Accredited Investor Crowdfunding with 506(c) – The Reg D Rule You Need To Know – Part 3
By: Heidi Abdul, Corporate Consultant and Auxana member
The first two blogs in this Reg D series focused on the most commonly-used Rule of Reg D, Rule 506(b), but Reg D’s most recent safe harbor rule is for crowdfunding. That’s why part 3 of this series focuses on Rule 506(c) – Accredited Investor Crowdfunding. With high net worth investors, online advertising and general solicitation, and $210 billion in total capital raised last year, Accredited Investor Crowdfunding is gaining popularity among later-stage businesses with interested backers.
While there are many similarities between Rules 506(b) and (c), such as exemption from SEC registration, Form D filings, Blue Sky Laws, and bad actor disqualifications, Rule 506(c) has its own set of benefits (and restrictions) when it comes to the determining which type of offering is the best fit for your business. Here are 3 features of Accredited Investor Crowdfunding:
- Advertise directly to potential investors
Rule 506(c) allows issuers to generally solicit and advertise their offering to potential investors; a huge distinction from other Reg D offerings and an opportunity to acquire investors in new ways. Because Rule 506(c) requires all investors to be accredited, the scope of the offering is more narrow than regulation crowdfunding, which allows for smaller investments.
This type of solicitation can take whichever form fits the business’s needs the best: social media, print ads, email campaigns, websites, matching platforms, etc. As Mark Twain once said, “Many a small thing has been made large by the right kind of advertising.” Accredited Investor Crowdfunding is geared towards exactly this – growing a smaller business into something much larger and exponentially faster than a company could do on its own.
- Higher net worth investors
The ability to advertise your offering through a general solicitation is a huge distinction, but it’s important to remember the strict requirement of 506(c) that investors must be accredited… it’s also up to the issuer to affirmatively confirm that investors are, indeed, accredited. This accreditation requirement is actually a benefit since accredited investors tend to have a higher net worth with more funds to invest. And, because there can be an unlimited number of accredited investors and unlimited capital raised under Rule 506(c), these higher net worth investors are even more valuable.
Keep in mind that if just one investor is unaccredited, your offering will no longer qualify for the Rule 506(c) exemption. Of course, most executives growing an emerging business may not want to spend their time confirming investors’ accreditation, so many businesses choose to use an online platform matching issuers with investors to ensure they’re protected from unaccredited investors taking part in their offering. There are also platforms that offer verification services of accredited investor status. Some of these platforms involve offerings of hundreds of millions of dollars with high levels of security to ensure a successful transaction.
- Digital transactions
Today’s business transactions are transforming to become more and more digital, but Rule 506(c) transactions have been fully online for a while now. Many online broker-dealer platforms use blockchain algorithms to ensure compliance and regulatory standards. These platforms are a true convergence of technology and finance. Where other types of offerings are catching up, Rule 506(c) is becoming more accessible for both businesses and investors.
Most of the regulatory filings associated with the SEC and Blue Sky Laws can be done online through EDGAR (federal) or NASAA (state). If you’re advertising the offering, finding the businesses to invest in, moving forward with the transaction, and filing compliance all online, everyone saves time and money throughout the transaction.
Accredited Investor Crowdfunding under Rule 506(c) of Regulation D is a great way for businesses to use general solicitation to promote their offering to high net worth investors in new ways while their offer remains exempt from SEC registration. With this type of offering growing in up-and-coming online platforms, it’s a Reg D rule that should be considered when looking to grow your business and investment.
My 25+ years of experience can help you navigate the planning, timeline, cost, and compliance of Regulation D offerings and purchases, taking you from an opportunity to a completed funding. Contact us for more information!
DISCLAIMER: This blog does not contain or constitute legal advice and we are not a law firm nor will we provide legal advice. Auxana Inc. is not a law firm, does not provide any legal services, any legal advice, explanation, opinion, or recommendation about possible legal rights, remedies, defenses, options, or any lawyer referral services, and does not provide or participate in any legal representation.