Private companies raising money in private offerings of securities often rely upon an exemption under Rule 506 of Regulation D.  In fact, Rule 506 is undoubtedly the most popular safe harbor from the registration requirements under Section 4(a)(2) of the Securities Act of 1933. This is due in no small part because an offering conducted under Rule 506 affords a company the ability to raise an unlimited amount of money.  Rule 506 provides two distinct exemptions: Rule 506(b) and (c).  Unlike Rule 506(b), an issuer relying on Rule 506(c) can engage in general solicitation when marketing its offering.  Certainly, there are traps for the unwary when proceeding under either exemption, as some cannabis companies have unfortunately discovered in recent years.

When is general solicitation available to issuers? Rule 506(c) allows a company to broadly solicit and generally advertise the offering. However, companies relying on Rule 506(b) are prohibited from engaging in general solicitation or advertising to market the offering.  Generally, as a practical matter, this means that companies raising capital under Rule 506(b) must have a pre-existing, substantive relationship with prospective investors.

Who can invest in a Rule 506 offering?  Under a 506(b) offering, a company may sell its … Keep reading