Glossary

506(b) Fund

Regulation D Rule 506(b) is a provision under the U.S. Securities and Exchange Commission (SEC) that allows companies to raise an unlimited amount of capital without registering the securities offering with the SEC. This exemption is widely used by private companies and investment funds to raise capital through private placements. Here are the key features and requirements of Rule 506(b):

  1. Unlimited Capital Raising: Issuers can raise an unlimited amount of capital under Rule 506(b).

  2. Accredited Investors: Managers or deal sponsors can sell securities to 99 or 250 accredited investors (individuals or entities that meet specific income or net worth criteria) and up to 35 non-accredited investors who meet certain sophistication standards.

  3. Companies can sell securities to an unlimited number of accredited investors and up to 35 non-accredited investors.  Purchasers can self-verify their accreditation status; GPs aren’t responsible for verifying accreditation.

  4. Information Requirements: Companies must provide non-accredited investors with disclosure documents that generally contain the same type of information as provided in registered offerings. The company does not have to provide specific information to accredited investors, but if it does provide information, it must not violate anti-fraud provisions of securities laws.

  5. No General Solicitation or Advertising: Issuers are not allowed to use general solicitation or advertising to market the securities. This means that the company must have a pre-existing relationship with the investors.

  6. Restricted Securities: Securities sold under Rule 506(b) are considered restricted, meaning they cannot be freely traded in the secondary market after the offering.

  7. Filing Requirements: Companies must file a Form D with the SEC within 15 days after the first sale of securities in the offering.

  8. State Securities Laws: While Rule 506(b) offerings are exempt from federal registration, they are still subject to state securities laws, which vary from state to state.

It's important for companies to ensure that they meet all the requirements of Rule 506(b) to qualify for the exemption from SEC registration. Failure to do so could result in legal and regulatory consequences.