SEC Regulation D, Rule 506(c) is a significant addition to Regulation D, which originally came into force in 1982. Regulation D has been designed to help business owners privately fundraise from a large pool of investors. Under Rule 506(c), companies are permitted to offer private securities without legal obligation to register with the SEC.
Capital Raising Advantages Under Rule 506(c)
There are a number of important benefits to raising capital under the Rule 506(c) exemption. One of the most prominent is not having to go through the SEC registration process, which is generally time-consuming and expensive, and places a burden on companies to raise funds as quickly as possible. The registration process can put an undue burden on smaller businesses that need capital urgently to keep up with their growth and serve their customers well.
Some of the benefits of raising capital under Rule 506(c) include:
- The ability to raise capital from qualified investors without being encumbered by the SEC registration process and its significant amount of paperwork.
- The lower cost compared to traditional public offerings due to less paperwork and filing fees.
- The ability to raise money from an unlimited number of investors.
- The ability to generally solicit accredited investors.
- The ability to pool money together with other investors and generate significant returns.
Capital Raising Disadvantages Under Rule 506(c)
Some of the drawbacks of raising capital under Rule 506(c) include not being able to raise funds from non-accredited investors. This does limit the pool of investors from which businesses may obtain the funding they need.
Although companies operating under Rule 506(c) are not permitted to solicit funds from nonaccredited investors, they can still access a large pool of accredited investors with the freedom to utilize general solicitation and advertising.
Another disadvantage when raising capital under Rule 506(c) is the limitation imposed on the resale of securities. This limitation prevents investors from accessing liquid capital when they need it since the limitation prevents investors from immediately selling the securities they purchased from a company’s offering.
In conclusion, despite some drawbacks, the unlimited ability to solicit accredited investors and engage in online crowdfunding under Rule 506(c) makes it highly advantageous for the issuer.
