Rule 506(c) vs 506(b)

When it comes to raising capital for your business, the Securities and Exchange Commission (SEC) provides several exemptions under Regulation D to facilitate this process without the need for a full-blown registration. Among these exemptions, Rule 506(b) and Rule 506(c) are the most widely utilized by companies due to their flexibility and the amount of capital that can be raised under these provisions. However, these two rules differ significantly in terms of who you can raise money from and the steps you need to take to comply with the SEC regulations. In this blog, we'll delve into the nuances between 506(b) and 506(c), and how Fassport, a comprehensive verification platform, can streamline the verification process required under Rule 506(c).

Rule 506(b) of Regulation D allows companies to raise an unlimited amount of money from an unlimited number of accredited investors and up to 35 non-accredited investors. However, the key restriction is that the issuer cannot engage in general solicitation or advertising to market the securities. Investors must have a pre-existing relationship with the issuer or be introduced through a broker or other intermediary.

The definition of an accredited investor includes individuals with a net worth of over $1 million (excluding the value of their primary residence) or an annual income of over $200,000 ($300,000 for joint income) in each of the two most recent years with a reasonable expectation of reaching the same income level in the current year.

Rule 506(c), introduced under the JOBS Act, marked a significant shift by allowing issuers to broadly solicit and generally advertise their offerings, provided that all the investors in the offering are accredited investors and the issuer takes reasonable steps to verify that status.

However, the major caveat with Rule 506(c) is the requirement for issuers to take reasonable steps to verify the accredited investor status of their investors. This goes beyond the self-certification allowed under Rule 506(b) and requires documentation such as tax returns, bank statements, or third-party verification letters.

Fassport provides automated accreditation verification, KYC/AML checks, and document management—helping fund managers comply with Rule 506(c) requirements while reducing onboarding time to under 90 seconds for investors.