Business Lawyers in Columbus, Ohio
By Drew Stevens - February 5, 2020 - Securities
If you’ve never consulted with a Columbus, Ohio securities
attorney before, raising funding for your Ohio startup can be confusing and
complex. Generally, unless your business falls under an exemption, you must
register your investment offering at two levels – with the Securities and
Exchange Commission at the federal level and the applicable securities
departments at the state level.
Two of the more popular and powerful securities exemptions are Rule 506(b) and Rule 506(c). Here, our securities lawyer in Columbus, Ohio will walk through some of the key differences and features with Rule 506(b) vs Rule 506(c).
Rule 506(b) Features
and Key Requirements
If you are pursuing exemption under Rule 506(b), you can
raise an unlimited amount of money from an unlimited number of accredited
investors. If you want to raise money from non-accredited investors, you are
limited to 35 or less.
Defined under Rule 501 of Regulation D, being an accredited
investor means the investor meets one of eight criteria. One often used
requirement is §230.501(a)(6) – the
investor had an income of $200,000 or more for the last two years and has a
“reasonable expectation” of reaching that income for the current year.
Alternatively, if the investor is married, the joint income threshold is
Another widely used
requirement is §230.501(a)(5) – the investor is a natural person whose net
worth exceeds $1,000,000. If the investor is married and the combined net worth
of the investor and the spouse exceeds $1,000,000, this also qualifies.
Remember though that the primary residence of the investor cannot be included
in calculating net worth.
in the early stages of an Ohio startup, the first round of investors can often
include close family and friends who may not meet any of the requirements of
being an accredited investor. Rule 506(b) does not bar these investors, but
additional steps are required.
If you do sell securities to non-accredited investors, you
must document that the non-accredited investors are “sophisticated.” To be
sophisticated, a non-accredited investor, either alone or in conjunction with
the investor’s personal representatives (lawyers, accountants), must have
experience or knowledge in business and financial matters, so that the investor
is capable of evaluating the potential merits and risks of investing in your
Another key 506(b) requirement is
disclosure. With accredited investors, technically there is no obligation to
disclosure certain information. However, if you do bring on non-accredited
investors, the disclosure requirements are extensive. In addition to providing
a private placement memorandum, your company must be available to answer
questions from potential investors.
Whether you raise
money from accredited investors or non-accredited investors, a best
practice when talking to investors is to have them fill out an investor
questionnaire. This will help document aspects like the investor’s primary
residence, income, and ability to evaluate the risks and merits of the proposed
Finally, one of the key limitations
of a 506(b) offering is a prohibition on general solicitation. Your startup
should avoid mass mailing and e-mail blasts, cold calling, and general
advertisement in any medium, including websites, televisions, and radio.
Rule 506(c) Features
and Key Requirements
Like Rule 506(b), Ohio startups that
raise money under a Rule 506(c) offering can also raise an unlimited amount of
money. However, one of the key differences with 506(b) is that a business can
only raise money from accredited investors under Rule 506(c).
Further, Rule 506(c) requires the
startup to take “reasonable steps” to verify accredited investor status.
Depending on which requirement under §230.501(a) that the accredited investor is relying on, verification can
include review of W-2s, tax returns, and/or bank statements. An investor
questionnaire, alone, is deemed not sufficient for verifying accredited
Another key difference between the
two rules is that Rule 506(c) does allow general solicitation. With 506(c), you
can go buy that billboard advertisement, plaster your offering all over your
website, run commercials on network television, and tweet your heart out on
Columbus Securities Lawyer
If you need assistance with filing Form D with the SEC,
filing with a securities department with a particular state, or raising funding
and under Rule 506(b) or Rule 506(c), contact our firm today.