Legal Definitions - Rule 506

Rule 506 is a regulation created by the Securities and Exchange Commission (SEC) that allows companies to offer an unlimited amount of securities through private placement under Regulation D. Private placement means that the securities are not offered to the general public, but rather to a select group of investors.

For a company to comply with Rule 506, they must meet certain requirements:

• The company can sell securities to an unlimited number of accredited investors, which are typically large financial institutions or high net-worth individuals.
• The company can sell securities to up to 35 non-accredited investors, but these investors must have sufficient knowledge in financial and business matters to evaluate the investment.
• The company cannot advertise the offering to the general public.
• Investors in a Rule 506 offering receive restricted securities, which means they cannot freely resell their securities.

For example, a startup company may want to raise money to fund their operations. Instead of going public and offering their securities to the general public, they may choose to offer their securities through private placement under Rule 506. They can offer their securities to a select group of investors, such as venture capitalists or angel investors, who have the financial resources and expertise to evaluate the investment.

Another example is a real estate developer who wants to raise money to fund a new project. They may offer their securities through private placement under Rule 506 to a select group of investors who are interested in investing in real estate. These investors may include high net-worth individuals or institutional investors who have experience investing in real estate.