Rule 506(b): planning a private securities offering

Rule 506(b) can fit a company raising from a defined investor audience through a private solicitation process. It has no federal offering dollar cap, but it prohibits general solicitation. Your preparation therefore begins with how you know prospective investors and how offering information reaches them.

The SEC’s Rule 506(b) guide explains the exemption’s core conditions. Build the operating plan around those conditions before collecting subscriptions.

Private outreach needs a documented basis

An existing substantive relationship is one recognized way to show that an offer does not involve general solicitation. SEC staff describes a substantive relationship as one in which the issuer or relevant person has enough information to evaluate, and actually evaluates, the prospective investor’s financial circumstances and sophistication. The staff also recognizes other fact-specific circumstances. See Questions 256.26 through 256.31.

Give counsel the actual source of each investor introduction. An address book, a purchased list, and a long-standing business relationship are different facts. Avoid assumptions such as “everyone in this group is an angel investor” without understanding how the group and introductions work.

Document the process that counsel determines is appropriate. Useful records can include the source of the introduction, relationship history, information reviewed, and the decision to provide offering access.

Publicity can affect a private offering

Rule 502(c) prohibits general solicitation by the issuer and people acting on its behalf. Founder posts and agency campaigns deserve the same review as a formal offering page.

A company can continue to communicate factual business information in appropriate circumstances. But presenting ordinary business news in a way that arouses interest in an investment opportunity can change the analysis. SEC staff Questions 256.23 through 256.25 address public websites and factual business communications.

A password-protected document room does not resolve general solicitation concerns created by the invitation used to attract investors. Review the entire communication path. Give employees and outside agencies a clear process for approval before they discuss the round publicly.

Non-accredited investors require more preparation

The exemption permits unlimited accredited investors. It also allows up to 35 non-accredited purchasers in any 90-calendar-day period, subject to the applicable purchaser-counting rules. Each non-accredited purchaser must be able to evaluate the investment’s merits and risks, alone or with a purchaser representative. These conditions appear in the SEC’s current 506(b) explanation.

Calling a participant a friend, customer, or sophisticated professional does not by itself satisfy the standard. Nor does the 35-person allowance renew whenever the company opens another closing.

If non-accredited purchasers participate, Rule 502(b) requires specified information a reasonable time before the sale. That includes financial information, access to questions and answers, and requirements concerning material information given to accredited investors. The financial statement requirements vary with the offering’s circumstances and size.

Ask counsel and the accountant to determine what must be prepared before inviting these purchasers. Accepting one non-accredited investor can change the disclosure work for the offering.

An all-accredited 506(b) round still needs care

Rule 506(b) does not impose 506(c)’s separate reasonable-steps verification requirement. The issuer still needs a reasonable belief that a purchaser satisfies an accredited category. Questionnaires and representations support that analysis in context. Do not ignore information that conflicts with an investor’s answers.

The SEC’s 506(b) guide also identifies Form D, state notice filings and fees, restricted securities, and bad actor provisions. The bad actor guide describes the covered participants and relevant disqualifying events. Establish the inquiry process before sales rather than waiting for the filing deadline.

A hypothetical private-round example

A fictional manufacturer approaches eight established investor contacts about a preferred stock financing. One wants to invest through a newly formed entity. Another does not meet an accredited category.

Those facts raise separate questions. Counsel needs to evaluate the entity’s purchaser status and counting treatment, while the potential non-accredited purchaser requires a sophistication and disclosure analysis. A signed subscription alone does not answer either question.

The issuer can prepare a review checklist before allowing either investment to proceed. The example illustrates process design, not a conclusion that the company qualifies for 506(b).

How Issuance fits

Issuance provides offering software for Rule 506(b), with investor checkout, electronic signatures, and dashboard records. Your company can use those tools within the private offering process it establishes with counsel.

Discuss document delivery, investor information, and record exports during a demo. Issuance licenses technology. It does not determine that a relationship satisfies the solicitation rules or replace the issuer’s responsibilities for eligibility and disclosure.