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Why Should You Consider Fund-Raising as a 506(c)?

What is Rule 506(c)?

About Rule 506(c): Under the Securities Act of 1993, Regulation D allows exemption to private issuers to register securities with the Securities and Exchange Commission(SEC). Exempt securities allow fundraisers to raise enough capital as long as the sale gets granted to a private investor. Startups can take advantage of private placements in their early stages of raising capital (money).

In 2013, under the governance of Barack Obama, the U.S. government passed the Jumpstart Our Business Startups (JOBS) Act which broke Regulation D into two new rules – 506(b) and 506(c). Rule 506(b) allows selling securities to raise an unlimited amount of capital to accredited investors and a small number of 35 non-accredited investors.

However, rule 506(c) allows startup companies to sell and market their offerings to a larger audience through the act of general solicitations. Startups can engage through various means of widespread advertising, such as social media, websites, tv ads, etc., to inform investors about a securities offering.

However, there are a few limitations under Rule 506(c), which gives consent to the issuer to offer to purchasers who are:

  1. Accredited investors
  2. They can verify their accredited status
  3. They meet other specifications under Regulation D

An accredited investor needs to have an annual income of USD 2,00,000 in the last two years or a yearly joint income of USD 3,00,000. The individual’s total net worth should exceed USD 1,000,000, without the inclusion of their primary residence. 

What Does Rule 506(c) Mean for Fundraising?

When the time comes for fundraising for your organization, the benefits of raising as a 506(c) should be considered. The 506(c) exemption was put in place in 2013 and enabled general solicitation by startups while fundraising. This essentially means that your startup can advertise while fundraising, which is not allowed for 506(b) organizations.

Pros and Cons

506(c) Pros

  • You can openly advertise and promote your startup’s fundraise
  • You can publish an official banner on your website to direct new investors to your Propel(x) deal profile.
  • You can collaborate with the Propel(x) marketing team to further promote your fundraising deal. This may include:
    • Press story
    • Media outreach
    • Social media and content marketing

506(c) Cons

  • You are required to verify that all potential investors are accredited. For funds raised from investors outside of Propel(x), you must take “reasonable steps” to verify that the investors are accredited. While the SEC does not explicitly define what “reasonable steps” are, they do mention that they may include ‘“reviewing documentation, such as W-2s, tax returns, bank and brokerage statements, credit reports and the like.” However, for all funds raised on Propel(x), we do all the work for you! Propel(x) takes care of all investor verifications as part of our service.

Summary

If you would like to maximize your fundraising efforts for current and future rounds, 506(c) is a good option to consider. For all investments raised on Propel(x), we take care of accredited verification for you. We are providing this information to inform entrepreneurs of this potential 506(c) option. Please consult your lawyer for further 506(c) consideration.

SEC info link: https://www.sec.gov/fast-answers/answers-rule506htm.html

Propel(x) Disclaimer
Propel(x) does NOT offer legal advice. We provide this information to inform founders about considering the 506(c) exemption. Please consult your lawyer for further 506(c) consideration.

 

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Fundraising 101 Startup Tips
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