for some of us "regular folks", a tidbit of info here to lower the appetite if you are not in that class of investments:
"Regulation D, Rule 506(c)" refers to a specific exemption under the U.S. Securities and Exchange Commission (SEC) regulations that allows companies to sell their securities without having to register the securities with the SEC. This rule is part of the Securities Act of 1933, which was established to provide more freedom for businesses to raise capital while still protecting investors.
Here are the key aspects of Regulation D, Rule 506(c):
Rule 506(c) Filing:
- Allows issuers to broadly solicit and generally advertise an offering, provided that all purchasers in the offering are accredited investors.
- Requires issuers to take reasonable steps to verify that the purchasers of the securities are accredited investors.
- Issuers must still file a "Form D" with the SEC after they first sell their securities.
The rule effectively lifts the prohibition on general solicitation and advertising for certain investment offerings, allowing companies to reach a broader audience when seeking investment.
Accredited Investor Definition:
To become "accredited," an investor must meet certain defined criteria regarding income, net worth, professional experience, or size of the entity (if the investor is an entity rather than an individual). As of my last update in April 2023, the definition of an accredited investor includes, but is not limited to, the following:
- Income: Individuals who have had an income of more than $200,000 (or $300,000 together with a spouse) for the past two years and expect the same for the current year.
- Net Worth: Individuals with a net worth exceeding $1 million, either alone or together with a spouse, excluding the value of the person's primary residence.
- Insiders: Directors, executive officers, and general partners of the company selling the securities.
- Professional Experience: Certain professional certifications, designations, or credentials or other credentials issued by an accredited educational institution may allow an individual to be considered accredited.
- Knowledgeable Employees: In the case of private funds, "knowledgeable employees" of the fund are also considered accredited investors.
- Institutions: Banks, partnerships, corporations, nonprofits, and trusts with assets exceeding $5 million.
By imposing these criteria, Regulation D is meant to ensure that all participants in such an offering are capable of fending for themselves or sustaining the risk of loss, thus requiring less regulatory protection.
Under Rule 506(c), it is not enough for an investor to simply claim accredited status. The company making the offering must take reasonable steps to verify that an investor is accredited, which may include checking financial statements, tax returns, or receiving confirmation from a broker-dealer, attorney, or certified public accountant.
These regulations reflect a balance between making capital more accessible for businesses and protecting investors from risks associated with unregistered securities. It's important to note that SEC regulations can evolve, so for the most up-to-date information and advice, you should refer to the latest SEC releases or consult a legal professional.
