When it comes to raising capital for your company, it is vital to successfully navigate the regulatory landscape. Rule 506 under Regulation D of the Securities Act offers two distinct paths: Rule 506(b) and Rule 506(c). Each has its own set of advantages and considerations. Below, we offer key information to help you determine whether your company should opt for Part B or Part C of Rule 506.
Understanding Rule 506(b)
Rule 506(b) has long been a popular choice for companies seeking to raise capital. Under 506(b), companies are permitted to raise unlimited amounts of capital from accredited investors and up to 35 non-accredited investors. The key distinction lies in the Rule’s prohibition against general solicitation. This means companies are forbidden from advertising their offering to the general public. The approach is often advantageous when it is desirable to maintain a more discreet fundraising process.
When Rule 506(c) Trumps Rule 506(b)
On the other hand, Rule 506(c) introduces a different dynamic, the lifting of the general solicitation restriction. This freedom allows companies to openly market and advertise their securities offerings. However, there is a trade-off. To participate in a 506(c) offering, all investors must be accredited and verified as such, adding an extra step to the fundraising process. This option is particularly ideal for companies that want to focus on broad outreach and are confident about their ability to attract a pool of accredited investors.
Key Considerations for Rule 506 (b) and (c) Exemptions
Determining whether to utilize Rule 506(b) or Rule 506(c) requires a careful evaluation of your company’s specific needs and circumstances. Companies with an established network of investors may find the confidentiality of 506(b) of great benefit. On the other hand, Rule 506(c) provides advantageous marketing opportunities, making it an attractive option for companies aiming to achieve widespread exposure among potential investors.
Rule 506 in Action: Practical Insights
The importance of regulatory compliance and legal guidance when navigating Rule 506 cannot be overstated. Whether you lean towards 506(b) or 506(c), ensuring that your offering aligns with regulatory requirements is paramount. The use of clear documentation and legal counsel is important to steer your company through the intricacies of securities regulations.
The choice between Rule 506(b) and Rule 506(c) depends on your company’s goals, marketing strategy, and existing network. While confidentiality may be valued in certain situations (506(b)), the benefits of open solicitation and a broader investor base might be compelling for others (506(c)). Ultimately, understanding the nuances of each option and seeking professional advice can enable your company to make better decisions when it comes to capital raising.
