What is a Reg D 506 Transaction?
A Reg D 506 transaction is a private offering of securities. You can compare this to a public offering of securities like a company that issues stock on the New York stock Exchange. Not every company is in the right stage to go public but these companies still need to raise money. Many of these companies use Reg D 506 to do it. With a Reg D 506 transaction, the following rules apply:
- The company that is raising money can raise an unlimited amount of money.
- The company cannot market the securities to the general public.
- Note: This piece of the legislation is subject to change as a result of the JOBS act that passed Congress in April, 2012. The Securities and Exchange Commission (the regulatory body for securities) is currently deciding on final rules.
- The securities that are sold are “restricted” so they cannot be resold during the first year
- The company must sell the securities to “accredited investors” and up to 35 “non-accredited” investors so long as they are sophisticated. Sophisticated investors in this sense means they have the requisite business and financial knowledge to make them capable of understanding the risks associated with the investment.
- When securities are sold to non-accredited investors, there are additional regulations and disclosures that are required.
- A Form D must be filed in every state where there is an investor.
Reg D 506 transactions help small companies as the regulatory requirements are much less onerous than filing for a public offering.
How Do Reg D 506 Transactions Apply in Real Estate?
The same way they apply for all other companies. In most real estate transactions, there is a new LLC or a new Limited Partnership opened for each property or each fund. By using the Reg D 506 exemption, that LLC can raise money from groups of investors within the confines of the law.