This is a question that isn’t asked often enough. Violations are scary, as it can mean forced rescission of your offering, regulatory fines and investor lawsuits.
And I see platforms violating this every day.
506(b) has one primary benefit – the ability to avoid having to confirm each investor’s accreditation (they are allowed to self-attest).
506(c) gives you all the features of the “old” 506-D exemption (now called 506b) plus the ability to use “general solicitation” to promote your fundraise; you can list it on websites (aka “platforms”), you can market it on Facebook, you can buy Google Adwords…heck, you can hire a blimp to circle the Super Bowl and drop leaflets on the crowd if you want. The downside is that the issuer has to reasonably verify each investor’s accreditation.
So, are you doing a 506(b)? If so, then that means you are not talking about, displaying, mentioning or communicating anything about your capital raise to anyone with whom you do not have a “substantive, pre-existing relationship.” Also, a broker-dealer may help sell your offering to investors with whom they already have pre-existing relationships (they can’t “smile & dial” as new investors/customers do not qualify).
Quick 506(b) compliance check: have you mentioned your need for capital anywhere, such as Facebook or Twitter? If yes, you’ve violated the law. Do you have anything about your offering on a website that is viewable to anyone not logged on and pre-screened pursuant to the LAMP no-action letter? If yes, you’ve violated the law. Did you file a Form D with Edgar while still raising capital and have any media source report publicly that you are conducting an offering? Goodbye exemption.
It’s a thin line and very easy to cross. In fact, many securities attorneys are now telling their clients not to even bother attempting a 506(b) offering and to just use 506(c), as in this electronic age it’s almost impossible to keep people from violating the law. It’s too easy, as capital hungry business owners will take opportunities to connect with potential investors without really thinking about the regulatory consequences.
Conclusion: 506(b) is great for those who understand and can successfully raise capital working within the very limited range of what the rules allow. Generally (pun intended) the vast majority of people raising money via Regulation D should use 506(c), even though it means a little more hassle to confirm the investors accreditation, as it takes the cuffs off how you promote your offering. In creating the 506c rules, the SEC essentially can now take a much harder line on how they view 506b raises. Yes, you have to reasonably confirm an investors accreditation, but in practice that’s really not very hard to do.
These materials are my personal opinions and for informational purposes only and not for the purpose of providing legal or tax advice. The issues discussed include complicated areas of law and legal advice should only be obtained and relied upon from a securities attorney about your specific circumstances.