What Are Rule 506 Offerings?
What Are Rule 506 Offerings? To wrap up my series on this topic I will hit on a few final points regarding Rule 506 offerings. Both Rule 506(b) and 506(c) are deemed federally covered securities and therefore pre-empt state law. Like any offering that pre-empts state law, the states can still require a notice filing and the offering is still subject to the state anti-fraud provisions and can be investigated for violations of same.
Both offerings require the filing of a Form D within 15 days of the first sale of securities. When 506(c) was enacted, Form D was amended to include, among other changes, a new check box items for 506(c) offerings. At that time there were proposals to require a pre-offering form D filing for 506(c) offerings, but that change was never enacted.
Also at the time of the 506(c) rule changes, there was a great deal of debate as to whether hedge funds should be allowed to rely on the rule and solicit and advertise. Ultimately the rule does allow use by hedge funds though the SEC has noted that it is monitoring the use and could make rule amendments in the future. The SEC made a specific point of reminding hedge funds of the anti-fraud provisions of the investment advisors act – which mirror the anti-fraud provisions in the Securities Act and is a good reminder for everyone.
In particular, it is a fraudulent, deceptive and manipulative act for an advisor to “make any untrue statement of a material fact or to omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading , to any investor or prospective investor in the pooled investment vehicle; or (2) otherwise engage in any act, practice or course of business that is fraudulent, deceptive, or manipulative with respect to any investor or prospective investor in the pooled investment vehicle.”
Finally, one of the requirements for a valid Regulation S offering is that there be no directed selling efforts in the U.S. Accordingly, many practitioners were concerned that a concurrent Rule 506(c) offering would eliminate the ability to conduct a concurrent Regulation S offering. The SEC dispelled these concerns by specifically pointing out that that Regulation S, by its terms, does not integrate with either registered or “domestic offerings that satisfy the requirements for an exemption from registration under the Securities Act.” Since general solicitation under the Rule 506(c) would satisfy the requirements of a US exemption, the SEC will not view concurrent offerings under Rule 506(c) and Regulation S as integrating such as to destroy the Regulation S exemption.