Rule 506(b) is a commonly used SEC registration exemption. It permits companies to raise an unlimited amount of capital from an unlimited number of accredited investors and only 35 non-accredited investors, with the caveat that the non-accredited investors are all “sophisticated” investors. This means that non-accredited investors must possess adequate experience and knowledge when it comes to business and financial matters that give them the ability to assess prospective investments regarding their advantages and risks.
SEC Filing Requirements Under Rule 506(b)
Regulation D provides Rule 506(b) as a safe harbor. The issuer of securities offerings under Rule 506(b) is required to file a completed Form D with the SEC in order to fulfill compliance requirements at the federal level. This is to be done on the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. Once the issuer files Form D on the EDGAR platform, it immediately becomes available to the public for viewing.
There is a time restriction for filing Form D – it must be filed within 15 calendar days following the “date of the first sale.” This is the date that the first investor in the securities offering is irreversibly contracted to participate in the offering in accordance with Regulation D.
State Filing Requirements Under Rule 506(b)
Securities are governed at the federal and state level. “Blue Sky laws” are state security laws and regulations that enable regulators in various states to accept or reject securities offerings through an evaluation of their merits.
Even though securities offerings issued under Rule 506(b) are exempt from federal registration mandates, they are still subject to applicable state regulations. As it regards Rule 506(b), many states include exemptions that are similar to the exemptions provided for under federal law. However, some states do mandate additional filing requirements or other conditions.
Since the requirements vary among the states, including the filing deadlines, companies issuing securities under Rule 506(b) must pay attention to any governing securities laws of the states in which their investors live.
Although companies that raise funds under Rule 506(b) benefit from certain SEC regulation requirements, they are still obligated to comply with investor communication requirements. Issuers must provide investors with the correct disclosure materials. They must also file Form D within the proper timeframe to alert the SEC of an exempt securities offering. Companies must also pay attention to “Blue Sky” laws that may mandate separate notice filings and international offering disclosures.
In order to avoid noncompliance with the law and placing at risk their business venture, it is critical for a company issuing securities offerings under Rule 506(b) to carefully combine investing innovation with adherence to all required documents and filing requirements under federal and state laws and regulations.
