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What’s up, everyone? Today, we’re going to answer the question: what is a 506(b) exemption?
This is applicable to any fund manager looking to get help/clarity with your fund documents!
What is it?
A 506(b) exemption is a legal exemption that private companies can use to offer and sell securities to accredited investors without having to register with the Securities and Exchange Commission (SEC).
Under this exemption, companies can raise an unlimited amount of capital, without limiting the number of investors.
Accredited investors are individuals or entities with a net worth of at least $1 million (excluding the value of their primary residence).
Or…
Those that have an annual income of at least $200,000 ($300,000 for joint income with a spouse) for their last two years and a reasonable expectation of the same income level in the current year.
The exemption is named after Rule 506(b) of Regulation D under the Securities Act of 1933.
Why Use a 506(b) Exemption?
There are several reasons why a private company/fund manager may choose to use a 506(b) exemption:
- Cost savings: Registering with the SEC can be expensive, with legal and accounting fees, and the time and effort required to prepare the necessary disclosures
- Speed: The registration process with the SEC can be lengthy, taking several months to complete, whereas a 506(b) offering can be completed quickly
- Privacy: Registering with the SEC requires significant disclosures, which can expose a private company’s operations and strategies to competitors
How to Use a 506(b) Exemption
To use a 506(b) exemption, a private company must comply with certain requirements, including:
- Accepting only accredited investors: The company must take reasonable steps to verify that each investor is accredited
- Accepting only 35 non-accredited investors: If a company wants to include non-accredited investors, it can only offer securities to a maximum of 35
- Providing certain disclosures: Even though a company does not have to register with the SEC, it must include information about the company’s business, the securities, and the risk
Conclusion
So, what is a 506(b) exemption?
It’s a useful tool for companies seeking to raise capital quickly and cost-effectively.
However, it’s important to note that the exemption comes with certain restrictions and requirements, which companies must comply with to avoid violating securities laws.
Be sure to consult with a qualified securities attorney and conduct due diligence to ensure compliance with applicable regulations.
This is not investment advice!
Visit Fund Launch to learn more fund terms or get individual help on starting/scaling your own investment fund!
That’s it for today,
Thanks,
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DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.
