My name is Tilden Moschetti, a securities attorney with the Moschetti Syndication Law Group. Today we’re going to do a deep dive into Regulation D Rule 506c and go line by line through the actual regulation itself to explain everything that’s going on there.
When I was in law school, one of my professors told me a little secret about when there was anything that you were confused about: go to the rule itself and understand that, and that will explain everything. This is why today I wanted to go through Rule 506c. In another video, I already went through Rule 506b, but it’s useful to go through 506c in case that’s one of the options you are considering for your own syndication or fund. So let’s go ahead and open up the text of the law itself.
This is the text of Regulation D Rule 506c. You can see it’s in Book 17 of the Code of Federal Regulations, Rule 230.506: “Exemption for limited offers and sales without regard to dollar amount of offering.” I’ve cut out a and b here, so this is really the law as of 506c.
First, we talk about the conditions that must be met in order for it to fall under here. There are some general considerations. It must satisfy all the terms and conditions of 230.501 and 502, A and D. Rule 501 is where all the definitions and terms are described. Most importantly for 506c people is the accredited investor definition under 501.A. We also have a video about that if you’re more interested in finding out what an accredited investor is.
Rule 502 covers the other general conditions that must be met. It says in 506c that A and D apply. Here we’re talking about integration under A. What that means is if, let’s say, a fund put together multiple offers – maybe they’d have one under 506B and then one under 506c – it says that this is how we need to first determine whether those offers should be integrated. By integrated, we mean should they be considered one and the same. That’s always a consideration of ours, especially if you’re thinking, “Well, I’m going to do a 506c, but I’d like to do a 506b.” Because if it becomes integrated, suddenly you’ve got a problem. You’ve got those people who came in on a 506b, and if it’s integrated, then those people came in incorrectly because they saw your advertising. So integration is a big deal.
502d is limitations on resale. I also did a video on the limitations of resale. Basically, you should not be buying this security with the intent of selling it. It is not a speculative purchase where you’re looking to sell it into a market. The SEC is not interested in you putting out offers where investors are going to create their own markets.
There are specific conditions as well that need to be addressed. But really, we’re talking about one specific condition: the status of the investors must be accredited investors. We know that all investors must be accredited investors. What’s further important is the verification of the accredited investor status. That’s what the SEC ultimately wants. It’s saying that yes, you can advertise or make a general solicitation of your offer to the public, except that you must have verification that this accredited investor is, in fact, an accredited investor.
It is almost certain that the best way to do this is to rely on third parties to verify. In order to verify that they’re an accredited investor, you, the issuer, must take reasonable steps to verify that they are. The best and simplest way to prove that you’ve taken reasonable steps is to rely on third parties. This means, in this case, a written confirmation from somebody such as a registered broker-dealer who has knowledge about whether or not they are an accredited investor, or an investment advisor registered with the Securities and Exchange Commission. This could be somebody who’s their registered investment advisor, their IA, who has knowledge of their account status and whether or not they are an accredited investor.
A licensed attorney can say whether or not they are. The attorney needs to know that person and be knowledgeable about the fact that they are. For example, I have written a letter like this for investors that I knew. I looked over their accounts and verified that they were, in fact, accredited investors under Rule 501.A. I felt comfortable writing a letter that confirmed that, in my opinion, this person is an accredited investor under Rule 506.A and would therefore invest in an offering under Rule 506c.
Lastly, a certified public accountant who’s duly registered may have that same kind of knowledge. They should have that from the investor or from their workings with that investor of their financial position to be able to determine that they are, in fact, an accredited investor.
There are companies that also give up certification of that person being an accredited investor or not. In order to be compliant, almost all of them will have an attorney on staff or an accountant on staff who supervises the work to verify, in their opinion, that they are an accredited investor. Then they issue that certificate, which can be sent to you as the sponsor of the security.
This is the deep dive into Rule 506c. You can see there’s actually not a lot going into it. Under Rule 506c, you can raise an unlimited amount of money. You can raise up to a year or longer if you extend it. But what you have to do is make sure that you qualify that we’re talking about accredited investors, that you obtain this verification of their accredited investor status, and that they know also that there are these limitations on resale, and that there is a possibility that offers could be integrated with each other. So you need to consider what effect that would have on yours.
My name is Tilden Moschetti. I am a securities attorney with the Moschetti Syndication Law Group. I put together a lot of Reg D 506c offerings for syndicators, funds, businesses, all sorts of things in order for them to be able to raise capital legally without registering with the SEC. They only are making a filing under Regulation D. If I can help you, please feel free to get in contact with me and we can have a conversation and see if I can help you.