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The JOBS Act: The 506(b)/506(c) Distinction Ain't Binary

William Carleton, Contributing Editor, VCExperts



No shortage of "client alerts" from law firms, famous and obscure, summarizing the massive changes coming to the federal exempt offering rules.

These rules have incredibly broad application. If you work in East Coast finance, you're likely to say they have to do with private equity and advertising hedge funds to retail clients. If you work in the tech sector on the West Coast, you are more likely to fuss over the Impact of the new rules on startup and emerging growth company financing.

As we get more perspective, now a few weeks out from the announcement of final rules lifting the ban on general solicitation, the headlines are both getting pithier and now straddling the two worlds. Case in point, the title of this alert from lawyers at the Day Pitney firm: "SEC Makes Fundamental Changes to Private Capital-Raising Rules."

Securities lawyers I know tend to go one of two ways when asked whether their clients will utilize 506(c) or 506(b) (for purposes of the hypothetical, assume that the SEC's proposed rules, loading up 506(c) with a ton of information posting and pre-filing requirements, are approved as proposed): some say they will tell their clients to only do 506(b) deals; others, that they should automatically pre-file and assume 506(c) will apply, just in case.

Here's how the Day Pitney lawyers express, diplomatically, their view that the higher quality deals will stay within 506(b) (506(c) having some of the taint of non-accredited crowdfunding, you might say):

"Although the impact of these rules is difficult to predict, we believe that many issuers will choose not to rely on Rule 506(c). This will be particularly true if the Regulation D Proposals are adopted and issuers relying on Rule 506(c) are required to file general solicitation materials with the SEC and place legends on such documents. Two of the SEC commissioners expressed concern that the Regulation D Proposals, if adopted, would subject private offerings to considerable burdens and undermine the goals of the JOBS Act. Although certain issuers with limited access to capital will undoubtedly be willing to accept these requirements, those issuers that are experienced in accessing the private capital markets may choose to rely on the traditional Rule 506(b) offering and forgo general solicitation."

Not a particularly controversial view, but it elides over a messier reality. In today's Rule 506 landscape, many offerings ostensibly under 506(b) are going to look a heck of a lot like they now belong in 506(c). The ambit of 506(b) will shrink because 506(c) better describes much of what has already become industry practice.

So the startup issuer may be stuck on a jack-stay between the 506(b) and 506(c) ships o'exemption!

Photo: "HMCS MACKENZIE (left) conducts a jack-stay personnel transfer with Canadian Improved Restigouche Class Destroyer," ReadyAyeReady.com.


William Carleton

Bill is a member of McNaul Ebel Nawrot & Helgren PLLC, a Seattle law firm. He blogs every day at http://wac6.com.