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Equity Crowdfunding Regulations: Reg D 506(b)

reg-dbToday in our series on equity crowdfunding regulations, we’re going to take a closer look at crowdfunding under Reg D 506(b). This approach has several benefits. First off, companies can raise an unlimited amount of capital under this regulation. In addition, both accredited and non-accredited (“sophisticated”) investors can participate in these rounds, which can make it easier for startups to achieve their fundraising goals. However, while an unlimited number of accredited investors can participate in a given fundraise, only 35 sophisticated investors total are allowed.

There is some administrative burden associated with Reg D 506(b), especially when sophisticated investors are allowed to participate. In that instance, the regulation requires an external financial audit, which puts an added burden on both the platform and on the startup, potentially increasing the cost and time it takes to close the round. Additional disclosures also must be made in that case.

It’s important to note that announcement or advertisement of a funding round (aka “solicitation”) is not allowed Under Reg D 506(b). Depending on the platform, this restriction may impact the platform’s ability to recruit investors for the fundraise, as platforms must have an existing, substantive relationship with any investors that they approach with the offering. Platforms like MicroVentures that have a large base of both accredited and non-accredited investors are generally not affected by this limitation.

Tune in next week, when we look at Reg D 506(c). Subscribe to our blog and we will let you know when it is published.

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