Rule 506(b)’s “sophistication” standard

If you read Rule 506(b) under Regulation D, you won’t find the word “sophisticated.”  The rule specifies that each of your investors that is not “accredited” must “have such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment, or the issuer reasonably believes immediately prior to making any sale that such purchaser comes within this description.”   The underlined text is Rule 506(b)(2)(ii) and is translated as “sophisticated” when people talk about who their investors may be if they are not “accredited”.  Remember, you may only have 35 non-accredited but “sophisticated” investors.  That is from Rule 506(b)(2)(i).

Here is a link to Rule 506.