SEC Rule 506 Lawyers & Attorneys - Priori

SEC Rule 506 Lawyers & Attorneys

While there are financial benefits to registered securities offerings, registration is expensive -- both in terms of time and money. Though private placements of securities may require some disclosures (typically, through a private placement memorandum), the related reporting obligations are not nearly as onerous. Private placements made by taking advantage of registration exemptions make it easier for companies, including startups, to secure the investment they need to grow. The most commonly used exemption is SEC Rule 506 under Regulation D.

Rule 506 offerings offer companies, including startups, the chance to raise vital capital without extensive reporting requirements, but compliance with the requirements of making a securities offering under the Rule 506 exemption is crucial. If you are considering using Rule 506, it may help to discuss the details with a qualified securities lawyer. Priori can help you connect with a securities attorney to discuss whether pursuing a private placement under Rule 506 is right for your company.

Understanding SEC Rule 506

The most common way to make a private placement is through a Regulation D Rule 506 securities offering. Private placements under Rule 506 have two features which many companies find extremely attractive: companies can raise an unlimited amount of funds with a Rule 506 private placement and the offering is not subject to state-level blue sky regulations. It’s important to note, however, that securities issued under Rule 506 are restricted securities. There are two basic types of Rule 506 offerings: Rule 506 b and Rule 506 c.

Rule 506 (b)

Any company can raise an unlimited amount of funds under Rule 506(b). Under the Rule 506(b) exemption, these securities can be sold to an unlimited number of accredited investors and up to 35 non-accredited investors who are financially sophisticated, so long as the company satisfies the following conditions: 

  • The company issuing securities uses no general solicitation or advertising to market the securities.

  • A private placement memorandum is provided for any offerings sold any non-accredited investor.

  • The company makes itself available to answer any questions put forth by prospective purchasers.

Rule 506 (c)

Rule 506(c) is a newer option that companies can take advantage of under the crowdfunding rules in Section 201 (a) of the JOBS Act. Essentially, the basic details of the Rule 506 c exemption are the same as they are under Rule 506 b: companies can raise an unlimited amount of funds, and these private placements are exempt from blue sky laws. Unlike Rule 506 b offerings, however, Rule 506 c offerings can be generally solicited, so long as the following two conditions are met:

  • All investors are accredited investors.

  • The company has made reasonable steps to verify that these investors strictly qualify as accredited investors, including by reviewing documentation like W-2s, tax returns, bank and brokerage statements, and credit reports.

Private Placement Memorandum 

Any private placement that includes non-accredited investors, such as those under Rule 506 b, requires financial disclosures and and other legal documentation issued through a private placement memorandum. A private placement memorandum informs prospective investors on all aspects of the business, including management, prior financial performance, and future prospects, as well as the potential risks involved with the transaction. Exactly what any private placement memorandum will include depends on many factors, including target investors and the complexity of the offering’s terms, but for Rule 506 private placements, the document must be fairly detailed. 

Rule 506 (d)

Any non-public offering under Rule 506 cannot include so-called “bad actors” or the entire exemption will be disqualified and subject to sanctions for failing to register. These bad actors are covered persons who have committed a “bad act,” securities-related or fraudulent crime, or been subject to a disqualifying event, such as being convicted of or sanctioned for securities fraud or another similar crime.

Covered persons that must be vetted before a Rule 506 offering to ensure that they are not considered Rule 506 bad actors include:

  • Any issuer;

  • Any director, executive officer, or other officer;

  • Any general partner or managing member of the issuer;

  • Any beneficial owner who possesses at least 20% of the company’s shares;

  • Any promoter selling shares; or

  • Any placement agent. 


Who is an accredited investor under Rule 506?

Accredited investors for the purposes of Rule 506 are defined in Rule 501 of Regulation D. These include banks, insurance companies, registered investment companies, business development companies, and small business investment companies, as well as employee benefit plans, businesses, and trusts with over $5 million worth of assets. Accredited investors can also be individuals who earn at least $200,000 per year (or $300,000 jointly with a spouse) or have a net worth exceeding $1 million.

What is a PIPE deal and can I use a Rule 506 exemption to complete it?

A PIPE deal is a private investment in public equity, wherein publicly traded shares are sold to private investors outside of a public offering in a stock exchange. A PIPE deal generally can be carried out under a Rule 506 exemption, so long as all the other requirements are fulfilled.

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