As an investor, choosing the right private placement investment can be challenging. Two popular types of private placement offerings are 506(b) and 506(c) deals. While both types of offerings fall under Regulation D of the Securities Act, there are some key differences to consider. In this article, we will explore the differences between 506(b) and 506(c) deals and provide some key factors to consider when choosing the right investment for you.
What are 506(b) and 506(c) deals?
First, let’s define what 506(b) and 506(c) deals are. Both offerings are private placements, which means that they are not publicly traded and are generally only available to accredited investors. Accredited investors are individuals or entities that meet certain financial requirements, such as a minimum net worth or income level, and are considered to have the financial sophistication to understand the risks of private placement investments.
506(b) offerings allow issuers to sell securities to up to 35 non-accredited investors and an unlimited number of accredited investors. However, issuers are prohibited from using any form of general solicitation or advertising to market the offering.
506(c) offerings, on the other hand, allow issuers to advertise and solicit investors publicly, but only accredited investors are allowed to invest in the offering.
Key Differences Between 506(b) and 506(c) Deals
Now that we understand the basics of 506(b) and 506(c) deals let’s explore some key differences between the two offerings.
Marketing and Advertising
The most significant difference between 506(b) and 506(c) offerings is the ability to market and advertise the offering. 506(b) offerings prohibit issuers from using any form of general solicitation or advertising to market the offering. This means that issuers must rely on personal networks and relationships to find investors.
In contrast, 506(c) offerings allow issuers to advertise and solicit investors publicly, including through social media and online advertising. This can potentially lead to a larger pool of investors and increased visibility for the offering.
Investor Verification
Another key difference between 506(b) and 506(c) offerings is investor verification. 506(b) offerings allow issuers to rely on self-certification from investors to determine if they meet the accredited investor requirements. This means that investors are not required to provide documentation to verify their financial status.
506(c) offerings, on the other hand, require issuers to verify that investors are accredited using one of several methods outlined in Regulation D. These methods can include reviewing tax returns or bank statements to verify income or net worth.
Number of Non-Accredited Investors
506(b) offerings allow issuers to sell securities to up to 35 non-accredited investors and an unlimited number of accredited investors. In contrast, 506(c) offerings are only available to accredited investors.
Table: Comparison of 506(b) and 506(c) Offerings
| Factor | 506(b) | 506(c) |
| Marketing and Advertising | Prohibited | Allowed |
| Investor Verification | Self-certification | Verification required |
| Number of Non-Accredited Investors | Up to 35 | Not allowed |
| Accredited Investor Requirements | Same as SEC definition | Same as SEC definition |
| Disclosure Requirements | Same as SEC requirements | Same as SEC requirements |
Which Offering is Right for You?
The decision between a 506(b) and 506(c) offering ultimately depends on your investment goals and risk tolerance. If you are comfortable with a smaller pool of investors and have personal networks to rely on, a 506(b) offering may be a good option. On the other hand, if you are looking for a larger pool of potential investors and are