My name is Tilden Moschetti of the Moschetti Law Group. I’m a syndication attorney and I put together a lot of private placement memorandums. When I do that, many times I get asked the question: should I put together a Regulation D Rule 506b offering? Or should I do a Rule 506c offering?
As a syndication attorney, most of my practice is within Regulation D. Many times I hear from syndicators some confusion on whether they should use the exemptions of Rule 506b versus Rule 506c. So here’s how I explain that decision-making to them. There are really two questions, and they kind of give you the guidance that you need.
The first question is: do you know and have a substantial business relationship with your investors? If you already have all of them, and they’re already established, you’re a very long way away from having to choose between 506b or 506c. Now, if you don’t know all your investors, if you’re going to need to put it out to the public, that automatically puts you into Rule 506c, because if you’re going to need to market, the only way to market is Rule 506c.
The second question is: is every one of your investors an accredited investor, meaning do they meet the test requirement for an accredited investor? If they do, then you can do either Rule 506c or 506b. If they don’t, your only choice is Rule 506b. So that pushes you back into the 506b category.
Now, when you’re making the decision, say you know everybody and you only have accredited investors, then it really becomes up to you on which you want to choose. In general, 506c is a little bit more complicated to put together, because it’s best practice to have a third-party verifier of the accredited investor status. Under Rule 506b, you can have the accredited investor self-verify that they are an accredited investor. We do that through a questionnaire and through your knowledge of what you think their finances actually are. They also sign a statement that says that yes, everything is truthful, and that they are indeed an accredited investor.
I would tend to think that 506b is a little bit easier. But Rule 506c is really quite safe, because then you don’t run into the issue of having investors who are not accredited investors but say that they’re accredited investors still come into your deal under that kind of false light. So it is safer to go Rule 506c, but it is probably easier to go under Rule 506b.
From the syndication attorney’s point of view, you can do whichever you prefer. It really is deciding where it tips on that side. But if you’ve got non-accredited investors, then that puts you in 506b, but you better know all of them and have a substantial business relationship with them. If you need to advertise, then you’re going to be in 506c, and then you’re going to find out quickly if everybody is an accredited investor because you need to get that third-party verification of their accredited investor status.
If you need some help with your syndication, be it for real estate, you’re an entrepreneur, you’re raising some capital for your business, or you’re putting together that new cryptocurrency hedge fund, give us a call. My name is Tilden Moschetti. I am a syndication attorney, and if you need help just with your private placement memorandums, we’ve got you covered there too.