Every private fund offering relies on a Regulation D exemption, and the two main options involve a fundamental tradeoff. Rule 506(b) lets you raise capital from people you already know, including up to 35 sophisticated but non-accredited investors, without advertising your fund. Rule 506(c) lets you market openly, but every single investor must be a verified accredited investor. Your choice shapes how you raise capital, who can invest, and what documentation you need.
Rule 506(b) Basics
Rule 506(b) is the traditional private placement exemption. Most private funds use it. The core rule is straightforward: you cannot engage in general solicitation or general advertising to market the offering.
You must have a pre-existing, substantive relationship with each prospective investor before discussing the offering. That relationship must be sufficient for you to evaluate the person's financial sophistication and suitability. A cold email, a LinkedIn message to a stranger, or a pitch at a conference to someone you have never met does not satisfy this requirement.
- No general solicitation or general advertising permitted.
- Up to 35 non-accredited investors allowed, provided each has sufficient knowledge and experience in financial and business matters to evaluate the investment (the "sophistication" standard).
- Accredited investors may self-certify their status through questionnaires and representations in the subscription agreement.
- No limit on the number of accredited investors.
- Issuer must provide specific disclosure documents to non-accredited investors, similar in scope to what a registered offering would require.
The 35-investor allowance for non-accredited investors carries a real cost. You must provide those investors with audited financial statements and detailed disclosure that mirror registered offering requirements. Many fund managers avoid non-accredited investors entirely because the added disclosure burden outweighs the benefit.
Rule 506(c) Basics
Rule 506(c), adopted in 2013 under the JOBS Act, removed the prohibition on general solicitation. You can advertise your fund offering on your website, at public conferences, on social media, or through any other channel.
The tradeoff is strict: every investor in the offering must be an accredited investor, and you must take reasonable steps to verify each investor's accredited status. Self-certification is not sufficient. You need actual evidence.
- General solicitation and advertising are permitted, including websites, social media, email campaigns, and public events.
- All investors must be accredited investors. No non-accredited investors permitted.
- The issuer must take reasonable steps to verify accredited status. Self-certification alone does not satisfy this requirement.
- The SEC has provided non-exclusive safe harbor verification methods (detailed below).
The Verification Requirement Under 506(c)
Verification is the defining obligation of a 506(c) offering. The SEC provides four safe harbor methods, though other reasonable methods may also satisfy the requirement.
Income Verification
Review IRS forms such as W-2s, 1099s, K-1s, or tax returns for the two most recent years, plus a written representation that the investor reasonably expects to meet the income threshold in the current year. The threshold is $200,000 individually or $300,000 jointly.
Net Worth Verification
Review bank statements, brokerage statements, tax assessments, and appraisal reports for assets, combined with a consumer credit report for liabilities. All documents must be dated within the prior three months. The threshold is $1,000,000 in net worth excluding primary residence.
Third-Party Verification Letter
Obtain a written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney, or a certified public accountant that the person has taken reasonable steps to verify the investor's accredited status within the prior three months.
Existing Investor Verification
For investors who previously invested in your fund as verified accredited investors, you may rely on a new written certification of continued accredited status, provided you have no reason to believe their status has changed. This simplifies re-verification for follow-on investments.
Side-by-Side Comparison
| Rule 506(b) | Rule 506(c) | |
|---|---|---|
| Marketing | No general solicitation. Pre-existing relationship required. | General solicitation permitted. Public advertising allowed. |
| Investor requirements | Accredited investors plus up to 35 sophisticated non-accredited investors. | All investors must be accredited. No exceptions. |
| Verification | Self-certification through investor questionnaire. | Issuer must take reasonable steps to verify. Self-certification insufficient. |
| Form D filing | Required within 15 days of first sale. | Required within 15 days of first sale. |
| State preemption | Federal preemption of state registration. | Federal preemption of state registration. |
| Typical use | Most private funds. Managers raising from existing networks. | Funds using online platforms, public marketing, or broad outreach. |
Which Should You Choose
Your choice depends on how you plan to find investors and what flexibility you need in investor composition.
Choose 506(b) if you raise capital through an existing network of relationships, if you want the option to accept sophisticated non-accredited investors, or if you prefer the simpler self-certification process for accredited investors. Most emerging managers raising from friends, family, former colleagues, and professional contacts use 506(b).
Choose 506(c) if you intend to market your fund publicly, use an online fundraising platform, attend conferences to pitch to people you have not previously met, or post about your fund on social media. The verification burden is real but manageable with proper processes in place.
Practical consideration
Some managers hesitate to use 506(c) because investor verification feels intrusive. Asking a high-net-worth individual for tax returns or bank statements can be an awkward conversation. Third-party verification letters from the investor's attorney or accountant often provide a smoother experience for both parties.
Can You Switch Between 506(b) and 506(c)?
Switching exemptions mid-offering is risky and generally not advisable.
If you start raising under 506(b) and later decide you want to advertise, you cannot simply amend your Form D to check the 506(c) box. Any prior sales to non-accredited investors would violate 506(c) requirements. You would also need to retroactively verify the accredited status of all existing investors using 506(c)-compliant methods, not just their self-certifications.
Switching from 506(c) to 506(b) is also problematic. If you have already engaged in general solicitation, you cannot claim the 506(b) exemption for the same offering, since 506(b) prohibits general solicitation.
Decide your exemption before the first investor signs a subscription agreement. Changing course after the offering has begun exposes you to the risk that the entire offering fails to qualify for any exemption.
Common Mistakes
Inadvertent general solicitation under 506(b)
Posting about your fund on LinkedIn, mentioning it at a conference panel to an audience of strangers, or sending a pitch deck to someone you have not previously established a relationship with can all constitute general solicitation. If you are relying on 506(b), any of these actions could disqualify your exemption for the entire offering.
Insufficient verification under 506(c)
Having an investor check a box on a form stating they are accredited does not satisfy the 506(c) verification requirement. You must take affirmative, reasonable steps to verify, using the methods described above or other procedures that are objectively reasonable given the facts and circumstances.
Not filing or updating Form D
Form D must be filed with the SEC within 15 days of the first sale of securities. If you change from 506(b) to 506(c) (or the reverse), an amendment is required. Many states also require notice filings. Missing these deadlines does not automatically void the exemption, but it creates regulatory risk and may trigger state enforcement actions.
Relying on a "demo day" or "pitch event" relationship
Meeting someone at an investor event and immediately discussing your offering does not create the pre-existing substantive relationship required under 506(b). The relationship must exist before the offer, and it must be sufficient for you to evaluate the investor's financial circumstances and sophistication.
How Capital Company Helps
Capital Company provides digital investor onboarding, including subscription documents, investor questionnaires, and qualification verification. Schedule a demo to learn more.
This guide is for informational purposes only and does not constitute legal, tax, or investment advice. Regulation D rules are subject to SEC interpretation and amendment. Consult qualified legal counsel before selecting an exemption or structuring your offering.