Rule 506 is one of the more popular exemptions from securities registration that emerging companies use to raise money. While Rule 506 is popularly associated with accredited investors, the rule also allows investment by a limited number of non-accredited investors. However, in offering securities to non-accredited investors under Rule 506, issuers also trigger a responsibility to provide those non-accredited investors (who must also be sophisticated — that is, possessing sufficient business knowledge, or counsel from an advisor with sufficient business knowledge, to evaluate the merits and risks of the investment) with disclosures similar to those required by a registered offering. In addition, any disclosures made to accredited investors in a Rule 506 offering must also be made to the non-accredited investors.
Companies thinking about making offerings to non-accredited investors under Rule 506 should consider whether the administrative costs of making the extensive disclosures required for non-accredited investors by Rule 506 is worth the capital to be invested by the non-accredited investors.