Rule 506: Offerings with no dollar limit

Under SEC Rule 506; an issuer may issue an unlimited amount of securities, with no dollar limit, to 35 unsophisticated investors plus any number of “accredited investors.” There are required disclosures, if a sale of securities includes purchasers who are not accredited investors. All non-accredited investors must be sophisticated and must sign an Investor Questionnaire acknowledging same. Advertising and a general solicitation are prohibited.

The securities are “restricted securities” which may not be readily resold. There is a major advantage to 506, in that it supersedes and preempts the securities laws of all the states. This saves a lot of time, effort, and expense if the issuer is obtaining money from investors in multiple states. Form D must be filed with the SEC within 15 days after the first sale of securities and also with the Secretary of State of each state in which a purchaser is a resident.

Under Rule 506(c)
Just like 506(b). there is no limit on the dollar size and a company can broadly solicit and generally advertise the offering if:

The investors in the offering are all accredited investors; and
The company has taken reasonable steps to verify that its investors are accredited investors, which could include reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, credit reports and the like.

Visit our FAQ page on Private Offerings for additional information

Rule 505: Offerings of $5 million or less

Rule 505 is used for offerings of $5 million or less in any 12-month period and is restricted to 35 purchasers other than “accredited investors.”

There are a number of required disclosures if the sale of securities includes investors who are not accredited investors: advertising and a general solicitation are prohibited, one must inform purchasers that they receive “restricted” securities (meaning that the securities cannot be sold for a time period without registering them), your must not violate the anti fraud prohibitions of the Federal Security Laws, financial statements need to be certified by an independent public accountant or at a minimum, the balance sheet needs to be audited.

Companies must give non-accredited investors disclosure documents that are the same as those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well. The company must also be available to answer questions by prospective purchasers. The Issuer must comply with the securities laws of each state in which a person who buys the security is a resident, and must usually file a notice with that state’s commissioner of corporations or similar official.

Rule 504

This rule is considered by many as the perfect answer for the company just starting out OR one that needs to raise less than $1 million.

Regulation D Rule 504 offers such companies:
An exemption to raise up to $1 million
No disclosure criteria
Few general solicitation and resale restrictions
No limit as to the number or type of investors

Actually, Congress’s original intent in 1982 for Rule 504 was to “set aside a clear and workable exemption for small issuers to be regulated by state blue sky requirements, but by the same token, to be subjected to federal anti-fraud provisions and civil liability provisions.” Rule 504 exemption is provided for almost any type of organization, including corporations, LLCs, partnerships, trusts, or other entities. However, it is not applicable to companies already reporting to the SEC (subject to the ’34 Act) or investment companies.