What is Rule 506(b)?

What is Rule 506(b)?

Rule 506(b) under Regulation D allows issuers to raise unlimited capital in private placements from accredited investors and up to 35 sophisticated but non-accredited investors, without public solicitation or advertising. Issuers are required to provide non-accredited investors with extensive disclosure documents and must file a Form D with the SEC after the first securities sale. Securities sold under Rule 506(b) are restricted and cannot be easily resold, emphasizing the rule's focus on private, rather than public, market transactions.

Key aspects of Rule 506(b) include:

  1. Unlimited Capital Raising: Allows issuers to raise an unlimited amount of capital from investors.
  2. Accredited Investors: Issuers can sell securities to an unlimited number of accredited investors. An accredited investor is typically defined by higher income or net worth thresholds.
  3. Non-Accredited Investors: Up to 35 non-accredited investors can participate, but they must be "sophisticated," meaning they have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.
  4. No General Solicitation or Advertising: Issuers are not allowed to use general solicitation or advertising to market the securities.
  5. Information Requirements: While there are no specific information requirements for accredited investors, issuers must provide non-accredited investors with disclosure documents that generally are the same as those used in registered offerings. Issuers must also be available to answer questions from prospective purchasers.
  6. Filing Requirements: Issuers must file a Form D with the SEC, typically within 15 days after the first sale of securities in the offering.
  7. Resale Restrictions: Securities acquired in a Rule 506(b) offering are restricted securities and cannot be easily resold.

Rule 506(b) is widely used for private placements due to its flexibility in raising capital and the ability to include a limited number of non-accredited investors. However, the restriction against general solicitation and advertising means that issuers often must have a pre-existing relationship with potential investors.

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