SEC Guideline Provides New Framework for 506 Issuers, Crowdfunding and Accredited Investors
Securities broker-dealers who have been using 506(c) and 506(b) offerings to raise funds must now abide by a new U.S. Securities and Exchange (SEC) compliance interpretation that effectively treats a 506(c) offering as a public offering, subject to guidelines that limit sales to verified, accredited investors.
The November 2016 compliance and disclosure interpretation (C&DI) by the SEC’s Division of Corporation Finance confirms that a 506(c) offering cannot be integrated with a recently recompleted 506(b) private offering, according to West Palm Beach Attorney Laura Anthony, founding partner of Legal and Compliance, LLC, and author of the Securities Law Blog.
Typically, issuers can raise funds through either 506(b) or 506(c) offerings. In general, 506(b) offerings cannot be advertised but can involve an unlimited number of accredited investors and up to 35 unaccredited investors, so long as the unaccredited investors verify via checkbox their financial soundness. By contrast, 506(c) offerings can be advertised but they are limited to accredited investors only, and issuers must disclose financial information about the investors.
Under the new interpretation, an issuer who wants to solicit public investors under 506(c) guidelines for a previous private 506(b) offering would not be allowed to integrate the two. Instead, the issuer must satisfy 506(c) guidelines for subsequent offers and sales, Anthony notes, including taking “reasonable steps to verify the accredited investor status of all subsequent purchasers.”
Anthony points out that since the SEC removed the prohibition against soliciting and advertising private 506(c) offerings in 2013, several trailblazing companies have emerged in the capital marketplace to provide online information and access to verified investors or that serve as accredited, investor-only crowdfunding websites.
“As interpreted by the SEC, a completed private offering will not be integrated with a subsequently commenced registered public offering,” Anthony explains. “Clearly, as a result of the ability to publicly solicit, the SEC is treating a Rule 506(c) offering as a public offering in making an integration analysis.”
Other SEC rules, Anthony notes, also provide clarity about whether separate offerings can be integrated, depending on the type of securities, timing of the offerings, purpose of the offering and other factors.
