The main difference between Rule 506(b) and Rule 506(c) of the JOBS Act, Title II is general solicitation and advertising. Under a 506(b) offering, general solicitation and advertising is prohibited. The investor under this exemption must have a previous substantiative relationship with the issuer.
Under Rule 506(c), you are permitted to generally solicit for capital as part of a private equity offering. You can freely utilize social media and other media outlets to spread the news of your capital raise efforts far and wide.
Some of the benefits and disadvantages mentioned below may help you determine whether Rule 506(b) or Rule 506(c) is the better option for your private offering.
Your Capital Raise
Raising capital through advertising under the provisions of Rule 506(c) expands the opportunities to receive investments for your offering. The trade-off is that you will not be able to use non-accredited investors, but only accredited investors, for your capital raise. However, the larger your fundraising needs, the more appealing the outreach potential of 506(c). You can reach a wider cross-section of investors through 506(c). It is also very important to carefully outline the benefits of your offering when reaching out to a broad swath of prospective investors.
Your Relationship With Investors
If you rely on Rule 506(b), you will be restricted from leveraging your previous relationships with investors. So you must determine if you can meet your capital raise goals from this limited investor pool if you want to work under Rule 506(b). If you are a budding entrepreneur or small business that needs to raise money quickly, Rule 506(c) can be the more attractive option.
The Accredited Status of Your Investors
If you prefer to raise capital under the provisions of Rule 506(b), you can utilize a maximum of 35 non-accredited investors in your deal who are nevertheless sophisticated investors. If you use one or more non-accredited investors, you will need some additional disclosures.
Your Comfort Level With Technology
Technology has advanced in recent years, making the raising of capital from any location easier than ever. Through technology, everything from accredited investor verification to raising funds has become fast and highly efficient for both issuers and investors.
If you have modern software working for you as an issuer, you may benefit from working under Rule 506(c). However, if you are relying on spreadsheets and less advanced technology, you may be better off raising capital through Rule 506(b).
