Raising Capital Through Private Placements: Rule 506(b) vs. Rule 506(c) for Startups
Articles by: Richey May, Nov 19, 2020
In October 2020, Manatt published the article, Raising Capital Through Private Placements: Rule 506(b) vs. Rule 506(c) Offerings. This article is a great read for emerging managers and founders of startups, who have found that raising funds can be a time-consuming process.
The following article reviews Rule 506(b) of Reg D’s offering of allowing a startup to raise an unlimited amount of money from an unlimited number of accredited investors. Up to 35 may be nonaccredited investors. Under this offering, startups will not need to go through the process to verify an accredited investor status for each investor, thus removing a lengthy procedure from fundraising processes.
Rule 506(c) allows startups conducting an offering to engage in general solicitation and advertising. However, unlike Rule 506(b), startups must take reasonable steps to verify that all investors are accredited investors. The lengthy procedure of this includes reviewing brokerage statements, tax documents, and other financial documents to verify the investors status before accepting a potential investment.
As founders have numerous options for raising capital, they should understand the offerings of both Rule 506(b) and 506(c) and the effective means of opting for one or the other without the burden of registering securities with the SEC.
If you have any questions on how to approach raising capital and the mentioned rules for startups, read the article linked above and contact Steve Vlasak.