A Guide for Syndicators and Fund Managers Offering Securities Under Rule 506(b)
If you’re raising capital under Regulation D, Rule 506(b) of The Securities Act of 1933 (the Act) and plan to include non-accredited investors, you are subject to stricter financial disclosure requirements than if you accept only accredited investors. This includes potential obligations to provide audited financial statements.
Rule 506(b) Basics
Rule 506(b) allows you to raise an unlimited amount of capital from:
- An unlimited number of accredited investors, and
- Up to 35 non-accredited but sophisticated investors
However, if any non-accredited investors participate, you must also comply with Rule 502(b) under the Act, which requires disclosures similar to those in a public offering.
When Are Audited Financials Required?
Audited financial statements are required if:
- You’ve had material financial activity (e.g., sales of securities to investors have occurred, asset purchases, income or expenses), or
- The company has completed at least one fiscal year since the date of its first sale of securities to a non-accredited investor
*A “sale” is deemed to occur when the investor becomes irrevocably contractually committed, which is the earlier of:
- The date the company countersigns and accepts the investor’s Subscription Agreement, or
- The date the investor’s funds are used by the company or released from escrow (if applicable)
Note that the date of sale also triggers the 15-day deadline for filing SEC Form D and Blue Sky (state) securities notices.
It is crucial for your team to understand that you must NOT countersign and return an investor’s Subscription Agreement as soon as you receive their funds, or you may prematurely trigger both the fiscal year audit and 15-day securities notice filing deadlines. The correct time to countersign is when: 1) you use the funds to close on a property, or 2) you raise the minimum amount your fund has established for your offering.
Audited financial statements are not required if:
- Your company is newly formed and hasn’t completed its first fiscal year (this applies to most real estate syndicates and new businesses), or
- You have no material operations or financial activity
In either case above, you must clearly disclose that audited financials are not available and explain why, stating one of the reasons above.
Example
But here’s where this gets tricky. If you want to avoid triggering the requirement to provide audited financials under Rule 502(b), you should carefully consider and adopt one of the policies below, which must be clearly spelled out in your Private Placement Memorandum, Operating Agreement, and Subscription Agreement:
For Syndicators: You can choose a fiscal year-end that aligns with the offering’s expected duration.
- For instance, a real estate offering with a closing date of September 1 could choose August 31 as its fiscal year end.
- A new business that starts its offering on September 15 but expects to achieve the minimum offering amount within 90 days of the start of its offering, or January 15, 2026, could choose a fiscal year that ends January 14, 2027.
- You must consult with your tax advisor about choosing a date other than December 31, or changing the fiscal year end date later, as doing so could require filing short-year tax forms.
For a multi-year offering, you could limit non-accredited investors to investing only during the first fiscal year and either continuing with Rule 506(b) as an accredited-only offering (with no advertising) or later convert to a Rule 506(c) offering that allows advertising. Multi-year offerings may include:
- A venture capital or private equity fund
- A blind pool fund
- A fund of funds using a single “fund” model
- A long-term real estate development project
- Any business raising millions that might take longer than one year to raise
In all cases, you must clearly state the fiscal year end date, or any authority of the Manager to change it on advice of a tax adviser, in the offering documents, including the Private Placement Memorandum, Operating Agreement, and/or Subscription Agreement.
Timing of Disclosures
Required disclosures, including audited financials, if required, must be provided to non-accredited investors a reasonable time prior to their investment—usually 48 to 72 hours before their signing of a Subscription Agreement or wiring funds.
In extended or rolling offerings (such as multi-year raises), you must update the required financial disclosures annually, including the most recent audited statements to any new non-accredited investors prior to acceptance.
While you are not legally required to provide audited financials to accredited investors under Rule 506(b), best practice is to share the same disclosures with all investors to avoid claims of unequal treatment or concealing material facts, and to demonstrate transparency to all investors.
Best Practices
- If you have not completed a fiscal year or have no meaningful activity, disclose this fact directly.
- Provide the same disclosure and financial package to all investors.
- Keep records showing when disclosures were provided to prove you gave reasonable notice.
- Update financials annually and provide them to all current and prospective investors during multi-year or ongoing offerings.
Conclusion
Audited financials are not always required, but if you’ve had meaningful financial activity and completed a fiscal year, you’ll need them before you can accept new non-accredited investors. For early-stage or pre-operational companies, you may explain their absence but must do so clearly and in writing.
Properly managing these obligations can help syndicators and fund managers stay compliant and build investor trust throughout the offering process.
