Your real or imaginary company might make a product, provide a service or invest in real estate.  

Let’s consider an astute accredited investor, whose local gourmet dog biscuit bakery advertises their private stock for sale. The founders forfeit some of their personal exposure to future profit or loss consequences. Instead of getting bank loans or paying expenses out of their own pockets since inception, the owners will raise capital from the public.  

Heather (from this blog post about Rule 506(b)) is in the unique position of knowing two different companies in her everyday life, which are using Reg D exemptions to SEC securities registration, in order to raise working capital or to fund balance sheet working capital expenditures (“capex”).  

506(b) versus 506(c)

Heather’s apartment complex is concurrently raising capital but cannot advertise its private stock to the general public. The local private equity firm, Judgement Proof, LLC (“JPL”) that owns her well-manicured residential rental unit uses 506(b), which is not entirely restricted to accredited investors but cannot advertise.  

Up to 35 sophisticated (but not necessarily accredited) believers may participate in this private “restricted stock” launch. Once you check into a “restricted stock” deal, it’s not so easy to check out. These are investments, not trading vehicles.

Buy What You Know

Chumley the puppy needs a walk, but Heather has an airplane to catch in the late afternoon.  She simply cannot sacrifice the hour that her “good boy” deserves. The dog has been cooped up, while Heather works on spreadsheets. (Yes, the dog is flying with her. That’s a thing now.)

She calls Ruff Rolls & Gentle Strolls for an over-priced dog walk, while contemplating silently, “I wish this company’s stock was listed. Ruff Rolls aren’t cheap. Nor are the dog walks, although great in a pinch when I need them. I should own their stock.”

Now she can!

Ruff Rolls & Gentle Strolls stock is advertised on a colorful sign with puppies and lots of legal disclaimers, citing the Regulation D, Rule 506(c) that allows for general solicitation to accredited investors, who can afford the inherent risk and illiquidity. Marketing materials and invoices also make mention of the private investment opportunity, calling special attention to the fact that, despite the fun exterior, Ruff Rolls is serious business.  

Whether the issuing company is Ruff Rolls or your own, these are the major rules of the road for 506(c) advertising to individuals:

  • All purchasers are accredited, which the issuer takes reasonable steps to verify.
  • Buyers receive restricted securities subject to Rule 144.
  • Form D must be filed within 15 days of the first contractually irrevocable sale of securities.  
  • States often require a “notice filing” (heads-up) and usually a small fee.
  • “Bad actor” clauses prevent those with ethical infractions in their past from raising funds.

As a non-affiliated customer (now partial equity investor), 506(c) stock buyers like Heather generally are permitted to sell their interests subject to holding requirements of Rule 144, and discretion of the company if there is a mandatory lockup.