SEC Regulation D 506 (c) Compliance

SEC Regulation D 506 (c) Compliance

 

Overview

Rule 506(c) permits issuers to broadly solicit and generally advertise an offering, provided that:

> all purchasers in the offering are accredited investors

> the issuer takes reasonable steps to verify purchasers’ accredited investor status and

> certain other conditions in Regulation D are satisfied


Purchasers in a Rule 506(c) offering receive “restricted securities.” A company is required to file a notice with the Commission on Form D within 15 days after the first sale of securities in the offering. Although the Securities Act provides a federal preemption from state registration and qualification under Rule 506(c), the states still have authority to require notice filings and collect state fees.


Rule 506(c) offerings are subject to “bad actor” disqualification provisions.


What are restricted securities?

“Restricted securities” are previously-issued securities held by security holders that are not freely tradable. Securities Act Rule 144(a)(3) identifies what offerings produce restricted securities. After such a transaction, the security holders can only resell the securities into the market by using an effective registration statement under the Securities Act or a valid exemption from registration for the resale, such as Rule 144.


Rule 144 is a "safe harbor" under Section 4(a)(1) providing objective standards that a security holder can rely on to meet the requirements of that exemption. Rule 144 permits the resale of restricted securities if a number of conditions are met, including holding the securities for six months or one year, depending on whether the issuer has been filing reports under the Exchange Act. Rule 144 may limit the amount of securities that can be sold at one time and may restrict the manner of sale, depending on whether the security holder is an affiliate. An affiliate of a company is a person that, directly, or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the company.


What is an accredited investor?

Certain securities offerings that are exempt from registration may only be offered to, or purchased by, persons who are “accredited investors.” An “accredited investor” is:


A bank, savings and loan association, insurance company, registered investment company, business development company, or small business investment company or rural business investment company.


An SEC-registered broker-dealer, SEC- or state-registered investment adviser, or exempt reporting adviser.


A plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5 million.


An employee benefit plan (within the meaning of the Employee Retirement Income Security Act) if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million.


A tax exempt charitable organization, corporation, limited liability corporation, or partnership with assets in excess of $5 million.


A director, executive officer, or general partner of the company selling the securities, or any director, executive officer, or general partner of a general partner of that company.


An enterprise in which all the equity owners are accredited investors.


An individual with a net worth or joint net worth with a spouse or spousal equivalent of at least $1 million, not including the value of his or her primary residence.


An individual with income exceeding $200,000 in each of the two most recent calendar years or joint income with a spouse or spousal equivalent exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.


A trust with assets exceeding $5 million, not formed only to acquire the securities offered, and whose purchases are directed by a person who meets the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment.


An entity of a type not otherwise qualifying as accredited that own investments in excess of $5 million.


An individual holding in good standing any of the general securities representative license (Series 7), the investment adviser representative license (Series 65), or the private securities offerings representative license (Series 82)


A knowledgeable employee, as defined in rule 3c-5(a)(4) under the Investment Company Act, of the issuer of securities where that issuer is a 3(c)(1) or 3(c)(7) private fund.


A family office and its family clients if the family office has assets under management in excess of $5 million and whose prospective investments are directed by a person who has such knowledge and experience in financial and business matters that such family office is capable of evaluating the merits and risks of the prospective investment.