Section 506 Offerings: Rules and Filing Requirements

Companies seeking to raise capital often face a choice. The path of a public offering involves a lengthy and expensive registration process with the U.S. Securities and Exchange Commission (SEC). For many businesses, the associated costs and complexities of a full public registration can be prohibitive.

Fortunately, federal securities laws provide exemptions that allow companies to offer and sell securities without this intensive registration. These exemptions provide a more streamlined and cost-effective route to capital formation.

Exploring the Offering Pathways

The SEC’s Regulation D provides several exemptions from registration requirements, with Section 506 being a widely used “safe harbor.” This section allows companies to raise an unlimited amount of capital. Within Section 506, there are two distinct pathways a company can follow, each with its own set of rules.

The first option, Rule 506(b), is for offerings conducted without general solicitation or advertising. This means a company cannot use broad, public marketing methods like television commercials or online banner ads to find investors. Instead, fundraising under this rule typically relies on pre-existing, substantive relationships with potential investors. It is often the preferred route for companies with established networks of contacts.

The second pathway is Rule 506(c), which permits companies to engage in general solicitation and advertising to market their offering. This opens the door to a wider range of marketing activities, including public websites, social media promotion, and presentations at industry events. The trade-off for this expanded marketing freedom is a stricter set of requirements regarding who can ultimately invest and how their status is confirmed.

Investor and Solicitation Rules

The rules for investors and communication differ significantly between the two pathways. A central concept is the “accredited investor,” which the SEC defines by financial criteria. An individual qualifies with a net worth over $1 million (excluding their primary residence) or an annual income over $200,000 ($300,000 joint) for the last two years with the same expectation for the current year. Certain entities, like banks, and individuals with specific professional licenses also qualify.

Under a Rule 506(b) offering, a company can sell securities to unlimited accredited investors and up to 35 non-accredited investors. These non-accredited investors must be “sophisticated,” meaning they have enough financial knowledge to evaluate the investment’s risks. If any non-accredited investors participate, the company must provide them with detailed disclosure documents, including audited financial statements.

In contrast, a Rule 506(c) offering is exclusively limited to accredited investors. Companies choosing this path must take “reasonable steps to verify” that every investor is accredited. This verification is a higher burden than in a 506(b) offering, where a company can often rely on an investor’s self-certification. Examples of reasonable verification steps include reviewing recent tax returns, bank statements, or obtaining a written confirmation from an investor’s attorney or certified public accountant.

Preparing the Required Notice Filing

Regardless of the pathway chosen, a company must notify the SEC of the sale by filing a Form D. This form is a notice, not an approval request, that provides basic information about the offering. It must be completed with specific details about the company and the securities being sold.

The required information on Form D includes:

• The issuer’s identity and address
• The names of its executive officers and directors
• The specific exemption being claimed (Rule 506(b) or 506(c))
• The total offering amount
• The amount sold to date
• The date of the first sale

Before filing, the company must also check for “Bad Actor” disqualifications under Rule 506(d). This rule prohibits using the exemption if the issuer or other “covered persons,” like directors or officers, have experienced a disqualifying event, such as certain criminal convictions or securities-related court orders. The company must exercise reasonable care to ensure none of its key participants are disqualified.

Submitting Your Form D

Form D must be filed electronically through the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system, as paper filings are not accepted. To use EDGAR, a company must first obtain a Central Index Key (CIK) by submitting a Form ID application. This process can take several business days to complete.

The deadline for filing Form D is no later than 15 calendar days after the first sale of securities. The SEC defines the first sale as the moment an investor is contractually committed to invest. If the deadline falls on a weekend or holiday, the filing is due the next business day. The SEC does not charge a fee for this filing.

A Section 506 offering preempts state-level registration requirements, known as “blue sky” laws, but states retain some authority. Most states require a notice filing, which involves submitting a copy of the federal Form D. This state-level filing is usually accompanied by a fee that varies by jurisdiction.