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Regulation D Rule 506(c) vs. Regulation A+: Differences Explained

Mihir Gandhi

The Securities and Exchange Commission (SEC) has developed some of the regulations that deliver both the spirit and the legal details required under the Jumpstart Our Business Startups (JOBS) Act of 2012. Most of the changes fall into the broad-stroke categories of general solicitation and investor eligibility.

Two of the main regulatory amendment vehicles engaging these categories are Regulation D’s Rule 506(c), and Regulation A, the updated version of which is known as Regulation A+.

Regulation A+
In June 2015, Title IV of the JOBS Act amended Regulation A into Regulation A+. Private companies can raise, via general solicitation, up to $50 million from accredited or non-accredited investors in a much more streamlined process than was possible pre-Title IV.

There are two tiers under Reg A+. Tier I offerings can raise up to $20 million and require both SEC and state-level review, but there are no ongoing reporting requirements. Tier II offerings require only SEC review for offerings up to $50 million, but trigger ongoing reporting requirements.  Both allow investments by non-accredited investors.

Private companies not eligible for exemption under Reg A+ include certain investment companies, those that are already SEC reporting companies, those issuing interests in gas, oil, or mineral rights, or any that have already been disqualified as a “bad actor”.

Rule 506(c)
Rule 506(c) also permits general solicitation, but issuing companies are required to ensure that each investor is verified as accredited using federally prescribed “reasonable steps”. An individual “accredited investor” has:

  • A minimum of $200,000 in earned income ($300,000 when combined with a spouse) in each of the two prior years and a “reasonable expectation” of a repeat in the current year, or
  • $1 million or more in net worth, not including primary residence.

Entities can also be accredited investors, e.g. charitable organizations, banks, or insurance companies with assets in excess of $5 million.

How does a private company relying on a Rule 506(c) exemption go about ensuring its investors are accredited? Through reasonable steps such as reviewing tax returns, bank or brokerage statements, or written confirmation from a qualified investment advisor, broker, certified public accountant or licensed attorney.  

These new rules for capital raising are designed to help the investment industry catch up to the crowdfunding craze by balancing permission for general solicitation with requirements for investor protection.

Whether you are an investor wishing to self-verify, or an issuer needing to accredit investors, can help. Contact us today.