506(c) Guide: What You Need to Know

The Securities and Exchange Commission's (SEC's) Regulation D, Rule 506(c) allows high-yield, unregistered securities to be offered to investors.

Many accredited investors invest their money in alternative investments such as real estate funds and private equity. America's wealthiest families have 50% of their assets tied up in securities holdings composed only of alternative investments. The attraction to these 506 (c) investments is because alternative investments can offer so much more return than typical SEC-regulated investments.

Alternative investments come with slightly more risk which is why they are often open only to accredited investors.

Most of these investments are offered under the Rules 506(b) and 506(c) of the Securities Act.

Wealthward Capital deals primarily with 506(c) investments which means we only accept accredited investors. While that may sound extremely exclusive, many people are already accredited investors and don't even know it!

In this article we will take a look at the pros and cons of 506c and 506b investments, and what the difference is between each one. 

Quick heads up: This is not financial advice and neither Wealthward Capital nor any of its reps are financial advisors. But we do make our money work for our investors!

What is Reg D rule 506?

Regulation D, Rule 506, was a regulation in the Securities Act of 1933 which allowed companies to sell private equity to investors without having to register those securities with the Securities and Exchange Commission (SEC). Rule 506 has now been updated into separate subsections, a, b, c, etc.

The previous version of Rule 506 allowed private companies to sell equity directly to the public, but it didn't allow for broad promotion. These investments were often obtained only through word of mouth, hindering the ability of many startups to get the capital they needed to grow.

The SEC introduced Rule 506(c) as part of the Jumpstart Our Business Startups Act (JOBS Act) in 2013. The old Rule 506 then became 506(b).

The Rule 506(c) allows companies to actively promote their investments under certain conditions. There are less reporting requirements for 506(c) offerings and they are open only to accredited investors.

What's the difference between 506(b) and 506(c)?

When the JOBS Act was implemented in 2013, the old Rule 506 of Regulation D in the Act became the new Rule 506(b). And Rule 506(c) was added. The two rules are similar but have some key differences.

Rule 506(b) and 506(c) similarities:

  • Neither rule has a dollar limit on the investment.
  • Both can be offered by both public and private companies.
  • Both sell "restricted securities" which means these are not registered offerings and that they are sold directly by the company itself, or one of its affiliates.
  • Accredited investors can invest an unlimited amount.
  • Both can sell securities of any type.
  • No review by the SEC is required.
  • No ongoing disclosures are required.
  • Both receive the same penalties for fraudulent activities.
  • Intermediaries are not required, but if an intermediary is involved then it must be a registered broker-dealer, or an entity that is exempt from registering.
  • "Bad Actors" are not allowed in either offering.
  • Neither are required to comply with Blue Sky Laws (see lower down for definition).

Rule 506(b) differences:

  • Accredited investors can self-certify.
  • The offering can accept up to 35 non accredited investors, provided they are "sophisticated investors." Sophisticated investors are investors with a thorough knowledge of investment but who might not meet the financial requirements to reach accredited investor status.
  • If non accredited investors are involved, 506(b) offerings must provide financial statements and make certain ongoing mandatory disclosures.
  • Companies offering 506(b) investments may not engage in "general solicitation" such as ads in newspapers, magazines, websites, etc. The company is allowed to market directly to investors it has a relationship with. No internet ads are allowed.
  • Companies offering 506(b) must file a Form D ("Notice of Exempt Offering of Securities") with the SEC no more than 15 days after the first sale.
  • Private Placement Memorandum is required if any of the investors do not have accredited investor status.
  • Brand advertising is allowed, but the prospective investment cannot be presented until the company has developed a substantive relationship with the potential investor.

Rule 506(c) differences:

  • Accredited investors are the only ones allowed to invest in 506(c) offerings. The company must take reasonable steps to verify the investor's status using federal guidelines.
  • No mandated filing or disclosure requirements. Disclosures are instead driven by any liability concerns or as demanded by the market.
  • Companies offering 506 (c) investments can perform "general solicitation" openly and freely, ads on the internet, social media, print, etc.
  • Companies offering 506 (c) investments must file a Form D 15 days before general solicitation begins.
  • No Private Placement Memorandum is required.
  • No submission or disclosure of financial statements are required.

An important point to understand is that, advertising aside, 506(b) and 506(c) offerings are otherwise exactly the same provided that only accredited investors are involved. As soon as a 506(b) offering accepts a non-accredited investor, it has a lot more filing and disclosure obligations.

What is a 506c accredited investor?

Under Rule 506(c), issuers of securities can advertise their offerings widely on the internet and in other media, however, these offerings can only be sold to accredited investors. These are potential investors who meet basic financial requirements that show they can have a high risk exposure.

Many tech employees are accredited and don't even know it. If you earn a salary of $200,000 a year, or a joint salary of $300,000 with your spousal equivalent, you might be accredited. 

As per federal securities laws, companies offering investments under Rule 506(c) must take reasonable steps to verify your accredited status through bank statements, pay stubs, appraisal reports, brokerage statements, or other statements. You can also be verified through an official letter from a licensed attorney or accountant.

What are Regulation A+ offerings?

Title IV of the JOBS Act of 2013 introduced Regulation A+ offerings. These offerings are open to the general public, not only accredited investors, and allow companies to raise as much as $75 million in 12 months.

The limit was raised from $50 million to $75 million in 2021.

There are two tiers to Regulation A+ offerings:

Tier #1 allows  companies raise up to $20 million within 12 months. This route means you have no ongoing reporting requirements to the SEC but you must still comply with applicable Blue Sky Laws (see below for details on Blue Sky Laws).

The other option is Tier #2, allows you to raise as much as $75 million in a single year. This has more reporting requirements.

Regulation A+ investments are sometimes called "Mini-IPOs" because they are a way for a private company to sell interests in the startup to the public at large.

Wealthward Capital does not offer Regulation A+ investments because we are not a startup requiring capital to expand. Our offerings are primarily Regulation D Rule 506(c) investments that are professionally managed to bring you steady cash returns every month or quarter.

What is a "bad actor" in a 506c offering?

The Bad Actor Rule was introduced with the JOBS Act of 2013. It exists to further protect potential investors from fraud by eliminating people with "Disqualifying Events" in their professional history, from offering securities to the public.

Both 506(b) and 506(c) prohibit the involvement of a Bad Actor in the offering. The issuer of the prospective investment must take reasonable steps to verify that there are no Bad Actors in the company.

Disqualifying events include:

  • Securities-related criminal convictions
  • Securities-related injunctions or restraining orders
  • Revoked registration by the SEC 
  • Various fraud violations

Wealthward Capital takes the Bad Actor rule very seriously and we conduct an extensive background check of anyone we work with, and before we hire anyone, to verify that their record is clean. You are welcome to check the records of Wealthward Capital and any of our representatives using BrokerCheck.org or using the SEC's AdviserInfo tool. In the rare event that you ever do find something that concerns you or which might indicate that some person connected to Wealthward Capital is a bad actor, please bring it immediately to our attention and we will give it the urgent due diligence it deserves.

What are Blue Sky Laws and do they affect 506c investments?

Blue Sky Laws are state-level securities laws regulating the registration, qualification, and sale of securities products. Each state has its own laws and these might differ significantly from federal securities laws.

Regulation 506(c) and 506(b) investments are called "covered securities." A covered security is a security that is federally exempt from state regulations. That means that 506(c) offerings don't need to follow Blue Sky Laws for regulation and qualification of the offering.

It doesn't mean that the issuer of the security is exempt from filing the necessary forms required at state level, such as the mandatory Form D ("Notice of Exempt Offering of Securities").

That 506(c) offerings are exempt from Blue Sky Laws does not exempt the issuer concerning matters of fraud and misrepresentation. You are entirely within your rights to report such financial and business matters to your state regulator.

What is general solicitation?

“General solicitation” refers to broad advertising on the internet, print media, or communications broadcasts. It includes ads on public websites, radio, TV, magazines, and newspapers.

Rule 506(c) allows companies to generally advertise their offerings to a potential investor using the internet, social media, websites, TV campaigns, radio ads, etc. This is in contrast to Rule 506(b) (which is the same as the old Rule 506 before the JOBS Act came in) which does not allow general solicitation at all.

The only condition of 506(c) is that a potential investor must have accredited status to buy into the investment. It is up to the issuer of the security to verify the potential investor's status.

Wealthward Capital offers high-yield real estate investments under Rule 506(c) that can bring in as much as 10% return for an investor. These investments are only available to accredited investors. We can help you determine if you are an accredited investor or not.

What is a Pre-Existing Substantive Relationship?

A pre-existing relationship means the relationship between the potential investor and the issuer existed before the investor takes part in the offering. A substantive relationship means the entity offering the security has sufficient information to know if the potential investor is accredited or not.

In 506(b) offerings, the issuer is not allowed to present the offering until a substantive relationship has been formed. In a 506(c) offering, general advertising is allowed  so the issuer can offer the investment opportunity to anyone, however,  in a 506(c) offering, only investors with accredited status can actually participate.