Rule 506(b) vs. Rule 506(c): How to Choose the Right Exemption

Rule 506(b) bans general solicitation and caps you at 35 non-accredited investors. Rule 506(c) lets you advertise openly, but every single investor must be verified as accredited before they buy. That tradeoff, reach versus investor restrictions, is the whole decision.

Both rules sit inside Regulation D, the SEC's safe harbor for private placements, and both let you raise an unlimited amount from an unlimited number of accredited investors without registering the offering. Most private capital raises in the United States run on one of these two exemptions.

What Rule 506(b) Allows

Rule 506(b) is the traditional private placement. You cannot generally solicit, meaning you cannot advertise the offering to the public, hold open-ended seminars, or post about the raise where anyone can see it. Your investors have to come to you through pre-existing relationships or targeted, quiet outreach.

In exchange for that silence, you get flexibility on who can invest. You may take up to 35 non-accredited investors, provided they are financially sophisticated, and provided you give them the kind of disclosure a registered offering would carry. If all your investors are accredited, your disclosure duties are much lighter, though antifraud rules still apply and material facts still have to be disclosed.

The concept that does the most work in 506(b) offerings is the pre-existing substantive relationship. The SEC treats outreach as non-general only when the issuer or its agent has a genuine relationship with the offeree, built before the offering, strong enough that the offeree's financial circumstances are known. Buying a list of cold leads and emailing them your deal memo is the classic way an issuer blows the exemption, usually without knowing it.

What Rule 506(c) Allows

Rule 506(c) flipped that silence rule in 2013. You can advertise. You can pitch the offering on LinkedIn, run paid ads, hold public roadshows, and take investors who respond to any of it. The catch is on the investor side: non-accredited investors are excluded entirely, and "checking the box" on a questionnaire is not enough. The issuer has to take reasonable steps to verify each investor is accredited, and keep records showing it.

What counts as reasonable depends on the facts. Reviewing W-2s, tax returns, or brokerage statements satisfies the safe harbor, as does a written confirmation from the investor's lawyer, CPA, broker-dealer, or registered investment adviser. Verification is an ongoing duty for repeat investors, but the SEC lets issuers rely on a prior verification, typically for about 90 days, when the investor returns for another closing.

Side by Side

	Rule 506(b)	Rule 506(c)
General solicitation	Prohibited	Allowed
Non-accredited investors	Up to 35, with disclosure	None
Verification duty	None; reasonable belief of status is enough	Take reasonable steps to verify every investor
Form D	Within 15 days of first sale	Within 15 days of first sale, check the 506(c) box
Bad actor rule	Applies	Applies

How to Choose

Pick 506(c) when you need reach: a raise aimed at investors you do not already know, a founder with a public profile, or a deal that benefits from public momentum. The price is verification paperwork and losing any investor who is not accredited.

Pick 506(b) when your investor base is warm: existing shareholders, industry contacts, friends and family with real money, or a small group you already know well. It keeps the door open to a few sophisticated non-accredited investors and skips the verification burden. Read our companion piece on what counts as general solicitation before you announce anything.

One warning that comes up in enforcement files more than any other here: an issuer starts under 506(b), posts about the raise publicly, realizes the mistake, and relabels the deal as 506(c) after investors have already bought in. Sales cannot be relabeled. If the misstep happens before any sale closes, counsel can restructure the offering and move forward under 506(c) cleanly. After the first closing, it is an unregistered offering problem, and the securities offerings counsel you call at that point is usually doing repair work, not planning work.