What is Regulation D, Rule 506(b)?
Regulation D, Rule 506(b), is one of the most widely used exemptions for private companies raising capital. Historically, before the advent of more public-facing options, this rule facilitated the fundraising efforts of companies like Facebook and Uber during their pre-IPO stages.
These offerings are typically referred to as “private placements” due to the inability to advertise them publicly. They are traditionally used for raising capital from friends and family, as well as through traditional angel and venture capital rounds. This exemption allows companies to raise unlimited capital but primarily restricts participation to accredited investors, with a limited allowance for up to 35 non-accredited investors who meet certain sophistication requirements.
Key aspects of Rule 506(b) include:
- No Public Advertising: Companies using this exemption cannot publicly market or advertise their fundraising efforts. This restriction is the primary distinction between Rule 506(b) and Rule 506(c), which allows public advertising for accredited-investor-only offerings.
- Investor Disclosure Requirements: When non-accredited investors participate, companies must provide disclosure documents akin to those in registered offerings. Financial statements and other pertinent information must be shared equally among all investors.
This exemption is often favored by startups seeking a more private and targeted fundraising approach. However, its restrictions make it less suitable for online fundraising campaigns or broad public outreach. Other securities exemptions, such as Regulation A+ and Regulation Crowdfunding (Reg CF), may offer more accessible pathways for companies aiming to engage a wider audience.
