506(C) Subscription Agreement

As more and more businesses turn to crowdfunding to raise capital, the provisions of Regulation D, Rule 506(c) are becoming increasingly important. Under this regulation, companies are allowed to offer and sell securities to investors without having to register with the Securities and Exchange Commission (SEC).

But in order to take advantage of Rule 506(c), companies must comply with several rules and regulations, one of which is the subscription agreement. A subscription agreement is a legal document that outlines the terms and conditions of the investment, and is signed by the company and the investor.

Here are some key things to know about the 506(c) subscription agreement:

1. Accredited investors only

Rule 506(c) allows companies to sell securities to accredited investors only. Accredited investors are individuals or entities that meet certain financial thresholds, such as having a net worth of at least $1 million or an annual income of at least $200,000. The subscription agreement must include language certifying that the investor is accredited.

2. Disclosure requirements

The subscription agreement must include a disclosure document that contains all the material information about the investment. This includes information about the company, its finances, risks associated with the investment, and more. The company must ensure that all material information is provided in a clear and concise manner.

3. No general solicitation

Under Rule 506(c), companies are not allowed to use general solicitation or advertising to promote the investment. This means that companies cannot use social media, television, radio, or other forms of advertising to market the investment. The subscription agreement must include language confirming that the investor learned about the investment through a pre-existing relationship with the company or its representatives.

4. Transfer restrictions

In order to maintain the exemption provided by Rule 506(c), the subscription agreement must include language prohibiting the transfer of the securities for a period of at least one year. This helps ensure that the securities are being sold to investors who are taking a long-term view of the investment.

5. Arbitration provisions

The subscription agreement may include provisions that require disputes to be resolved through arbitration rather than through litigation. This can be beneficial for both the company and the investor, as arbitration can be faster and less expensive than going through the court system.

Overall, the 506(c) subscription agreement is an important document that helps ensure compliance with Rule 506(c) and protects both the company and the investor. As with any legal document, it is important to consult with an experienced attorney to ensure that the agreement is drafted properly and meets all legal requirements.