The Difference Between A 506(b) Offering And A 506(c) Offering
The Difference Between A 506(b) Offering And A 506(c) Offering- the difference between a traditional 506(b) offering and a 506(c) offering that allows general solicitation and advertising.
As previously discussed both Rule 506(b) and (c) offerings pre-empt state law and both allow for an unlimited capital raise and for continuous offerings.
Rule 506(b) allows offers and sales to an unlimited number of accredited investors and up to 35 unaccredited investors, provided if any unaccredited investors are included in the offering, certain delineated disclosures are provided to all potential investors. Under Rule 506(b) a company can rely on an investors representation as to whether they are accredited which is usually accomplished by checking a box in a subscription agreement or questionnaire. Rule 506(b) prohibits the use of any general solicitation or advertising in association with the offering.
Rule 506(c) allows general solicitation and advertising however all sales of securities are strictly limited to accredited investors and the Company has an added obligation to take steps to verify accredited status of the investor. The investor cannot simply check a box or self-verify.
A gating question is whether a company is engaging in general solicitation or advertising for purposes of determining whether they are utilizing Rule 506(b) or (c). I am going to just run through some facts and scenarios that either result in or don’t result in solicitation and advertising. In a prior Lawcast in this series I discussed conferences and venture fairs so I’ll leave that out.
- SEC interpretations and case law have established the principle that where there is a pre-existing, substantive relationship with offerees, offers will not be considered a general solicitation. A “pre-existing” relationship is one that the company, or someone acting on the company’s behalf such as through a broker-dealer or investment adviser, has formed with the prospective investor prior to the commencement of the offering. the existence of a pre-existing relationship depends on facts and circumstances. There is no set minimum amount of time that a relationship must exist to be considered pre-existing.
- A “substantive” relationship is one in which the company, or someone acting on the company’s behalf such as a broker-dealer, has sufficient information to evaluate, and in fact does evaluate, such prospective investors’ financial circumstances and sophistication and established accreditation. Self-certifying by checking a box is not enough to establish a “substantive” relationship.
- unrestricted publicly available websites that offer or sell securities constitute a general solicitation;
- not all communications are solicitations for the sale of securities, even if the company is engaged in an offering – so advertisements or disseminated information related to a company’s products or services without the mention of securities, will not be a general solicitation unless it is clear that the communication is designed to prime the market or arouse interest in a securities offering;
- The absence of a pre-existing relationship does not automatically make a communication a general solicitation – a company may solicit prospective investors they are introduced to who are members of an informal, personal network of individuals or investors, such as angel investor groups. As a rule of thumb, if all members of the group or network are sophisticated and experienced in the type of investment being offered, members can be solicited without triggering the solicitation and advertisement rules under Regulation D.