Reg D 506C - What is Reg D 506C?
There are a lot of decisions that you have to make when it comes to fundraising. The size of the offering, who to call first, what terms, what instrument, etc. are some of the primary decisions. One aspect that is generally overlooked, but is equally important, is choosing a suitable regulatory option for crowdfunding. Regulation D or Reg D fund is a popular choice. It has two primary rule extensions: 506B and 506C. This article focuses on Reg D 506C.
What is Reg D 506C?
506C is an extension of Rule 506 under Reg D. It came as a result of the JOBS Act from 2012. This was done to offer more opportunities to investors as well as business owners to raise funds to help the economy’s growth.
Before 506C, there was are a general solicitation ban under Reg D exemptions. But 506C lifted this ban, hence allowing businesses and people seeking investors to advertise their investment opportunity publicly. However, non-accredited investors are not allowed to invest in this kind of offering. That said, issuers are still able to raise an unlimited amount of capital from an unlimited number of investors, but they all must be accredited.
Since all investors must be accredited, issuers have to verify their accredited investor status. They have to review documents, e.g. W2 statements or tax returns in order to verify documents or income that can prove the net worth of the potential investor. Some issuers opt to hire the services of a third-party company to handle this process to satisfy the verification requirement.
Pros and Cons
As you only work with accredited investors, there are less disclosures that need to be provided. You can offer high-quality investment opportunities to grow your investor network.
It offers opportunities to investors that are normally reserved for smaller groups.
You can advertise the offering
You can raise an unlimited amount of money
Non-accredited investors are not allowed
Since any accredited investor can invest, you probably won’t be able to achieve as deep of a relationship with all your investors
The accreditation status of investors must be verified
You can learn about other advantages and drawbacks of 506C from regulation D exemption chart.
Raising Capital Under the Reg D 506C
Route Reg D 506C did a lot for investors, particularly those who have limited funds. It allows investors with limited funds to start buying great deals without taking several years to slowly build their wealth and portfolio. If you have the knowledge and experience as well as access to the kinds of deals that will attract investors, then raising capital under the Reg D 506C route may be an excellent choice for you.
Before you proceed, it is recommended that you familiarize yourself with the rules under Reg D and do proper research to find out what investors are looking for. With the right ambition and knowledge, you can go a long way utilizing the potential of Reg D 506C crowdfunding.
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