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).

Understanding Rule 506(b)

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 under Rule 506(b) is the prohibition against general solicitation or advertising of the offering. This means companies cannot publicly advertise their investment opportunities; they can only approach investors with whom they have a pre-existing relationship.

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) for the last two years with the expectation of earning the same or higher income in the current year. For non-accredited investors participating in a 506(b) offering, the issuer must believe they have sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.

Transitioning to Rule 506(c)

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. This opened up new avenues for companies to reach potential investors through social media, traditional media, and other public means.

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 process allowed under Rule 506(b) and requires a more rigorous verification process, such as reviewing tax returns, bank statements, credit reports, and other documents that can prove an investor’s financial status.

How Fassport Can Help

The verification requirement under Rule 506(c) can be daunting for issuers due to the sensitive nature of the documents involved and the potential to slow down the capital-raising process. This is where Fassport comes in. Fassport is a verification platform that streamlines the process of verifying accredited investor status, making it easier and more efficient for issuers to comply with Rule 506(c) requirements.

Fassport uses advanced technology to securely collect, verify, and store sensitive financial documents from investors. The platform ensures compliance with privacy laws and regulations, providing a secure and efficient way for issuers to verify accredited investor status without directly handling sensitive information. This not only speeds up the verification process but also builds trust with investors, who may be hesitant to provide personal financial information directly to an issuer.

Advantages of Using Fassport

1. Efficiency: Fassport automates the verification process, reducing the time and effort required by issuers to verify each investor’s accredited status.
2. Security: With advanced encryption and compliance with privacy laws, Fassport ensures that sensitive financial documents are handled securely.
3. Compliance: Fassport’s verification process is designed to meet the SEC’s requirements for reasonable steps to verify accredited investor status under Rule 506(c).
4. Investor Trust: By using a third-party verification service, issuers can build trust with potential investors, who may feel more comfortable providing their sensitive information to a secure platform rather than directly to a company seeking investment.

The choice between Rule 506(b) and Rule 506(c) depends on your company’s specific needs and the type of investors you aim to attract. While Rule 506(b) offers the flexibility of raising capital from up to 35 non-accredited investors without the need for public solicitation, Rule 506(c) allows for a broader reach to potential investors through general solicitation, with the caveat of a more stringent verification process. Fassport simplifies this process, enabling issuers to take full advantage of Rule 506(c) without the administrative burden of verifying each investor’s accredited status. By leveraging technology to streamline compliance, Fassport helps issuers focus on what they do best — growing their business.

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