When General Solicitation is Permitted? Rule 506(c) vs. Rule 506(b)

The process of general solicitation involves the dissemination and advertising of information about a securities offering to the public. The Securities and Exchange Commission (SEC) looks at the particular facts of the case when determining if a communication is considered general solicitation.

Examples of General Solicitation

One example of potential general solicitation would be sending an email to all individuals on your contacts list, informing them of your intention to raise capital. In this case, the email blast is likely to be considered general solicitation if it was sent to enough recipients to be considered public, and the information in the email pertains to the offering. Another example would involve posting the actual terms of a securities offering in a widely published newspaper and asking interested investors to contact you.

Rule 506(c) vs. Rule 506(b) and General Solicitation

Regulation D is divided into two different offerings: Rule 506(c) and Rule 506(b) offerings. Each rule permits issuers of securities to raise an unlimited amount of capital from a limitless number of investors without the requirement to file a statement of registration with the SEC as long as the issuer follows specified requirements.

As an example, issuers utilizing either rule are permitted to sell securities to accredited investors. Under Rule 506(b), issuers may sell securities to a maximum of 35 non-accredited sophisticated investors. However, under Rule 506(c) issuers must take reasonable steps to verify the investor’s status as an accredited investor. On the other hand, under Rule 506(b) issuers are permitted to depend on certifications offered by investors indicating their accredited status.

The issuer’s ability to use general solicitation to advertising offering is one of the most essential distinctions between the two Rules. Under Rule 506(c), general solicitation is permitted. Under Rule 506(b), general solicitation is not permitted, and issuers may only advertise to investors with whom they have an existing relationship, primarily by word-of-mouth.

Before advertising and offering to the public, it is crucial to decide whether to operate under Rule 506(b) or Rule 506 (c). A mistake made by the issuer with regards to these Rules could subject the issuer to examination by the SEC and enforcement for selling unregistered securities, or potential private lawsuits.

The Bottom Line

In conclusion, with any offering you intend to conduct under Regulation D, refrain from advertising your offering to the public if you are going to operate under Rule 506(b). If as an issuer you are going to conduct a crowdfunding campaign, you must do so under Rule 506(c) or under another regulation that allows general solicitation.


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Author: Myrtice Lovett

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