have used Rule 504 or 505 based on offering size . The primary reason for this is that ALL states recognize Rule 506 as it is written at the federal level, which makes it much easier to stay compliant with state blue sky laws.

Rule 506 of Regulation D is considered a “safe harbor” for the private offering exemption of Section 4(2) of the Securities Act. Companies using the Rule 506 exemption can raise an unlimited amount of money. A company can be assured it is within the Section 4(2) exemption by satisfying the following standards:

  • The company cannot use general solicitation or advertising to market the securities unless they only accept investments from Accredited Investors pursuant to Rule 506(c);
  • The company may sell its securities pursuant to Rule 506(b)to an unlimited number of “accredited investors” and up to 35 other purchases. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated—that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;
  • Companies must decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that are generally the same as those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well;
  • The company must be available to answer questions by prospective purchasers;
  • Financial statement requirements are the same as for Rule 505; and
  • Purchasers receive “restricted” securities, meaning that the securities cannot be sold for at least a year without registering them.

While companies using the Rule 506 exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what is known as a “Form D” after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s owners and stock promoters, but contains little other information about the company.

If you are thinking about investing in a company making a Rule 506 offering, you should call the SEC’s Public Reference Branch at (202) 551-8090 or send an email to publicinfo@sec.gov to find out whether a Form D has been filed or to obtain a copy. If the company has not filed a Form D, this should alert you that the company may not be in compliance with the federal securities laws.

You should always check with your state securities regulator to see if it has more information about the company and the people behind it. Be sure to ask whether your state regulator has cleared the offering for sale in your state. You can get the address and telephone number for your state securities regulator by calling the North American Securities Administrators Association at (202) 737-0900 or by visiting its website. You’ll also find this information in the state government section of your local phone book.

Source: Securities and Exchange Commission (2016)