The SEC fundamentally changed the Rule 506 registration exemption in 2013 by eliminating the long-standing prohibition on general solicitation in new Rule 506(c). The rule change, made in response to a congressional mandate in the JOBS Act, allows companies to engage in general solicitation or advertising in connection with unregistered securities offerings, provided the securities are sold only to accredited investors. Despite the opportunity to reach new investors through the internet, however, issuers have been slow to warm up to the Rule 506(c) exemption. As SEC Chair Mary Jo White stated in January 2016 in a speech at a securities conference:
Although Rule 506(c) allows issuers to reach out to investors through internet advertising and social media, the rule places new obligations on issuers that are present in the exemption under Rule 506(b). Under Rule 506(b), accredited investors typically self-certify their eligibility status through an issuer questionnaire. The Rule 506(c) exemption requires issuers to take proactive steps to confirm that the purchasers are eligible buyers.
Under the rule, issuers must take “reasonable steps” to verify accredited investor status. The SEC advised that issuers may verify income for eligibility purposes by reviewing IRS documents, and may review bank and brokerage statements and credit reports to determine net worth.
In addition to a more rigorous vetting process for prospective investors, Rule 506(c) does not allow sales to any unaccredited investors. Rule 506(b) affords the flexibility of selling to up to 35 non-accredited investors who meet specified financial sophistication standards.
These differences between the two exemptions may explain the rather lackluster response to the opportunities afforded by Rule 506(c). However, prospects exist for increased usage of the rule. Chair White noted that “one thing we’ve seen this year, and again, not to over conclude from this, is that the size of the 506(c) offerings are getting bigger by size, not in numbers, but in size.” A growing number of registered broker-dealers are also acting as intermediaries for these transactions. Although not required for Rule 506(c) transactions, the use of an intermediary may streamline the offering process for issuers and connect them with suitable and interested investors.