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How Rule 506(c) of the Securities Act Affects You
What is Rule 506(c)? An amendment to Rule 506 of Regulation D, making it possible for companies to solicit funding from accredited investors through general solicitation and advertising. Main Benefit: Most private companies have limited capital and limited financial networks. This can make using traditional channels for soliciting funds impossible. Rule 506(c) makes solicitation legal. Capital raising through digital methods, such as social media, can be very affordable. Other Benefits: * Provided that they provide all material information necessary for investors to make an investment decision, businesses can choose how much, and in what way, they disclose details of their business to potential investors. * No need for audited financial statements. * Any amount of capital can be raised. * Businesses are exempt from pre-sale filings and state reviews, saving time and money. * Positive impact on small business development and capital formation. Main Stipulations: * Investors have to be verified as accredited investors. * Previously, the investors could self-certify that they were accredited. Now the company raising funds is required to take “reasonable steps” to verify this accredited status. What Are “Reasonable Steps?” Taking “reasonable steps” ensures you are protected from the potential risks of noncompliance – which could include enforcement action and having to return funds to investors. The SEC doesn’t stipulate how companies must verify the accreditation of an investor, other than the fact that “reasonable steps” must be taken. However, there are several safe harbor methods ways in which a company can do this, including:
Verify income through a combination of tax reporting forms (such as W-2 or 1099) and written investor representations.
Determine net worth through bank/brokerage statements, tax assessments, recent credit report, etc.
Written confirmation from an SEC registered investment advisor, a registered broker dealer, a licensed attorney or certified public accountant.