Rule 506(c) vs Rule 506(b): Understanding the Key Differences
- A) All purchasers of the Rule 506(c) securities must be accredited investors as defined in Rule 501, whereas Rule 506(b) permits a limited number of sophisticated, but not accredited investors.
- B) The issuer must take "reasonable steps" to verify that all purchasers are accredited investors, while no such obligation falls upon issuers in a 506(b) offering.
- C) General solicitation is permitted under Rule 506(c) offerings; no advertising is permitted under Rule 506(b).
Detailed Explanation:
Rule 506(c) vs Rule 506(b)
Rule 506(c) and Rule 506(b) are both provisions under Regulation D of the Securities Act of 1933 that allow for private offerings exempt from full SEC registration. While they have similarities, such as both being considered "federal covered securities," they also have key differences that set them apart.
Accredited Investors
One of the significant distinctions between Rule 506(c) and Rule 506(b) is the requirement for investors. Under Rule 506(c), all purchasers of securities must be accredited investors as defined in Rule 501. On the other hand, Rule 506(b) allows for a limited number of sophisticated, but not accredited, investors to participate in the offering. This difference can impact the pool of potential investors for each type of offering.
Verification Process
Another critical difference is the verification process for investors. In Rule 506(c) offerings, the issuer must take "reasonable steps" to verify that all purchasers are accredited investors. This verification requirement aims to ensure that only qualified investors participate in the offering. In contrast, Rule 506(b) does not have the same verification obligation, allowing issuers to rely on self-certification from investors.
Solicitation and Advertising
Rule 506(c) permits general solicitation and advertising, meaning issuers can promote the offering to the public. This increased marketing flexibility can help attract a broader range of potential investors. On the other hand, Rule 506(b) does not allow for general solicitation, requiring issuers to have a pre-existing relationship with investors or use traditional methods of raising capital.
Overall, while both Rule 506(c) and Rule 506(b) offerings involve federal covered securities exempt from state registration requirements, the specific nuances in investor requirements, verification processes, and advertising capabilities differentiate the two rules.