Rules 506(c) and 506(b) Explained for Investors

February 22, 20236 min read
Rules 506(c) and 506(b) Explained for Investors
Share on facebookShare on TwitterShare on Linkedin

Key Takeaways

  • Rules 506(b) and 506(c) opened the door for smaller companies to attract investors to private placement offerings with minimal SEC regulation.
  • Rule 506(c) makes it easier to find and invest in deals, while 506(b) allows non accredited investors to participate in offerings.
  • Rules 506(b) and 506(c) came about when the SEC divided Reg D into a pair of sub regulations to accommodate smaller companies under the JOBS Act.

Alternative investments with little correlation to the public equities markets can be a good hedge against market volatility. However, in most cases, these investments are private placements, meaning they aren’t offered to the general public. Further, these private placements are also freed of certain Securities and Exchange Commission registration requirements.

To enjoy these exemptions, issuers must be careful to confirm the investors with whom these opportunities are shared are capable of understanding what they’re getting into. Moreover, they must verify that all the investors who participate have sufficient means to weather a loss should the investment not realize its goals.

This brings us to Rules 506(b) and 506(c) of the SEC’s Regulation D.

What is SEC Regulation D?

In a nutshell, Regulation D (Reg D) permits the raising of capital by offering equity or debt securities, without having to register those offerings with the Commission. Generally employed by smaller companies or for crowdfunding, Reg D enables issuers to raise capital more expeditiously and at a lower cost than would a public offering. With that said, there are some state and federal regulatory requirements in place that must be met, including the requirements of Rules 506(b) and 506(c).

The JOBS Act

Rules 506(b) and 506(c) came about when the SEC divided Reg D into a pair of sub regulations to accommodate smaller companies under the Jumpstart Our Business Startups (JOBS) Act. The SEC was directed to revise the rules of the Securities Act of 1933 to make it easier for smaller companies to attract investors.

Under these two rules, issuers are allowed to operate as follows:

Rule 506(b)

Under Section 4(a)(3) of the Securities act, Rule 506(b) grants an issuer the ability to offer an unlimited number of securities. However, those offers must be made without solicitation or advertising. In other words, investors need to approach the issuer, rather than the other way around. There must also be a pre-existing relationship between the issuer and the investor.

Investors must either be accredited or one of 35 non-accredited investors who meet the standards set forth for sophisticated investors. These investors are responsible for providing proof of status as either accredited or sophisticated. Issuers need only have a reasonable belief the investor meets the standard they are claiming.

There are no limits on the amount of capital an issuer can raise under this rule, nor is there a limit on the amount of money an investor can invest. However, there are limits on the number of investors with which an issuer can work under a 506(b) exemption. In fact, this is true of both 506(b) and 506(c). An issuer with a roster of more than 2,000 investors must meet the full-reporting standard. The same is true if they have more than 500 non-accredited investors.

While recommended, there is no requirement for issuers to provide information about the investment to accredited investors. However, most do anyway to avoid liability under SEC Rule 10b-5. However, information is required to be provided in situations in which even one non-accredited investor participates.

As previously mentioned, advertising deals are not permitted under Rule 506(b). However, brand advertising is allowed. Moreover, transactions may only be conducted with investors with whom the issuer has a pre-existing relationship.

Rule 506(c)

Under this rule, issuers may only work with accredited investors. Further, they must take reasonable steps to verify the accredited status of an investor before they can proceed by reviewing their proof of income and asset statements. There are no dollar limits on the amount of capital that can be raised, nor is a limit placed on the amount of money an investor can invest.

Just as under Rule 506(b), if a company has more than 2,000 investors, it must comply with the requirements of a full reporting company under the tenets of the Exchange Act. Because they are only permitted to work with accredited investors under 506(b), issuers are under no obligation to provide investment information. Again though, most do so just the same to avoid Rule 10b-5 liabilities.

Perhaps the most significant difference — aside from the investor participation requirement — is that advertising is permitted. This can make it easier to attract investors. After all, specific investments can be shown to potential participants right away, with no need to demonstrate a pre-existing relationship. Another key point for issuers is that an offering can be started under 506(b) but can be switched to 506(c) if no non-accredited investors are participating.

Sophisticated (Non-Accredited) vs Accredited Investors

A sophisticated investor is a person who has the capital, experience, and net worth to be expected to be capable of evaluating the potential benefits and risks of a minimally regulated investment. While the term “sophisticated investor” is not considered an official term per se, these people are characterized by the SEC as having “sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.” This characterization also assumes the individual has the capability of absorbing a sizable loss without experiencing financial ruin.

An accredited investor is an individual with a net worth exceeding $1 million — excluding the value of their primary residence. People with an annual income of $200K for two consecutive years and the expectation of continued earnings at that level are also considered accredited. Married couples earning $300k annually, within the same parameters, also qualify as accredited investors. Institutions with assets exceeding $5 million are considered accredited as well.

Yieldstreet and Rule 506(c)

Private placements, such as those covered under Rules 506(b) and 506(c), can be useful tools for portfolio diversification. Traditional portfolio asset allocation envisions a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split incorporating 20% alternative assets may make a portfolio less sensitive to public market short-term swings.

Real estate, private equity, venture capital, digital assets and collectibles are among asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less correlated with public equity, and thus offer potential for diversification.

These assets were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors who buy in at very high minimums — often between $500,000 and $1 million. In other words, accredited investors. Operating under Rule 506(c), Yieldstreet was founded with the goal of dramatically improving access to alternative assets by making them available to a wider range of investors.

In Conclusion

Rules 506(b) and 506(c) opened the door for smaller companies to attract accredited investors, as well as those who are not accredited, to avail themselves of certain private placement offerings with minimal SEC regulation. That said, there are still a series of federal and state requirements companies must meet to make these offerings.

However, this fact does not free the investor from the need to conduct stringent due diligence efforts. Actually, it makes doing so more important, because there are instances in which issuers are not required to provide background information about an investment.

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to www.yieldstreetalternativeincomefund.com. The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

300 Park Avenue 15th Floor, New York, NY 10022

844-943-5378

No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice, except for specific investment advice that may be provided by YieldStreet Management, LLC pursuant to a written advisory agreement between such entity and the recipient. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefore.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and are willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

YieldStreet Inc. is the direct owner of Yieldstreet Management, LLC, which is an SEC-registered investment adviser that manages the Yieldstreet funds and provides investment advice to the Yieldstreet funds, and in certain cases, to retail investors. RealCadre LLC is also indirectly owned by Yieldstreet Inc. RealCadre LLC is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Information on all FINRA registered broker-dealers can be found on FINRA’s BrokerCheck. Despite its affiliation with Yieldstreet Management, LLC, RealCadre LLC has no role in the investment advisory services received by YieldStreet clients or the management or distribution of the Yieldstreet funds or other securities offered on our through Yieldstreet and its personnel. RealCadre LLC does not solicit, sell, recommend, or place interests in the Yieldstreet funds.

Yieldstreet is not a bank. Certain services are offered through Synapse Financial Technologies, Inc. and its affiliates (collectively, “Synapse”) as well as certain third-party financial services partners. Synapse is not a bank and is not affiliated with Yieldstreet. Bank accounts are established by Evolve Bank & Trust. Brokerage accounts and cash management programs are provided through Synapse Brokerage LLC (“Synapse Brokerage”), an SEC-registered broker-dealer and member of FINRA and SIPC. Additional information about Synapse Brokerage can be found on FINRA’s BrokerCheck. By participating in a Synapse cash management program, you acknowledge receipt of and accept Synapse’s Terms of Service, Privacy Policy, and the applicable disclosures and agreements available in Synapse’s Disclosure Library.

Investment advisory services are only provided to clients of YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission, pursuant to a written advisory agreement.

Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.

Read full disclosure