RegD 506b

RegD 506b is a provision in Regulation D of the Securities Act. It allows companies to raise funds without registering with the Securities and Exchange Commission (SEC).

What is RegD 506 (b)?‍

The Rule 506(b) of Regulation D allows private institutions to raise capital for a project through investors without having to register with the Securities and Exchange Commission (SEC). Under certain qualifications, a company can raise unlimited funds without registering with the SEC but the company is not allowed to solicit the securities or advertise the securities in the market.

This is a helpful exemption because it allows private companies to raise capital without having to undergo SEC obligations. It also provides objective standards for a company to follow in order to meet the requirements of this regulation. 

‍What are the benefits of RegulationD 506(b)?‍

To private companies, there are many benefits of this regulation. Some of the most important ones are:

• The securities offered under this regulation are not under the SEC rules. 
• Investors can verify their accreditation by themselves, the General Partner need not do it for each investor separately. 
• If only accredited investors take part in the purchase of securities, then the General Partner will not need to undergo mandatory disclosure documents with SEC which is required to be provided to non-accredited investors.

Are there any limitations to this rule?‍

As much as this rule benefits private institutions in offering their securities for unlimited fundraising, there are certain limitations as well that the company needs to follow at all costs. 

• The company cannot advertise the securities in the market or talk about it publicly or on public platforms. 
• The securities can only be bought by accredited investors and up to 35 unaccredited investors only. 
• Unaccredited investors must meet certain sophistication requirements to be able to take part in the deal. 
• A company is not allowed to take up unaccredited investors without providing disclosure documents as is required by the law.   

What is the difference between Rule 506(b) and 506(c)?‍

The difference between 506(b) and 506(c) rules is easy to understand. While 506(b) allows up to 35 unaccredited investors to participate, rule 506(c) only allows accredited investors to purchase the securities. 

Under rule 506(b), advertising the securities is strictly prohibited. Contrary to this, companies or GPs can advertise their securities in the market in whichever manner they want without any investor relationship requirement. 

Conclusion

Companies who fulfill the requirements under the rule of 506(b) and 506(c) do not need to register their securities with the SEC but they do need to fill out the ‘Form D’ electronically with the SEC after they have sold their first security. This regulation is a boon for private institutions and non accredited investors alike to participate in bigger investment projects. A company should define its objectives before choosing to list their company under 506(b)b or 506(c) rules. For this, it is best to take help of a legal attorney to pave the way.