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Regulation D, Rule 506(b) ​

Rule 506(b) is a "safe harbor" under Regulation D that allows issuers to raise capital from a mix of investors without registering the offering with the Securities and Exchange Commission (SEC). It is the most widely used exemption for private placements and is defined by its prohibition on public advertising.

Fundraising Limits ​

There is no limit on the amount of capital an issuer can raise in a Rule 506(b) offering.

Solicitation Rules ​

Issuers are strictly prohibited from using any form of general solicitation or general advertising to market the securities. Offers may only be made to prospective investors with whom the issuer has a substantive, pre-existing relationship. This relationship must be established prior to the offering and allow the issuer to determine that the investor is a suitable candidate for the investment.

Investor Qualifications ​

Rule 506(b) permits the sale of securities to two categories of investors:

  • Accredited Investors: An unlimited number of accredited investors may participate. The issuer must have a "reasonable belief" that these investors meet the accredited criteria. This standard is typically met through the use of a self-certification questionnaire.
  • Non-Accredited Investors: Up to 35 non-accredited investors may participate. However, each non-accredited investor must be "sophisticated." This means they must possess sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the investment.

Disclosure Requirements ​

The required level of disclosure is directly tied to the type of investors in the offering.

  • If Selling Only to Accredited Investors: Rule 506(b) does not mandate any specific disclosure documents. However, the offering is subject to federal anti-fraud provisions, which require the issuer to provide all material information necessary to make an informed investment decision.
  • If Selling to Any Non-Accredited Investors: The issuer must furnish all non-accredited investors with disclosure documents that are "generally of the same kind" as those required in a registered offering. This typically necessitates a comprehensive Private Placement Memorandum (PPM), which must include audited financial statements.

Reporting Requirements ​

The SEC Notice Filing (Form D) is the one and only required filing with the SEC for a Reg D offering.

  • What it is: A Form D is a brief notice that a company has sold securities without registration. It is not a disclosure document and does not contain detailed financial information. It simply alerts the SEC and the public that a private placement has occurred.
  • When it's filed: It must be filed with the SEC within 15 days of the first sale of securities in the offering.
  • Frequency: This is a one-time filing for the offering, not a recurring or ongoing report.

Reporting to Investors ​

While the SEC doesn't require ongoing public reports, issuers still have an obligation to keep their investors informed. This obligation is not defined by Regulation D itself, but rather by the legal agreements signed during the investment.

  • What it is: The Subscription Agreement, LLC Operating Agreement, or Shareholders' Agreement will typically outline the issuer's commitment to provide investors with updates.
  • What it includes: This can range from a simple quarterly email update to providing annual financial statements. For investments in LLCs or partnerships, it also includes providing necessary tax documents, like a Schedule K-1.
  • Why it's done: This is a matter of good governance and maintaining strong investor relations. It is a private, contractual obligation to the people who invested, not a public filing for the whole world to see.

Ongoing Updates & Communication ​

There are no SEC-mandated ongoing reports. All communication is either voluntary (a best practice for good investor relations) or a contractual obligation as defined in the Shareholders' or Operating Agreement.