Differences in SEC Exemptions for Private Placements

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Before hiring a private placement memorandum professional, your company should have a solid understanding of the type of securities offing SEC exemption it intends to exercise, which will uniquely depend upon how it anticipates raising capital.

In general, capital raises depend on to whom the security is being solicited (E.g. institutions, accredited investors)  and how it is being promoted (E.g. privately or through advertising). Failing to properly classify under the appropriate exemption could result in fines and penalties that could complicate your company’s fundraising process.

The following table provides a breakdown on the various exceptions by the SEC broken down by requirements and use case. In general, some of the most commonly applied are Rule 506(b) or Rule 506(c).

The primary difference between these two exemptions are that Rule 506(b) allows up to 35 non-accredited investors that are considered ‘sophisticated’ and does not require the same investor accreditation requirements as its more complicated Rule 506(c) alternative, which is required if the security will be promoted through “general solicitation”, commonly regarded as marketing materials in mass media and other paid promotional channels.

 

Questions you should ask yourself when determining the appropriate SEC exemption you will need include the following:

  • How much money do I need to raise?
  • How will I promote the investment to find investors?
  • What type of investors will I be targeting? (E.g. institutional accredited, unaccredited)

 

** We strongly encourage you to retain a securities attorney, this information provided is general in nature and does not supplement speaking with an attorney and is not legal advice.