𝗪𝗵𝗮𝘁 𝗶𝘀 𝗮 𝗿𝘂𝗹𝗲 𝟱𝟬𝟲(𝗯) 𝗼𝗳𝗳𝗲𝗿𝗶𝗻𝗴?
A 506(b) offering, originally called rule 506, is a type of offering that allows a company to raise as much money as they want from as many investors as they want. However, most of these investors must be accredited investors. Only 35 of these investors can be non-accredited.
𝗕𝘂𝘁 𝘄𝗵𝗮𝘁 𝗺𝗮𝗸𝗲𝘀 𝗮𝗻 𝗶𝗻𝘃𝗲𝘀𝘁𝗼𝗿 𝗮𝗰𝗰𝗿𝗲𝗱𝗶𝘁𝗲𝗱?
For individuals, accredited investors are those who:
- Made more than $200,000 annually for the past two years
- Had a joint income of more than $300,000 annually for the past two years
- As an individual or as a couple, have a net worth of over $1,000,000 not including the value of their primary residence
Additionally, when an offering is filed under rule 506(b), investors can self-verify their accreditation status. As we’ll see in a 506(c) offering, investors will have to be verified by a third party in that case.
In addition, rule 506(b) prohibits companies from advertising their securities to the public. They can advertise their company but they can’t advertise specific deals or publicize specific offerings.
If someone has met and spoken with an investor multiple times, they can discuss an offering. You must have a real relationship with someone before you can present a deal.
𝗪𝗵𝗮𝘁 𝗶𝘀 𝗮 𝗿𝘂𝗹𝗲 𝟱𝟬𝟲(𝗰) 𝗼𝗳𝗳𝗲𝗿𝗶𝗻𝗴?
In 2012, rule 506(c) was created, allowing companies to advertise their offerings and not just their company.
Only accredited investors are allowed to invest under rule 506(c) with no exceptions, and investors must be verified by a third party. This can be done by the investor providing a copy of their W-2s or their tax returns. Otherwise, the investor can ask a professional such as an accountant or lawyer to inform the offering issuer that the investor is accredited.
𝗣𝗿𝗼𝘀 𝗮𝗻𝗱 𝗖𝗼𝗻𝘀
- Investors can self-verify if they are accredited
- Can have up to 35 non-accredited investors
- The offering cannot be advertised
- Usually requires additional steps when non-accredited investors are involved
- The offering can be advertised
- Generally, fewer steps are required because we are only working with accredited investors
- Non-accredited investors are not allowed to invest
- Investors must be verified by a third-party
𝗪𝗵𝗶𝗰𝗵 𝗼𝗻𝗲 𝗶𝘀 𝗯𝗲𝘀𝘁?
In conclusion, it ultimately comes down to what you are looking for and what you have. If you are a company that has a relationship with a set group of investors, rule 506(b) is likely for you because you already have people who trust you. But if you are a smaller company needing to raise capital, rule 506(c) can help you find investors by advertising your deal. appealing to potential investors wanting to make a profit.
Today, the majority of companies follow rule 506(b). However, rule 506(c) is a way for smaller companies to attract investors even if they don’t have a relationship with them.