Reg D 506(c) Offering

Verifies an individual's income meets the SEC's threshold. Acceptable documentation includes:

• IRS forms: Recent W-2, Form 1099, or filed Form 1040.
• Written confirmation: From a CPA, attorney, or registered investment advisor.
• Third-party verification: Reliance on a registered broker-dealer or investment advisor's verification. The standard is $200,000 individual income ($300,000 joint) for the last two years with an expectation of the same in the current year.

Confirms an individual's net worth exceeds $1 million, excluding the value of their primary residence. Verification steps include:

• Asset review: Bank statements, brokerage statements, and appraisal reports.
• Liability review: A credit report from a nationwide consumer reporting agency.
• Third-party confirmation: Written verification from a broker-dealer, investment advisor, or attorney. The issuer must review relevant documentation for assets and liabilities dated within the prior three months.

For investors who were accredited investors prior to a 506(c) offering and remain investors in the same issuer, verification can be streamlined. The issuer may rely on a certification from the investor that they still qualify. This method applies when:

• The investor invested in the issuer as an accredited investor before September 23, 2013.
• The investor maintains their investment through the new 506(c) offering. The issuer must have a reasonable belief that the investor still qualifies.

An alternative to the specific checklist approaches, this method requires an issuer to consider the facts and circumstances of each purchaser and the transaction. Factors include:

• Nature of the purchaser (e.g., sophistication, financial knowledge).
• Amount and type of investment.
• Nature and terms of the offering. The issuer must conclude, based on its overall assessment, that it has taken reasonable steps to verify accredited status. This is a more flexible but subjective approach.

Failure to properly verify accredited investor status in a Rule 506(c) offering carries significant risks, including:

• Rescission rights: Investors may have the right to demand their money back.
• Loss of exemption: The offering may lose its safe harbor from SEC registration, potentially violating the Securities Act.
• SEC enforcement: The SEC can bring actions for injunctions, disgorgement, and civil penalties.
• State enforcement: State securities regulators (Blue Sky laws) may also bring actions. Proper documentation of the verification process is critical for defense.

Unlike traditional private placements, Rule 506(c) explicitly permits issuers to publicly advertise their offering. This includes using websites, social media, and conferences to reach potential investors. The trade-off is a strict verification requirement. Issuers must take reasonable steps to verify that all purchasers are accredited investors, shifting the burden of proof from the investor to the issuer.

Issuers must use objective, third-party methods to confirm an investor's accredited status. Acceptable verification methods include:

• Income Verification: Reviewing IRS forms (e.g., W-2, tax returns) for income exceeding $200k (individual) or $300k (joint) for the last two years.
• Net Worth Verification: Reviewing bank statements, brokerage statements, and credit reports to confirm net worth over $1 million (excluding primary residence).
• Third-Party Verification: Relying on a written confirmation from a registered broker-dealer, investment adviser, attorney, or CPA.

506(c) is a primary legal framework for Security Token Offerings (STOs) of tokenized real-world assets (RWAs). Blockchain enables:

• Programmable Compliance: Embedding verification checks and transfer restrictions directly into the token's smart contract (on-chain KYC/AML).
• Global Investor Pools: While U.S.-focused, it allows issuers to market to accredited investors worldwide, with blockchain facilitating efficient cross-border settlement.
• Secondary Market Potential: Tokens can be designed for trading on Alternative Trading Systems (ATS) regulated by FINRA, like tZERO or INX.

This exemption offers significant benefits for capital formation:

• No Fundraising Limit: There is no cap on the amount of capital that can be raised.
• Broader Reach: Ability to use modern marketing channels to find investors.
• Reduced Regulatory Hurdle: Avoids the costly and time-consuming SEC registration process of a public offering (IPO).
• Investor Certainty: By dealing solely with accredited investors, issuers face a presumed sophistication level, potentially reducing disclosure burdens.

Issuers must file a Form D notice with the SEC within 15 days of the first sale. This filing discloses basic information about the company, its executives, and the offering details. While ongoing reporting is less burdensome than for public companies, issuers remain subject to anti-fraud provisions of federal securities laws. All offering materials, including advertisements, must not contain any untrue statements or material omissions.

The traditional Rule 506(b) exemption is often compared to 506(c). Key differences:

• Solicitation: 506(b) prohibits general solicitation/advertising.
• Verification: 506(b) allows issuers to rely on an investor's self-certification of accreditation, without mandatory verification steps.
• Non-Accredited Investors: 506(b) permits up to 35 sophisticated (but non-accredited) investors, whereas 506(c) is exclusively for accredited investors.
• Pre-existing Relationship: 506(b) offerings typically require a substantive, pre-existing relationship between the issuer and investor.

The cornerstone of a 506(c) offering is the issuer's affirmative obligation to verify that all purchasers are accredited investors. This is a higher standard than the 'reasonable belief' test used in traditional 506(b) offerings. Acceptable verification methods include:

• Reviewing tax returns, W-2s, or other IRS forms for income.
• Obtaining written confirmation from a registered broker-dealer, investment adviser, or attorney.
• Reviewing bank statements, brokerage statements, or other documentation for assets. Failure to properly verify investor status invalidates the exemption.

Rule 506(c) explicitly permits general solicitation and advertising, such as public websites, social media, and seminars, to attract investors. This is its primary distinction from 506(b). However, all marketing materials must be truthful and not misleading, and the offering is still restricted to verified accredited investors only. This allows for broader outreach while maintaining a closed pool of eligible participants.

Only accredited investors are permitted to purchase securities in a 506(c) offering. Non-accredited investors are categorically excluded. The definition of an accredited investor includes:

• Individuals with income exceeding $200,000 (or $300,000 with a spouse) for the last two years.
• Individuals with a net worth over $1 million (excluding primary residence).
• Certain entities like banks, investment companies, and trusts with over $5 million in assets. This creates a high barrier to entry for retail participation.

Issuers must file a Form D notice with the SEC. This is a notice filing, not an approval process. Key requirements include:

• Filing 15 days after the first sale of securities.
• Amending the filing to indicate the offering is conducted under Rule 506(c).
• Providing basic information about the issuer, its executives, and the offering. Failure to file Form D can result in the loss of the exemption and regulatory penalties.

Securities offered under Rule 506 are federally preempted from state registration and qualification requirements. However, issuers must still file the Form D and pay a fee in each state where investors reside (state notice filings). States retain authority to investigate and enforce anti-fraud provisions. This simplifies multi-state offerings but does not eliminate all state-level compliance.

Rule 506 offerings are subject to 'bad actor' disqualification rules (Rule 506(d)). The exemption is unavailable if the issuer or certain affiliated persons (e.g., directors, officers, significant shareholders) have a disqualifying event, such as certain criminal convictions or SEC orders. Issuers must conduct factual inquiries to confirm no disqualifications exist. Additionally, securities acquired are restricted securities subject to resale limitations under Rule 144.

An Accredited Investor is an individual or entity permitted to invest in unregistered securities offerings like Reg D 506(c). The SEC defines this status primarily by financial thresholds, such as:

• Individual Income: >$200,000 (or $300,000 with spouse) for the last two years.
• Net Worth: >$1 million (excluding primary residence).
• Entities: Certain trusts, corporations, or partnerships with >$5 million in assets. This classification is central to 506(c), as issuers must take reasonable steps to verify this status for all purchasers.

Regulation D is an SEC regulation providing exemptions from the registration requirements for securities offerings. It consists of several rules, with Rule 506 being the most widely used. Key distinctions:

• Rule 506(b): Permits sales to an unlimited number of accredited investors and up to 35 sophisticated non-accredited investors, but prohibits general solicitation.
• Rule 506(c): The subject of this glossary, allows general solicitation but restricts sales to verified accredited investors only. These exemptions are critical for private capital formation.

General Solicitation refers to the public advertising of a securities offering through channels like websites, social media, or public events. Traditionally prohibited for private placements, Rule 506(c) explicitly permits it, revolutionizing startup and fund marketing. However, this freedom comes with the strict requirement for accredited investor verification. This contrasts with Rule 506(b), where using general solicitation would void the exemption.

A SAFE is a common investment instrument used in early-stage fundraising, often under Reg D 506(c). It is not a debt instrument but an agreement to provide the investor future equity upon a triggering event (e.g., next equity round). Key features:

• Convertible: Converts to preferred stock later, with a discount or valuation cap.
• Speed: Simpler and faster to execute than priced equity rounds.
• Use Case: Frequently used by startups raising from accredited investors via platforms that utilize the 506(c) exemption for broad outreach.

Form D is a mandatory notice filing with the SEC required after the first sale of securities in a Regulation D offering, including 506(c). It is not a registration statement but provides the SEC and state regulators with basic information about the company and the offering. Key details include:

• Issuer information and industry.
• Size of the offering.
• Types of investors.
• Date of first sale. Filing is required within 15 days of the first sale and must also be filed with relevant state securities regulators (blue sky laws).

Blue Sky Laws are state-level securities regulations that exist alongside federal rules like Reg D. Even with a federal exemption under 506(c), issuers must comply with the laws of each state where investors reside. Requirements can include:

• State Notice Filings: Similar to Form D, often with fees.
• Broker-Dealer Licensing: Requirements for those selling the securities.
• Substantive Merit Review: Some states review the fairness of the offering terms. Failure to comply can result in rescission offers or penalties, making state compliance a critical step.