504, 505, or 506?

Question

Let's say you have a $5M deal and need to raise $2M. And 15-25 investors coming in on the deal. Most are accredited investors and some are sophisticated. Which PPM would be the best choice to go with, 504, 505 or 506? And why?

Bryan Hancock · Answer

It depends on a lot of factors that a good securities attorney can help you answer.  A 504 won't work if you're raising $2M.  The limit is $1M:

Rule 504

Rule 505 would likely work just fine:

Rule 505

Your question begs the question as to whether or not you'll be soliciting for new investors or if you have a pre-existing, substantive relationship with the investors for your raise.  If the latter is accurate Rule 505 may be fine.

Rule 506 has some new parts.  A 506(c) raise would enable you to generally solicit for investors as long as you "reasonably verify" they're accredited.  These rules are enumerated here:

Reasonableness Steps Under 506(c)

The old rules which are now called 506(b) are here:

Rule 506

The level of sophistication of your investors will matter along with the nature in which you advertise to them.  A lot also depends on where the investors reside and where the project you're financing is.  The ones that are not sophisticated will most likely need to be accredited.

There could be other state exemptions that are easier to use if everyone resides in one state along with the property.  Each state has their own rules and for some situations navigating these rules is easier than going after federal exemptions.