Rule 506 Roadmap l Ask Securities Lawyer 101

Private placement offerings under Rule 506 of Regulation D of the Securities Act of 1933, as amended (the “Securities Act”) are a cost effective and relatively quick way for private companies to raise capital prior to their going public transactions.  According to the Securities and Exchange Commission (the “SEC”) Rule 506 is the relied upon by issuers more than any other exemption from registration.  Rule 506(c) fundamentally changes the way unregistered offerings may be conducted. While the rule imposes stringent requirements, these requirements are manageable for issuers putting effective  compliance strategies into place.

Issuers may use general solicitation and advertising in Rule 506 (c) offerings made to accredited investors, making it easier for issuers to raise capital and obtain the necessary shareholder base for their going public transaction. This blog post addresses the common questions we receive about private placement offerings made in reliance upon Rule 506(c) under the JOBS Act.

Q. What is a Rule 506 offering?

A. Rule 506 of Regulation D provides issuers with a safe harbor from the registration requirements for certain private placement offerings.

Q. What are the maximum amounts that can be raised in  a securities offering conducted in reliance upon Rule 506′s safe harbor?

A.   Rule 506 does not limit the amount that can be raised.

Q. Can all companies rely on the securities exemption provided by Rule 506 of Regulation D?

A. Yes, Rule 506 is available to both private and public companies regardless of whether they are reporting with the SEC.  It is also available to both domestic and foreign issuers.

Q. Is there a limit on the number of purchasers who can invest in a Rule 506 Offering?

A.  No. After September 23, Rule 506(b) will allow issuers to sell securities to up to 35 non-accredited investors and an unlimited number of accredited investors. Rule 506(c) will allow issuers to sell securities to an unlimited number of accredited investors.

Q. How did the JOBS Act change Rule 506 offerings?

A.  The JOBS Act eliminated the prior prohibition against general solicitation and advertising in Rule 506 securities offerings, provided that the securities offered are sold only to accredited investors; however, the issuer is required to take “reasonable steps” to verify that all investors are accredited. After September 23, 2013, Rule 506 offerings being made without general solicitation will be conducted pursuant to Rule 506(b).

Q. Can an issuer conduct offerings under 506(b) and Rule 506(c) at the same time?

A.  Probably not if the securities are of the same class because it would be difficult if not impossible to prevent the general solicitation used in connection with a Rule 506(c) offering from impacting the simultaneous Rule 506(b) offering.

Q. Can an issuer conduct a Rule 506(b) offering after a Rule 506(c) offering?

Yes, once a Rule 506(c) offering has been completed, the issuer can conduct an offering under Rule 506(b) but the issuer should undertake an integration analysis.

Q.  Are there any new requirements that apply to investments in Rule 506 (b) offerings?

A.  The Dodd-Frank Wall Street Reform and Consumer Protection Act imposed bad boy provisions. The Dodd Frank Act requires the SEC to adopt rules that would prohibit the use of the Rule 506 exemption for any securities offering in which certain felons and other bad actors are involved. The new provisions prohibit issuers as well as underwriters, placement agents, directors, executive officers, and certain shareholders from participating in Rule 506 offerings, if they have been convicted of, or are subject to court or administrative sanctions for, securities fraud or other violations of specified laws. This prohibitions apply to offerings conducted under Rule 506(c0.

Q. Can an issuer rely on the Section 4(a)(2) exemption in connection with a Rule 506 offering made after September 23?

A. Issuers may rely on the private offering exemption provided by Section 4(a)(2) if general solicitation and advertising are not used as an alternative to an offering made under Rule 506(b).  The Section 4(2) exemption cannot be used in a Rule 506(c) offering because general solicitation is used.

Q. In connection with a Rule 506 offering, is the issuer required to undertake investor verification steps ?

A. When general solicitation is used the issuer must take steps to verify accredited investor status. The issuer must demonstrate a reasonable belief that the investors in the offering are accredited investors. As a result, the issuer must some conduct diligence if it relies upon a third-party verification service. For offerings made in reliance upon Rule 506(b), issuers are not required to confirm accredited investor status.

Q. Are the securities sold in offerings made under Rule 506(b) and (c) restricted securities?

A. Yes, securities sold in Rule 506(b) and Rule 506(c) offerings are restricted securities. The changes to Rule 506(c) would not affect tradability or resales, because Rule 506 is available only to issuers.

Q. Do companies have to make a filing with the SEC if they conduct a securities offering under Rule 506 (c) of Regulation D?

A. While companies relying upon the Rule 506 exemption do not have to register their securities, they must file a Form D with the SEC.  This includes issuers conducting offerings under Rule 506(c). In these offerings, Form D requirements have been expanded to include among other things, disclosure of whether general solicitation and/or advertising is used in the offering.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com.   This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. For more information about going public and the rules and regulations affecting the use of Rule 144, Form 8K, crowdfunding, FINRA Rule 6490, Rule 506 private placement offerings and memorandums, Regulation A, Rule 504 offerings, SEC reporting requirements, SEC registration statements on Form S-1 , IPO’s, OTC Pink Sheet listings, Form 10 OTCBB and OTC Markets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, direct public offerings and direct public offerings please contact Hamilton and Associates at (561) 416-8956 or [email protected]. Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855
www.SecuritiesLawyer101.com