When raising capital under Rule 506(b) using a Series LLC structure, questions often arise about how many non-accredited investors are permitted across multiple Series, and whether the sponsor can continue forming new Series with non-accredited investors once a certain threshold has been met. Below, we address two frequently asked questions about these issues based on securities law integration principles.
Question 1:
Is there a passage of time or some other condition that could alleviate the integration issue so a sponsor could offer a new 506(b) Series offering that includes non-accredited investors after hitting the 35 non-accredited investor limit in a previous offering?
Yes, in some cases, integration can be avoided, but it is not as simple as waiting a specific amount of time. The SEC does not provide a bright-line rule but instead uses a facts-and-circumstances analysis. Integration concerns may be mitigated if:
- The offerings serve different business purposes (e.g., acquisitions vs. development)
- The offering terms are materially different (equity vs. debt, fixed returns vs. profit-sharing)
- The prior offering has closed and all commitments are complete
- The investor groups are distinct and there is no overlap in marketing or solicitation
- The offerings rely on different exemptions (e.g., switching from 506(b) to 506(c))
Even a six- or twelve-month break between offerings won’t necessarily avoid integration unless there are substantive differences in structure and purpose. The key issue is whether the SEC would view the offerings as part of the same plan of financing.
Question 2:
Once the 35 non-accredited investor limit is reached under Rule 506(b), is it correct that the sponsor must continue with accredited investors only, or convert future Series to Rule 506(c)?
Yes, that is correct. Once the 35 non-accredited investor limit is reached across all integrated 506(b) offerings, any further offering that would be considered integrated must be limited to accredited investors only.
At that point, the sponsor has two options:
- Continue using Rule 506(b), but only accept accredited investors
- Switch to Rule 506(c), which allows public solicitation but requires verification of accredited status
If converting to Rule 506(c), sponsors must comply with strict verification requirements, such as obtaining third-party documentation or CPA letters. Advertising is permitted, but only once proper disclaimers and compliance procedures are in place.
It is critical to treat similar Series offerings under one regulatory framework unless there are material and meaningful differences that would avoid integration.
