Private Placements: The Advantages of 506(c)
Companies seeking to raise capital through a private placement have long preferred to proceed under Rule 506 of Regulation D of the Securities Act of 1933. Regulation D provides a safe harbor for private offerings, with three separate registration-exemption schemes governed by Rules 504, 505, and 506. These rules grant issuing companies an exemption from formal registration of the securities, although any issued securities remain subject to federal antifraud provisions and civil liability provisions of the Securities Exchange Act of 1934.
Rule 506 arguably provides the most advantages, with Rule 506(b) allowing issuing companies to raise an unlimited amount of money through an unlimited number of accredited investors, provided the company does not use any general solicitations or general advertising to market the securities and sufficiently vets the sophistication of any non accredited investors. If there are no non accredited investors, the issuing company is free to decide what information to give to the investors, as long as the information complies with antifraud prohibitions of federal securities laws.
The relatively new Rule 506(c) offers a further advantage to issuing companies: the ability to engage in general solicitation or public advertising. Companies may hesitate to proceed under 506(c) because of the additional requirements that the company must verify that anyone who actually invests is an accredited investor, and that the investors themselves must prove they are accredited to participate in the offering. Since the enactment of Rule 506(c), companies that provide compliant investor matching and vetting services have entered the market, offering a solution for issuers that wish to proceed under the new scheme.
This new allowance creates a lot of utility on both sides of the transaction. Issuing companies can greatly broaden their reach when advertising their offering and can thereby raise more money faster. This broad market exposure also clues the company in on the relative strength of the offering. On the other side, investors can more easily search for suitable placements without needing connections to insider networks. The opportunity space is huge for both sides—large enough that it should not be overlooked if the only concern is compliance with Rule 506(c) accredited investor verification requirements. An experienced attorney can help your company address those concerns and unlock the benefits of 506(c).
For a consultation regarding your individual business issues, please contact San Diego Corporate Law today!