506(c) Exemption- Today is the continuation of a Lawcast series discussing Rule 506 of Regulation D including the difference between a traditional 506(b) offering and a 506(c) offering that allows general solicitation and advertising.
In prior Lawcasts in this series I have been drilling down on the question of what constitutes general solicitation and advertising for purposes of determining whether particular solicitations would require a company to rely on Rule 506(c) as opposed to 506(b) in connection with their offering.
High Level 506(c) Exemptions- Today, I’m going to backtrack a little and explain the overall high level 506(c) exemption. A Rule 506(c) offering has no limit on the offering amount. Moreover, there is no limit on the number of 506(c) offerings a company can engage in – a company can even engage in ongoing perpetual 506(c) offerings for years at a time.
In a 506(c) offering, the company, or persons acting on the company’s behalf, such as a broker dealer or registered investment advisor, may engage in general solicitation and advertising of an offering as long as sales are strictly limited to accredited investors. Moreover, the company must take extra reasonable steps to verify the investor’s accredited status – the investor cannot merely check a box or self-verify.
In addition, all conditions of Rules 501 and 502(a) and (d) must be satisfied in a 506(c) offering. Rule 501 is the definition section of Regulation D and includes a definition of “accredited investor”. Rule 502(d) provides that securities sold in a Regulation D offering are restricted under Rule 144.
Rule 502(a) is the integration Rule. Basically, where two or more offerings are integrated, all the requirements to satisfy the exemption for each offering must be met, or the exemption will be lost for both. For example, a Rule 504 offering is limited to $1million in any 12 month period, generally allows solicitation and does not require that investors be accredited, whereas a Rule 506(c) offering has no dollar limit, allows solicitation but is strictly limited to accredited investors. If a company completed concurrent Rule 504 and 506(c) offerings that were deemed integrated, both exemptions would likely be lost and a rescission offering would be necessary. That is, if the Rule 506(c) offering was integrated with the Rule 504 offering, the dollar amount raised would be in excess of the Rule 504 $1 million limit destroying the Rule 504 exemption. Also, the Rule 506 exemption would be destroyed because there would likely be unaccredited investors, and a lack of accredited investor verification from the prior Rule 504 offering.
The same integration issue would be a problem if a 506(b) offering that sold to 35 unaccredited investors and lacked accredited investor verification was integrated with a prior or subsequent 506(c) that engaged in solicitation and advertising.
To assist in analyzing integration, Rule 502(a) provides a six month safe harbor from integration for successive Regulation D offerings and sets out a five-factor fact test analysis which can be used if the six-month rule is not available. The 5 factor test including an analysis of:
1. are the offerings part of a single plan of financing;
2. do the offerings involve the issuance of the same class of securities;
3. are the offerings made at or about the same time;
4. will the company receive the same type of consideration in the offerings (such as cash vs. employee services); and
5. are the offerings made for the same general purpose – i.e. use of proceeds.
Laura Anthony, Esq.
Legal & Compliance LLC.
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