What are the different types of regulatory exemptions people can use to raise capital?
When raising capital, entrepreneurs must generally register with the SEC, or fall under a regulatory exemption. Those who register with the SEC are the likes of public companies, such as the ones you see on the New York Stock Exchange or the Nasdaq. However, the vast majority of capital raised in the United States is actually raised privately, not publicly, and falls under a private placement exemption.
Of the $1.8 Trillion raised under Regulation D from 2009-2017, 99.9% of the capital was raised under Rule 506(b) and 506(c). There’s good reason for this–those exemptions are fairly easy to use and provide federal preemption, meaning issuers don’t have to deal too much with state laws.
The general rule of thumb when it comes to the various SEC securites regulations and rules is that the more the SEC allows you to do, the more they’re going to ask for in return.
Most issuers raise capital under Rule 506(b), which allows an unlimited raise amount and unlimited numbers of accredited investors, but limits you to up to 35 non-accredited investors. You should have a substantial, pre-existing relationship with these investors, and cannot generally solicit (or advertise). Investors can self-certify (or fill out a form) that they are accredited.
About 4% of capital raised under Regulation D is raised under Rule 506(c)–a newer exemption that became effective only in 2013 as a result of the JOBS Act. Much like Rule 506(b), this rule allows unlimited raises and unlimited numbers of accredited investors, but bars investments from an non-accredited investors. However, issuers are allowed to generally solicit (or advertise) the offering, meaning that they can announce it online through ads, social media, at meetups, through unsolicited email, via radio, etc. However, issuers must verify that their investors are, in fact, accredited (thus, no more self-certification process, as was the case in Rule 506(b)). This is a more probing investigation of the investor involving W-2s and tax documents, and a source of friction when closing an investor, so many issuers will not use a Rule 506(c) offering unless they have a well thought-out plan to take advantage of the advertising capability that Rule 506(c) offers.