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Rule 506b Securities Exemption

29. What is a “Rule 506” exemption?

Rule 506 of Regulation D allows for two exemptions of securities issuances. The statutory authority for a Rule 506 is pursuant to Section 4(a)(2) of the ’33 Act. Rule 506 exemptions are the most commonly employed exemptions to securities registration.

Rule 506(b) Safe Harbor Exemption

•    Issuer Protection – Rule 506 protections available for issuers are similar those of Rule 505. The notable exception is that the limitations for reporting companies under the ’34 Act, or the so-called “bad boy” disqualifications do not apply to this exemption.

•    Dollar Limits – This exemption allows for an unlimited dollar value for issuances.

•    Purchaser Requirements – An issuer may sell its securities to an unlimited number of accredited investors and up to 35 non-accredited investors.

•    Restricted Securities – This is a transactional exemption. As such, this exemption applies only to issuers and does not cover later sales by investors.

•    General Solicitation – Rule 506(b) does not allow for general solicitation, which means that the issuer cannot use general advertising methods to reach potential customers. Of note, this general rule applies only to actual sales of securities, rather than to both offers and actual sales.

⁃    Note: The issuer must also use reasonable care to assure that the purchasers of the securities are not statutorily considered to be underwriters of the securities, as this can cause general solicitation issuers.

•    Private Placement Memorandum – Rule 506(b) information disclosures are divided between accredited and non-accredited investors. There is no information disclosure requirement for the accredited investors, but the non-accredited investors must receive extensive disclosures. These disclosures are similar to those required under other Regulation D exemptions. The issuer must provide a private placement memorandum containing the necessary disclosures. Also, all non-accredited investors must meet a sophistication requirement. More specifically, they must have the knowledge or resources necessary to evaluate the merits of the investment.

⁃    Note: As with a Section 4(a)(2) exemption, the issuer must ascertain that offers only happen to individuals who meet qualification requirements to be purchasers. These non-accredited investors must either have sufficient sophistication to evaluate the merits and risk of the prospective investment or be represented by a sophisticated agent.

•    State Regulation – Section 18 of the ’33 Act exempts Rule 506 securities from registration requirements or a merits review under state law. As such, states cannot place additional registration requirements on the security issuance.

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