When to use a 506b vs a 506c

When issuing private securities to raise funds for your business, there are several options that may meet your goals. Two of the most popular options are 506b and 506c raises. Both of these raises can help you meet your funding needs, but they are very different processes, and it’s important to understand the advantages and disadvantages of each.

Rule 506b: Private Placements

A 506b raise allows businesses to raise money from an unlimited number of accredited investors — people who have enough money to protect themselves in the case of financial loss. Additionally, you can solicit funds from up to thirty five sophisticated investors — individuals with enough experience in the financial field to appropriately assess the merits and risks of the deal. However, any investor in this 2nd category, must receive extensive disclosure documents, which may include balance sheets, income statements, and other financial details about the business. In this type of deal, the sponsor does not have verify that an investor is accredited unless they have reason to believe the investor is lying about their accreditation status. Under 506b, businesses are not allowed to solicit to funding from the general public. This means no web advertisements, billboards, postings, or any other advertisement. This limits solicitation to investors that one already knows, or can reach through word or mouth. The SEC may require a sponsor to prove that he or she has a substantial pre-existing relationship with an investor. Although this limits the pool of investors, the benefit of a 506b raise is the ability to raise unlimited amount of money. For a deal of any size, a 506b offering is a good way to connect with investors that aren’t part of the 1%.

Rule 506c: General Solicitation

In a 506c offering, sponsors can only take investments from accredited investors. Unlike 506b, rule 506c allows sponsors advertise as much as they want, and in any way they want. Under 506c, solicitors must verify that investors are accredited, typically using a 3rd party that specializes in this kind of verification. However, a 506c raise does not require extensive financial disclosures. Because advertising is allowed, a 506c raise makes it easier to find investors quickly. Since only accredited investors are allowed, there is no limit on the number of investors, or on the amount of money which can be raised. 

Which is right for you?

Either of these options can help businesses raise needed funds, but are generally offered to very different types of investors. If your business represents a good opportunity for friends and family, or you already have a network of contacts who are willing to invest, the 506b can be a good choice. On the other hand, if your business is better suited to accredited investors, and you need to bring in investment from outside your immediate circle, the 506c might be the best option for you.

At TLC, we can help determine which of these options is right for your business, and can assist with everything necessary to get your fundraising venture off and running.