Today in our series on equity crowdfunding regulations, we’re going to take a closer look at crowdfunding under Reg D 506(c). As with Reg D 506(b), startups can raise an unlimited amount of capital under Reg D 506(c), which went into effect in 2013. But that’s pretty much where the similarities end. Crowdfunding under this regulation is limited to accredited investors, which necessarily means that the base of potential investors is going to be smaller than with Reg D 506(b).
In addition, extra hoops must be jumped through in order to verify that those investors meet the SEC’s definition of an “accredited investor” – above and beyond what’s required for 506(b) fundraises. The good news is that platforms that routinely raise under these regulations should have the procedures in place to satisfy the SEC with regard to this requirement. MicroVentures, for example, requires investors to provide specific financial documents to substantiate their income or net worth.
Solicitation is allowed under this regulation, which means that startups may advertise their fundraise, including via social media or email as well as via offline/print methods. By allowing solicitation, Reg 506(c) ostensibly has the potential to open up the fundraise to a wider audience, especially given that existing, substantive relationships with potential investors are not required in order for them to participate in the round. Given that those investors have to be accredited, however, a platform with a large base of existing qualified investors can give the company a head start.
All things being equal, fundraising under Reg D 506(c) is one of the most cost-efficient and time-efficient of the crowdfunding options. This regulation has few appreciable downsides for startups, especially for those that aren’t set on including sophisticated investors in the round.
Stay tuned for our next installment, when we tackle equity crowdfunding under Title IV Reg A+.
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