Rule 506(c) Offering: What It Is and How It Works

Rule 506(c) allows businesses to raise capital without registering their securities offerings with the U.S. Securities and Exchange Commission (SEC). This rule provides an exemption from the costly federal registration process typically required for public offerings. It facilitates private capital raising, allowing companies to reach a broader audience of potential investors. This framework balances a company’s need for capital with the SEC’s mandate to protect investors.

This exemption is part of Regulation D under the Securities Act of 1933, designed to simplify capital formation for smaller companies. Adhering to Rule 506(c) conditions allows issuers to avoid the complexities of full SEC registration. The rule streamlines fundraising, making it more accessible for entities seeking investment. Understanding its provisions is crucial for both companies looking to raise funds and individuals considering private investments.

Understanding Rule 506(c) Offerings

Rule 506(c), a provision under Regulation D of the Securities Act of 1933, operates as a “safe harbor” exemption from SEC registration. This rule, established in 2013, allows issuers to raise an unlimited amount of capital through private offerings. A defining characteristic of Rule 506(c) is its allowance for general solicitation and advertising, departing significantly from previous private offering limitations.

General solicitation permits issuers to publicly promote their offerings, utilizing various channels to reach investors. This can include online advertisements, social media marketing campaigns, public presentations, and mass emails. The ability to advertise broadly helps companies extend their reach beyond pre-existing relationships, potentially attracting a wider pool of capital.

Despite general solicitation, a fundamental requirement of Rule 506(c) is that all purchasers must be accredited investors. While a company can publicly advertise, only investors meeting specific SEC financial criteria are eligible to participate. This ensures investors are presumed to have the financial sophistication and capacity to evaluate and bear the risks of private investments.

The rule was implemented as part of the JOBS Act, intending to stimulate capital formation for businesses. It provides a mechanism for companies to broadly seek investors while maintaining investor protection through strict accredited investor requirements and mandatory verification. This balance allows for greater fundraising flexibility without compromising regulatory oversight for investor suitability.

Accredited Investor Verification

Mandatory verification of each investor’s accredited status is a core component of a Rule 506(c) offering. Unlike some other exemptions, issuers cannot simply rely on self-certification; they must take “reasonable steps” to confirm all purchasers meet the SEC’s definition of an accredited investor. This places direct responsibility on the issuer to conduct due diligence on prospective investors.

An individual generally qualifies as an accredited investor if they have an annual income exceeding $200,000, or $300,000 jointly with a spouse or spousal equivalent, for the two most recent years, with a reasonable expectation of reaching that income level in the current year. Alternatively, an individual can qualify with a net worth over $1 million, either individually or jointly with a spouse or spousal equivalent, excluding the value of their primary residence. Certain entities, such as trusts, corporations, or limited liability companies with over $5 million in assets, or registered broker-dealers and investment companies, can also qualify.

To verify income, issuers may review IRS forms reporting income for the two most recent years (e.g., W-2s, 1099s, K-1s, or Form 1040s). This documentation should be accompanied by a written representation from the purchaser confirming their expectation to meet the income threshold for the current year. For net worth verification, issuers often review bank statements, brokerage statements, and other statements of securities holdings dated within the prior three months. Liabilities can be confirmed through a consumer report from one of the nationwide consumer reporting agencies, along with a written representation from the investor that all liabilities have been disclosed.

Issuers can also obtain written confirmation from a qualified third party (e.g., a registered broker-dealer, investment adviser, licensed attorney, or certified public accountant). This third-party verification, stating the professional has taken reasonable steps to verify the investor’s accredited status within three months, provides a safe harbor for the issuer. Recent guidance suggests that requiring a high minimum investment (e.g., $200,000 for natural persons or $1 million for legal entities), along with written representations, can serve as a reasonable verification step, provided no facts indicate otherwise.

Distinctions from Other Exemptions

Rule 506(c) is often compared to other private offering exemptions, particularly Rule 506(b). Both rules fall under Regulation D, allowing issuers to raise unlimited capital without SEC registration, but differ significantly in investor solicitation and participation. The primary distinction lies in the allowance of general solicitation.

Rule 506(b) prohibits general solicitation and advertising; issuers generally cannot publicly market their offerings. Instead, under Rule 506(b), offerings are typically limited to investors with whom the issuer has a pre-existing substantive relationship. This contrasts sharply with Rule 506(c), which permits broad advertising and public promotion.

Another difference concerns the types of investors permitted. Rule 506(c) requires all purchasers to be accredited investors, with the issuer taking reasonable steps to verify this status. Rule 506(b), however, offers more flexibility regarding investor types. While it allows unlimited accredited investors, Rule 506(b) permits up to 35 non-accredited investors to participate, provided they are sophisticated enough to evaluate investment merits and risks.

The verification process for accredited investors also varies. Under Rule 506(b), an issuer can generally rely on an investor’s self-certification of accredited status, assuming a reasonable belief in that status. This is less stringent than Rule 506(c)’s mandatory “reasonable steps to verify” standard, which necessitates more concrete evidence or third-party confirmation. These distinctions influence a company’s fundraising strategy, particularly its ability to publicly market and the types of investors it can include.

Issuer Compliance and Filings

Issuers utilizing Rule 506(c) must fulfill specific compliance and filing obligations with regulatory bodies. A central requirement is the submission of Form D to the SEC. This form serves as a notice of sale, not a registration statement, informing the SEC about the offering.

Form D must generally be filed electronically with the SEC within 15 days after the first sale of securities. The form requires basic issuer information (e.g., identity, contact details) and offering specifics (e.g., amount, types of securities, use of proceeds). While issuers can complete Form D, it is often handled by legal counsel to ensure accuracy and compliance.

Beyond federal requirements, issuers must also consider state “blue sky” laws. Rule 506(c) offerings are “covered securities” under federal law, preempting state registration requirements, but states retain authority to require notice filings and collect fees. While states cannot block a Rule 506(c) offering, issuers typically submit a notice filing (often a copy of Form D) and pay a fee in each state where investors reside or are solicited.

State notice filing costs vary, typically ranging from a few hundred to several thousand dollars, depending on the number of states and their fee structures. Failure to comply with these state notice filing requirements can result in penalties, including the suspension of the offering within that state’s jurisdiction. Therefore, diligent attention to federal Form D filing and state blue sky notice requirements is essential for a compliant Rule 506(c) offering.