• What is 506(c) Offering and What Does It Mean for Financing Your Company?
  • March 7, 2017 | Author: James H. Gulseth
  • Law Firm: JGPC Business & Corporate Law - Pleasanton Office
  • A New Day for Startups Seeking Capital

    The Jumpstart Our Business Startups (JOBS) Act of 2012 was designed to assist startups – especially new small businesses– in obtaining capital without having to comply with some of the restrictions that the Securities and Exchange Commission (SEC) had put in place governing other types of transactions. However, a 506(c) offering may or may not be the best method of raising capital for your new business.

    Benefits of 506(c) Offerings in General

    The new Rule 506(c) gives businesses greater flexibility in raising capital by permitting businesses to publically advertise an offering to a large number of people in a very cost-effective manner. For example:

    • Under Rule 506(c), businesses are permitted to use social media, and use other advertising and soliciting techniques to solicit investments from large numbers of investors to raise money so long as the business does not commit fraud in doing so and limits investors to “accredited investors”.
    • Businesses also have greater freedom in making disclosures to investors, provided that the disclosures do not contain false or misleading information.
    • Financial statements produced by the business for investors do not need to be reviewed or audited by an independent accountant.
    • There is no limit to the amount of capital that can be raised.

    One of the few limitations to 506(c) offerings is that the business may only sell to accredited investors for whom the business has taken reasonable steps to verify their accredited status prior to sale. A new business can use a third party service to verify the status of investors, or the business can perform this work on its own.

    Benefits of 506(c) Offerings Over Crowdfunding

    The SEC has recently issued regulations for equity crowdfunding, another new type of capital raising method in which a large number of investors are solicited to invest small amounts of money for a new startup. Despite the arguably greater popularity of equity crowdfunding, 506(c) offerings may still offer benefits that equity crowdfunding cannot. Whereas an unlimited amount of capital can be raised through a 506(c) offering, equity crowd funders can only raise limited amounts of funds per year. This means that equity crowdfunding is more likely to be a better option for artists and those who do not need a significant amount of capital, whereas a 506(c) offering may be more appropriate for other types of businesses. The annual costs of complying with the equity crowdfunding rules and regulations each year are also far higher than compliance costs for 506(c) offerings.

    This article was originally published on JGPC.com.