Comparing 506(b) and 506(c) Offerings

Rule 506 as a whole (both 506(b) and 506(c)), will, for the foreseeable future, remain the predominant securities offering exemption because either or both offer all of these benefits:

  • Maximum flexibility about what you disclose to accredited investors and how you disclose it, subject only to the requirement to not commit securities fraud.
  • No requirement that financial statements be reviewed or audited by independent accountants.
  • No limit on how much money you raise.
  • A blanket exemption from state rules that require pre-sale filings and reviews by state securities administrators, which would cause delays and extra offering expenses.
  • Other than filing Form D and amendments with the SEC and some states, no post-sale filing or reporting requirements. 

The adoption of Rule 506(c) was expected to result in a shift from 506(b) to 506(c).

A shift to 506(c) involves a formal elimination of any sales to any non-accredited investors, a more formal requirement to verify each purchaser's accredited investor status, and provides a complete freedom to advertise, subject only to the requirement to not commit securities fraud.

The factors favoring Rule 506(b) to remain predominant in the market as compared with Rule 506(c):

  • Prohibitions on general solicitation are not especially meaningful in context--506(b) offerings can be conducted on Internet platforms if the platform takes modest effort to screen out users without accredited investor status.
  • 506(b) offerings maintain current practices about accredited status without a formal verification requirement
  • 506(b) offering exemptions are not completely lost if, in hindsight, there is a purchase of securities by a non-accredited investor

But there are advantages of Rule 506(c):

  • Use of social media, advertising and other general solicitation--Some say that social media can be a cost-efficient tool for attracting investors.
  • While Rule 506(b) offerings could be challenged if any general solicitation is found to exist, Rule 506(c) is unassailable based on any possible indicia of general solicitations.
  • With accredited status being subject to verification, there will be less risk of a non-accredited investor being inadvertently allowed to purchase