U.S. Securities and Exchange Commission (SEC) Rule 506 of Regulation D

What is SEC Rule 506 of Regulation D?

SEC Rule 506 of Regulation D enhances investor protection and facilitates business capital formation. It provides two distinct exemptions from registration for companies when they offer and sell securities. SEC Rule 506(b) of Regulation D — referred to as a "safe harbor" — allows companies to raise unlimited funds by selling securities to an unlimited number of accredited investors.

Who does SEC Rule 506 of Regulation D apply to?

SEC Rule 506 of Regulation D impacts:

• Issuers who raise capital through general solicitation and advertising
• Accredited investors who purchase securities
• Bad actors, who are disqualified from relying on Rule 506 exemptions
• Companies conducting offerings under Rule 506(b)

Key exemptions of SEC Rule 506 of Regulation D

SEC Rule 506 of Regulation D offers two key exemptions to registration for companies selling securities, allowing them to raise unlimited capital.

• Rule 506(b) allows companies to sell to an unlimited number of accredited investors and up to 35 non-accredited investors, who must be financially sophisticated. They cannot engage in general solicitation.
• Rule 506(c) allows for general advertising, provided all investors are accredited and companies take adequate steps to verify their status.
  Companies using either exemption must file Form D with the SEC after sales, ensuring compliance while simplifying access to capital. Investments under this rule come with restrictions on resale for a specified period.

What are the penalties and consequences for violating SEC Rule 506 of Regulation D?

Companies and their leaders must navigate various legal risks and potential consequences associated with non-compliance, including:

• Legal action: Companies and their leaders may face civil or criminal lawsuits from federal or state governments, which can result in financial penalties or incarceration, depending on the severity of the violation.
• "Bad actor" disqualification: Due to violations, certain individuals may be barred from future capital raising under exemptions like Rule 506(b) and Rule 506(c).
• Rescission liability: Non-compliance with registration requirements can lead to investors demanding a return of their investment plus interest, posing challenges if capital is already allocated.
• Investment risks: Previous non-compliance can deter investors, as they often require proof of past adherence to securities laws before committing funds.

How Smarsh helps

Set on helping our customers future-proof their communications data strategy, the Smarsh Enterprise Platform — our unified, cloud-native solution — empowers organizations to capture, retain, analyze, and act on critical insights across all data types.

The Smarsh Enterprise Platform is designed to maximize the value of your communications data while ensuring compliance and efficiency.

Key Benefits:

• Comprehensive data management: Seamlessly capture, retain, analyze, and act on communications data throughout its entire lifecycle.
• Cloud-native solutions: Experience the power of our Enterprise Data Cloud, offering petabyte scalability and elastic compute to analyze and enrich your data.
• Versatile capture capabilities: Support over 100 channels, including email, social media, mobile, and voice, all retained in their native formats for easy access and flexibility.
• Regulatory compliance: Our Enterprise Archive delivers secure storage that meets rigorous standards, including FINRA, GDPR, and MiFID II.
• Advanced risk mitigation: With Enterprise Conduct, leverage AI to enhance compliance and reduce workflow noise by up to 95%, allowing your team to focus on what matters.
• Efficient legal workflows: Enterprise Discovery streamlines e-discovery processes, enabling quick legal holds and efficient review in native formats.

With an eye on the future, a proven track record of leading communications compliance, and an organization and product built for agility, Smarsh keeps you moving forward no matter what regulatory changes may come.