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PRIVATE OFFERING EXEMPTIONS FROM REGISTRATION: RULES 506(c) AND 504

As previously mentioned, the most common exemptions from registration used in private offerings are the following:

  • Section 4(a)(2);

  • Rule 504 under Regulation D;

  • Rule 506(b) under Regulation D (link to previous blog post);

  • Rule 506(c) under Regulation D;

  • Rule 701;

  • Regulation S;

  • Regulation A (Reg. A+); and

  • Regulation Crowdfunding.

What is the Rule 506(c) exemption used in private offerings?

Rule 506(c) of Regulation D is an exemption from the registration requirements of the Securities and Exchange Commission (the “SEC”) for issuers and is considered a “safe harbor” under Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). A “safe harbor” provides objective standards an issuer can rely upon in order to comply with Section 4(a)(2).


What are the benefits and downsides of using a Rule 506(c) exemption in a private offering?

The benefits to using a Rule 506(c) exemption in a private offering are as follows:

  • General solicitation and general advertising of the private offering are allowed;

  • No limit on private offering amount;

  • No limit on private offering duration;

  • Unlimited amount of investors in the private offering;

  • No disclosure requirements for investors in the private offering (although 10b-5 under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), applies);

  • Exemption pre-empts federal law so no state compliance required for private offering (besides notice filing and fee payment); and

  • Limited filing requirement following private offering (Form D).

The downsides to using a Rule 506(c) exemption in a private offering are as follows:

  • Only “accredited investors” allowed in the private offering;

  • The issuer must take reasonable steps to make sure all investors in the private offering are “accredited investors;”

  • Bad actor disqualification applicable in private offerings; and

  • The securities sold in the private offering will be restricted securities, which means they may not be resold, without registration with the SEC, for up to 12 months.

What constitutes “reasonable steps” when verifying whether an investor in a private offering is an “accredited investor?”

Although not intended to be an exclusive list of verification methods used in private offerings, the SEC has given the following methods which constitute “reasonable steps” to verify whether an investor (individual) is an “accredited investor:”

  • Verification of Income. Review copies of any IRS form that reports income (Form W-2, Form 1099, Schedule K-1 of Form 1065, and a filed Form 1040);

  • Verification of Net Worth. Review specific types of documentation dated within the prior three months (bank statements, brokerage statements, certificates of deposit, tax assessments, credit report from at least one of the nationwide consumer reporting agencies); and

  • Third Party Verification. A written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney or a certified public accountant stating that such person or entity has taken reasonable steps to verify that the purchaser is an accredited investor within the last three months and has determined that such purchaser is an accredited investor.

What is the Rule 504 exemption used in private offerings?

Rule 504 of Regulation D is an exemption from the registration requirements of the SEC for issuers offering and selling up to $5,000,000 of their securities over a 12-month period.


What are the benefits and downsides of using a Rule 504 exemption in a private offering?

The benefits to using a Rule 504 exemption in a private offering are as follows:

  • Unlimited amount of investors in private offering;

  • All investors may participate in the private offering regardless of net worth or annual income;

  • No disclosure requirements for the private offering (although Rule 10b-5 under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), applies); and

  • Limited filing requirement following private offering (Form D).

The downsides to using a Rule 504 exemption in a private offering are as follows:

  • Private offering amount limited to $5,000,000 over 12 months;

  • In most cases, general solicitation and general advertising of the private offering are not allowed;

  • Not available to SEC reporting companies;

  • Bad actor disqualification applicable in private offerings.

  • Generally, the securities sold in the private offering will be restricted securities, which means they may not be resold, without registration with the SEC, for up to 12 months; and

  • State exemptions still required for private offering.

The decision whether to commence a private offering, including the preparation of required disclosures and federal and state compliance, can be complicated and difficult. Business Legal Advisors, LLC has over seven years of experience assisting companies with private offerings from preparing for the private offering to the completion of a successful offering.

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