Raising capital is one of the most challenging aspects of launching a startup or expanding an existing business. Fortunately, the Securities and Exchange Commission (“SEC”) has established two regulations, amongst others, that allow both public and private companies to raise capital from investors: Regulation D 506(b) (“Reg. D 506(b)”) and Regulation D 506(c) (“Reg. D 506(c)”), but they do have different requirements and restrictions.
While both Reg D 506(b) and Reg D506(c) have similar objectives, they differ in terms of their scope and benefits. For instance, Reg D 506(c) offers more flexibility to issuers when it comes to raising capital, but Reg D 506(b) provides more protection for investors by requiring more disclosure and additional information from issuers. Both regulations provide several benefits for businesses seeking to raise capital, such as access to larger pools of investors and reduced costs associated with issuing securities.
Understanding the differences between these two regulations can help businesses make informed decisions about which type is best suited for their needs. So, let’s dive right in and begin with Reg. D 506(b).
Regulation D 506(b)
Regulation D 506(b), also known as a private placement Rule 506(b), is a Securities Act rule that is a powerful tool for businesses seeking capital. Reg. D 506(b) allows companies to raise an unlimited amount of capital from up to 35 non-accredited investors and an unlimited number of accredited investors, without having to register the securities offered and sold with the SEC. With respect to the non-accredited investors however, companies must provide Registration Statement Information (i.e. Form 10) and financial statements.
This saves companies both time and money. It also provides investors with more flexibility in the types of investments they can make. However, no general solicitation or advertising is permitted to market the securities. Investors participating in a 506(b) offering receive “restricted securities,” and the company must file a notice with the SEC (Form D) within fifteen (15) days after the first sale of securities in the offering.
An example of a company utilizing Reg D 506(b) is Dot Hip Hop Partners, LLC. (https://www.sec.gov/edgar/browse/?CIK=1944671).
Now, on the other hand, there’s Regulation D 506(c). Let’s look at that!
Regulation D 506(c)
Regulation D 506(c), also known as a private placement Rule 506(c), is a Securities Act rule that allows companies to raise capital from accredited investors through public advertising and general solicitation. However, companies must take reasonable steps to verify that investors are accredited. Unlike Reg D 506(b), there is no limit on the number of accredited investors that can participate in Reg D 506(c) offerings. However, it’s important to note that 506(c) does not allow non-accredited investors to participate in the offering at any level or point in time.
The accredited verification process in the 506(c) can be more of a burden for investors and issuers alike. Investors may be required to submit financial documents, tax returns, and other sensitive information. Companies may also be required to disclose more information about the investment than they would for a 506(b) offering, as well as verify the investor status of each investor.
As with Reg D 506(b), investors participating in a 506(c) offering receive “restricted securities” and the business must file a notice with the SEC (Form D) within 15 days after the first sale of securities in the offering.
An example of a company utilizing Reg D 506(c) is Digital Asset Monetary Network, Inc. (https://www.sec.gov/edgar/browse/?CIK=1958353https://www.sec.gov/edgar/browse/?CIK=1944671).
Key Differences between Reg. D 506(b) and Reg. D 506(c)
The primary difference between Reg D 506b and 506c is the ability to publicly advertise and promote the offering. 506(c) allows companies to reach a larger audience and potentially attract more investors, but also requires a more stringent verification process. 506(b) limits the number of non-accredited investors that can participate and there is no general solicitation or advertising allowed. However, 506(c) offers a simpler process for both companies and investors, while allowing non-accredited investors to participate.
As both a startup or developing stage company, and a potential investor—novice or savvy, it’s important to understand the differences between these two regulations before proceeding with any offering or making any investment decisions. Choosing between Regulation D 506(b) and Regulation D 506(c) depends on the company’s goals, target audience, and resources. Both regulations offer benefits and drawbacks for a company, and from an investor’s standpoint, it’s always important to fully understand the differences before investing.
So please, always do your due diligence and consult with a securities attorney and/or a financial advisor before doing anything!!
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