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506b Offering: Key Features, Requirements, Legal Help

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What is a 506(b) Offering?

A Rule 506(b) offering is a private placement that gives companies the chance to raise unlimited amounts of money without having to register it. However, a misconception is that there are no requirements with 506(b), which isn’t the case.

Read the rest of this article to explore Rule 506(b) offerings in greater detail, such as their key features, requirements, and how a lawyer can help you navigate them for accuracy and to avoid disputes.

What are Key Features of a 506(b) Offering?

A 506(b) offering has the following features to know about:

  • No general solicitation. Issuers of the offering aren’t allowed to advertise it via websites or public advertising.
  • Relationship. The company must have a pre-existing relationship with investors prior to offering them securities.
  • Accredited investors. An unlimited number of accredited investors can participate.
  • Non-accredited investors. Only up to 35 non-accredited, sophisticated investors can participate.
  • Verification. Issuers don’t have to conduct in-depth investor verification.
  • Blue Sky law” exemption. 506(b) securities are exempt from Blue Sky laws, or state registration requirements, which reduces a company’s regulatory duties.

What are Common Requirements of 506(b) Offerings?

Although 506(b) offerings might seem easier to execute, they still have certain requirements to meet. These include the following:

Disclosure

Disclosure requirements mainly affect non-accredited investors. Companies have to provide a private placement memorandum (PPM). This document contains the following information:

  • Terms. Details about the issuer, minimum investment amounts, and purpose of the offering must be included.
  • Risks. Potential risks need to be shared with investors, such as financial and regulatory pitfalls.
  • Company summary. This details the company’s business model and history to ensure transparency for investors.
  • Use of capital. There should be information about how the capital the company raises will be used, and for what purpose.
  • Financial statements. The company should provide supporting financial documents to investors so that they can make an informed decision on the offering.

Form D Filing

To comply with the Securities and Exchange Commission (SEC), companies are required to file a Form D with the SEC within 15 days of their first securities sale.

Form D is a simple form that provides details about the offering and company.

If you don’t file Form D, you will be noncompliant, which can land you in serious legal trouble. The SEC could pursue administrative and civil enforcement action against you, which could include penalties or not being allowed to issue securities.

To file a Form D, you should register on the EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system on the SEC platform.

No General Solicitation

No type of general solicitation or public advertising is allowed. This includes large and small activities, such as creating social media campaigns, sending mass emails, marketing on websites, and even making public presentations.

Being mindful of permitted activities you can engage in is important. For example, you can have one-on-one meetings with known investors you’ve worked with before.

Is a 506(b) Offering Right For You?

A 506(b) offering is ideal for companies who meet the following requirements.

  • They have an existing strong network of investors, which enables them not to have to publicly advertise the offering.
  • The company is a startup that wants to avoid general solicitation or advertising.
  • The company wants to avoid expensive and/or time-consuming verification because investors can self-certify themselves.
  • The company wants to use non-accredited investors.

Should You Consider a 506(c) Offering Instead?

Some companies or investors might want to choose Rule 506(c) instead of 506(b), for various reasons.

One of the most important is that they can engage in general solicitation and advertising. That said, they can only make use of accredited investors.

Under Rule 506(c), self-certification is allowed for investors, but this comes with strict conditions.

Do You Need a Lawyer for a 506(b) Offering?

Although you don’t always have to hire a lawyer to help you through the 506(b) offering process, it’s advisable. Many offerings can be quite technical and legally complex because they are securities laws.

You want to hire a securities lawyer to help you structure the offering and prevent making early mistakes that can cost you later. Here are some other ways in which a lawyer can help you:

  • A lawyer will help you assess if your deal should be a 506(b) or other offering, depending on your needs and business goals.
  • They’ll draft or review essential documents you need, such as the PPM, to ensure they’re clear, transparent, and legally sound.
  • They’ll keep the offering documents and deal compliant with all rules and regulations.
  • They’ll ensure you stay on track with all filing deadlines to prevent having to pay penalties.
  • They’ll manage your investor risk. For example, if you have a dispute with an investor who claims that they were misled, a lawyer can help you to deal with the situation and protect your interests.

Where to Find a Lawyer for a 506(b) Offering

Although finding a qualified, professional lawyer can sometimes feel overwhelming, it doesn’t have to be a time-consuming process. You can find a lawyer on an online legal network such as ContractsCounsel, one of the largest online legal marketplaces connecting clients with qualified lawyers. All lawyers on the platform are vetted.

Lawyers will help you whether you’re issuing the offering or you’re an investor, such as by structuring the deal and preventing prohibited activities, such as engaging in advertising. They’ll also take the hassle out of all required filing and paperwork.

On the ContractsCounsel platform, you can hire a lawyer based on criteria such as previous projects they’ve completed, their level of experience, their expertise, and client ratings. Accessing this research will give you the confidence to choose the best lawyer for your 506(b) offering.


ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.


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