Regulation D, otherwise referred to as Reg D, consists of a series of exemptions to the securities registration requirement given by the Securities Act of 1933. Through Reg D, issuers and sponsors can raise capital privately without the need to register those securities with the Securities and Exchange Commission (SEC).
Differences between Rules 506(b) and 506(c)
At the time that Regulation D was first instituted, Rule 506 consisted of only one exemption. However, in 2013, the JOBS Act added another category of exemption in the form of Rule 506(c). With the addition of Rule 506(c), issuers now have the opportunity to market offerings to investors outside of their close network.
The differences between the two Rules in Reg D are as follows:
Rule 506(b)
- General Solicitation – Not permitted. Issuers are required to have a pre-existing relationship with their investors.
- Investor requirements – An unlimited number of accredited investors, in addition to 35 non-accredited investors, are permitted.
- Investor verification – Issuers are permitted to rely on self-certification alone.
- Document Disclosure – Issuers are required to provide non-accredited investors with disclosure documents.
Rule 506(c)
- General Solicitation – Issuers may perform general solicitation, openly marketing their offering to all accredited investors.
- Investor requirements – Only accredited investors are allowed to participate.
- Investor verification – Issuers are required to take reasonable steps to verify that investors meet accreditation requirements.
- Document Disclosure – Issuers are not required to submit disclosure documents.
The Biggest Difference Between the Two Regulation D Exemptions
As it concerns exemptions 506(b) and 506(c) of Reg D, the major difference between the two is the ability to perform general solicitation and offer securities for sale to investors. Before the JOBS Act of 2013, issuers could only sell securities to investors within their personal networks. This restricted new companies and companies outside of major population areas from opportunities to raise capital.
It is important to note that despite the fact that advertising and marketing efforts are permitted under general solicitation, actual sales of the securities must be performed by registered broker-dealer representatives unless your employees qualify under the issuer exemption.
Investor Verification
Unlike with Rule 506(b), issuers operating under Rule 506(c) are required to take reasonable steps to verify the accredited status of all their investors. The verification process is usually carried out through the services of a trusted third party or registered broker-dealer. This reduces regulatory risk and makes the process more efficient, especially when a large number of investors are involved.
