Lee A. Blackman
US Private Placements Offerings- Rule 506(b)
Updated: Jun 23, 2020
Courtesy of the SEC website
Section 4(a)(2) of the Securities Act exempts from registration transactions by an issuer not involving any public offering.
To learn more about Section 4(a)(2), please click the link at the end of this article
Rule 506(b) of Regulation D is considered a “safe harbor” under Section 4(a)(2). It provides objective standards that a company can rely on to meet the requirements of the Section 4(a)(2) exemption. Companies conducting an offering under Rule 506(b) can raise an unlimited amount of money and can sell securities to an unlimited number of accredited investors.
An offering under Rule 506(b), however, is subject to the following requirements:
No general solicitation or advertising to market the securities.
Securities may not be sold to more than 35 non-accredited investors (all non-accredited investors, either alone or with a purchaser representative, must meet the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment).
If non-accredited investors are participating in the offering, the company conducting the offering:
Must give any non-accredited investors disclosure documents that generally contain the same type of information as provided in registered offerings (the company is not required to provide specified disclosure documents to accredited investors, but, if it does provide information to accredited investors, it must also make this information available to the non-accredited investors as well)
Must give any non-accredited investors financial statement information specified in Rule 506 and
Should be available to answer questions from prospective purchasers who are non-accredited investors
Purchasers in a Rule 506(b) offering receive “restricted securities." A company is required to file a notice with the Commission on Form D within 15 days after the first sale of securities in the offering. Although the Securities Act provides a federal preemption from state registration and qualification under Rule 506(b), the states still have authority to require notice filings and collect state fees.
Rule 506(b) offerings are subject to “bad actor” disqualification provisions
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