In the past several years, certain SEC regulations have gone through various changes. These changes have occurred in connection with the JOBS Act which was initially passed in 2012. This Act was created to lower the obstacles to the formation of capital in the small business marketplace. Through the implementation of Rule 506(c) and equity crowdfunding, the goal was to help businesses acquire more investors, more easily.
Provided no public offerings are issued, Rule 506(c) releases companies from the requirement to register their securities offerings. The prohibition against general solicitation is no longer in force under Rule 506 (c) as long as the investor who was the recipient of the general solicitation complies with certain rules. Crowdfunding is different and will be explained below.
The Structure of 506(c) Offerings
Crowdfunding and Rule 506(c) offers a similar benefit to companies. They help businesses have access to a wide-ranging pool of investors. They also utilize advanced technologies to raise capital inexpensively and fast. There are, however, some key distinctions between the two ways of acquiring funds. Generally, 506(c) offerings have fewer prohibitions than crowdfunding other than the fact that a Rule 506(c) offering is stricter about who can invest.
Investors
Crowdfunding has access to a larger pool of investors than 506(c) offerings which are restricted to accredited investors. Also, a Rule 506(c) investor must be verified. Often, investors use a third-party verification service in order to bypass the requirement to give sensitive information about themselves to the company which they are intending to support.
Advertising Restrictions
Rule 506(c) offerings are now widely advertised, whereas the regulations on soliciting through crowdfunding are still more restrictive. There are significant limits on general advertising through crowdfunding. The offeror must conduct primary disclosure through a recognized funding portal website.
Capital Raise Limits
Although there is no limit on the capital raised for a 506(c) offering, those desiring to raise capital through regulation crowdfunding are limited by a $5 million USD per year cap. If a business requires much more capital, this avenue of raising capital may not be feasible.
Legality
Rule 506(c) offerings are completely legal. On the other hand, there are some legal restrictions to be aware of in crowdfunding.
As is evident, there are some distinct differences between Rule 506(c) offering and crowdfunding. The use of either tool requires the proper knowledge of multiple factors.
