In 2013, the Securities and Exchange Commission altered the registration exemption under Rule 506 by getting rid of the long enforced restriction on general solicitation. Under the new Rule 506(c) created by the JOBS Act, companies are permitted to engage in such solicitation so long as the securities are sold strictly to accredited investors.
Regardless of the opportunity available now to attract new investors via general solicitation through the power of the Internet, it has been slow-going for investors to take advantage of Rule 506(c).
Rule 506(c) vs. Rule 506 (b)
In comparison to the market under Rule 506(b) in which general solicitation does not exist, the market under 506(c) has not expanded as significantly as many have expected. The use of the two exemptions is by no means equal, with some $2 to $3 trillion total capital raised under 506(b) between 2013 and 2015 in comparison to a little over $70 billion of capital raised under 506(c) during that same period of time.
Although the ease of marketing investments has expanded under Rule 506(c), the rule itself imposes additional obligations on issuers not present under 506(b). These obligations include the necessity to take active steps to verify investor eligibility instead of allowing investors to self-certify themselves through a questionnaire provided by the issuer.
Specifically, under 506(c) issuers are required to take reasonable steps to verify accredited investor status. The verification process may require issuers to review financial documents from their investors including bank and brokerage statements, IRS documents and credit reports for the purposes of verifying the investors meets the accredited investor definition.
It’s also not permissible to sell to non-accredited investors under Rule 506(c). This restriction does not exist under 506(b), which allows issuers to sell to as many as 35 non-credited investors as long as they meet particular financial sophistication requirements.
Trends
An increasing number of registered broker-dealers are serving as intermediaries for transactions under Rule 506(c). Using an intermediary may in fact help issuers find interested and qualified investors with greater ease, which in the end may result in an increase in the number of transactions occurring under the Rule.
However, due to the restrictions that have come with Rule 506(c) regarding general solicitation, it is understandable why the market has not opened up as quickly as anticipated under this Rule. That being said, evidence exists individual offerings under Rule 506(c) are growing larger in size, although not necessarily in the number of offerings to a significant degree, at least as of yet. It’s important to remember however, that 506(c) offerings are a new thing; it may take a while for the market to adapt to them. Many experts continue to believe that Rule 506(c) offerings will surpass Rule 506(b) offerings over time.
