When raising capital, a company must comply with securities laws. As previously discussed, all offerings of securities, must either be registered with the SEC or exempt from such registration. Rule 506(b) is the most commonly used securities exemption for private companies. Even after complying with the basics of this exemption, there are many nuanced requirements that, if missed, can jeopardize qualifying under the exemption. Failure to comply with Rule 506(b) can subject an issuer and its officers and directors to various penalties. The SEC and state regulators can institute investigations and administrative and civil actions, enter various orders, and impose significant monetary penalties, and can transmit evidence to the U.S. Attorney General, who can bring criminal proceedings. In addition, violating securities registration requirements entitles the purchasers to rescission rights under federal and state laws. This blog post compiles some of the best practices for conducting a 506(b) offering in a bullet-pointed list for easy reference.

[Read more…]