What is a 506 investor group?
Quick Overview on 506 Investor Groups
A 506 investor group refers to a collective of investors participating in private placements under Rule 506 of Regulation D, as outlined by the U.S. Securities and Exchange Commission (SEC). Rule 506 allows issuers to raise an unlimited amount of money from accredited investors (and up to 35 non-accredited investors under certain conditions) without having to register the securities with the SEC. This rule is part of the broader Regulation D, which provides a framework for the exemption from SEC registration for private placements.
There are two main types of offerings under Rule 506:
- Rule 506(b): Allows for an unlimited amount of capital to be raised from accredited investors and up to 35 non-accredited investors, provided that there is no general solicitation or advertising for the securities being offered, and adequate financial information is provided to the non-accredited investors.
- Rule 506(c): Allows issuers to publicly advertise their offering but requires that all investors in the offering be accredited investors. Issuers must take reasonable steps to verify that their investors are indeed accredited.
Investor groups formed under this rule typically consist of individuals or entities that meet the SEC's criteria for being "accredited investors," meaning they have a certain level of income, net worth, or professional experience, which ostensibly reduces the need for the protections afforded by public registration. These groups pool their resources to invest in opportunities not available to the general public, such as startups, real estate, and other alternative investments.
