Posted on

What is Rule 506?

Rule 506 of Regulation D is a rule that pertains to private capital raising and using an exemption from having to register the offering with the SEC and state regulators. Rule 506 has two parts that are frequently used to use the exemption. Those rules are 506(b) and 506(c).

What is Rule 506(b)?

Rule 506(b) is the ‘old rule’ still used by most companies who are raising capital. It stipulates that sellers (issuers of stocks or units) cannot advertise or solicit their offering to ‘any’ investor(s). Rule 506(b) allows sellers to raise any amount of capital, from $1 to billions of dollars. This rule also allows issuers to sell to 35 unaccredited investors who are at least sophisticated in their knowledge of investing and financial condition. Most sellers use this rule.

What is Rule 506(c)?

Rule 506(c) has all the same stipulations as 506(b) above, however, this rule allows general advertising, provided the solicitations are targeted solely at accredited investors; moreover, if general advertising is used it disqualifies the seller from taking ‘any’ unaccredited investor capital.