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.

Next Article: Rule 506(c) Securities Exemption Back to: SECURITIES LAW

What is a 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.

Related Topics

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• What are Securities Laws?
• What is a Security?
• What qualifies as an Investment contract?
• What are the primary federal securities laws?
• What are the regulatory goals of security laws?
• What is the Securities and Exchange Commission?
• What is an Initial Public Offering?
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• Securities Act of 1933
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• Who are the parties regulated in an offer to sell securities?
• What are the primary disclosure documents required in an offer to sell securities?
• Forward Looking
• Red Herring Prospectus (Securities) Definition
• Registration of Securities
• What is an issuer allowed to do at each stage of the registration process?
• How are issuers classified for purposes of the registration and offering process?
• What is an issuer allowed to do during the Pre-filing Period?
• What are the limitations on the issuer during the Post-filing, Waiting Period?
• What is an issuer allowed to do during the Post-Effective Period?
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• Deficiency Letter (Securities Law)
• Registration Exemptions Securities Act of 1933
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• Section 3(a)?
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• What is a Section 4(a) Exemption?
• Section 4(a)(5)?
• What is a Regulation A Exemption?
• What are Regulation D Exemptions?
• What is a Rule 504 Exemption?
• What is a Rule 505 Exemption?
• What is a Rule 506(b) Exemption?
• What is a Rule 506(c) Exemption?
• What is Rule 502(d) and the Rule 144 Safe Harbor?
• Rule 144a
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• What is the requirement to file Form D?
• What is the effect of failing to register an offering under Section 5?
• Liability Under the Securities and Exchange Act of 1933
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• What is civil liability under Section 12 of the 33 Act?
• What are defenses available to charges under Sections 11 and 12?
• What is civil liability under Section 17 of the 33 Act?
• What is potential criminal liability under the 33 Act?
• The Security Exchange Act of 1934
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• What damages are available under Section 10 and Rule 10(b)(5)?
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• What is liability under Section 16 of the 34 Act?
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• What is criminal liability under the 34 Act?
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• Blue Sky Laws State Securities Laws
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