Rule 506(c) permits businesses to share their securities offerings to the public without the requirement to register with the SEC. However, the securities must be sold to accredited investors, and the issuer must take reasonable steps to verify the investors are accredited.
Rule 506(c) – A Favorite of Real Estate Investors
Real estate investors often utilize Rule 506(c) to raise capital. These investors can raise an unlimited amount of funds from an unlimited number of investors. The Jumpstart Our Business Startups Act (JOBS Act) created this rule. Before Rule 506(c) was instituted, most businesses relied on Rule 506(b), which did not permit general solicitation. When a real estate investor can publicly advertise its sale of securities, many opportunities open up for deals they may never have had access to.
Raising Funds With Rule 506(c)
Raising funds with this exemption is similar to raising funds under Rule 506(b), with additional work required. Because Rule 506(b) only requires accredited investors to certify themselves, the issuer is not responsible if they end up as a non-accredited investor. However, Rule 506(c) requires issuers to conduct reasonable steps to verify the accredited status of investors.
Issuers may verify the accredited status of investors by checking the investors’ income through submitted tax returns from the previous two years or documents that demonstrate net worth from assets and liabilities. There are many other methods, and the net worth method is one of the most common methods. An issuer may also rely on a third-party verification company to perform the verification work.
Regardless of the method used for verification, it is essential to retain a complete record of how you verified the status of each potential investor, in case the SEC asks for such.
Next, it is time to locate accredited investors. This may be done through general advertising under Rule 506(c). Email marketing and social media are two popular ways to advertise private offerings. Under 506(c), you are not required to restrict your advertising to only accredited investors. You only have to make sure the investor in your offering is accredited before accepting his or her money.
You will be required to file Form D per the requirement of the SEC within 15 days of the sale of your first securities. Depending on the state in which you live, you may also be required to file a notice and possibly a filing fee.