Most private placements in the United States travel under one of two sibling rules: Rule 506(b) and Rule 506(c). They share a parent in Regulation D, and at a glance they look nearly identical. The space between them, however, is where deals get advertised on LinkedIn or stay quiet in inbox threads, and where sponsors pull bank statements from investors or simply ask them to tick a box.
Choose the wrong exemption for your fact pattern and the consequences are unpleasant: a technical 506(b) offering that slipped a public pitch can lose its exemption entirely, exposing the sponsor to investor rescission rights and SEC action. Choose correctly, and either rule is a workable, well-trodden path to closing a private placement memorandum (PPM) in a few months.
This guide walks through the five differences that matter, the fact patterns that point to each exemption, and what the PPM itself looks like under each regime. The goal is not to replace your securities counsel — no guide can — but to give a sponsor enough vocabulary to have a productive first conversation with theirs.
Why Rule 506 matters more than the rest of Reg D
Regulation D contains several exemptions — 504, 506(b), and 506(c) are the survivors after the old 505 was folded into 504 in 2017. Of the three, Rule 506 is the industry workhorse because it preempts state registration. An offering under 506(b) or 506(c) is a covered security under the National Securities Markets Improvement Act (NSMIA), meaning states can ask for notice and fees but cannot require you to register the offering substantively in each state where you sell.
That preemption matters. It is the difference between filing a handful of notice forms across your investor base and negotiating separate registrations with 15 state administrators. (Our guide on state blue sky filings covers the notice-filing mechanics.) Rule 504 offerings do not get preemption; they still have to answer to each state. Almost nobody raising serious money uses 504 anymore.
That leaves the 506 pair. The regulatory distinction between them was created in 2013, when the JOBS Act — through the then-new 506(c) — lifted the long-standing ban on general solicitation for a specific slice of private placements. Before 2013 every Reg D raise had to be quiet. After 2013, sponsors had a choice.
The five differences that actually matter
Strip away the regulatory prose and five practical dimensions separate the two rules:
- General solicitation. 506(b) forbids it. 506(c) allows it.
- Investor base. 506(b) allows up to 35 non-accredited but sophisticated investors. 506(c) is accredited only.
- Verification burden. 506(b) permits self-certification. 506(c) requires the issuer to take reasonable steps to verify accreditation.
- Pre-existing relationship. 506(b) effectively requires one with each investor before the pitch. 506(c) does not.
- PPM disclosures. If even one non-accredited investor participates in a 506(b), the disclosure obligations escalate sharply — essentially to public-offering-lite level.
General solicitation, in practice
The SEC has never written a tight, affirmative definition of general solicitation. The closest the rules come is Rule 502(c), which lists examples: advertisements in newspapers, television or radio broadcasts, seminars where attendees were invited by general advertising, and — by later SEC guidance — posts on public social media, open webinars, and unrestricted websites. Anything that broadcasts to an unknown audience is presumptively general solicitation.
Under 506(b), that means: no LinkedIn posts about the raise, no tweets, no podcast interviews where you name the deal, no public-facing investor portal landing pages, and no cold outreach to prospects without a pre-existing substantive relationship. The relationship test — not the source of capital — is where most inadvertent 506(b) violations happen.
The question is never “are my investors accredited?” It is always “how did they hear about this deal?”
Under 506(c), the door swings open. Sponsors can publish the offering on their website, run paid ads, post one-pagers on Twitter, and speak freely on podcasts. The trade — and it is a non-trivial one — is that every investor in the deal must then pass a verification process. There is no “just this one” non-accredited accommodation.
Accredited verification — the operational reality
The verification standard under 506(c) requires “reasonable steps” to confirm accreditation. The SEC has spelled out several safe-harbor methods: reviewing two prior years of IRS tax returns for the income test; reviewing bank, brokerage, and credit-report statements for the net-worth test; or obtaining a written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or CPA.
In practice, most sponsors delegate the actual verification to a third-party service — VerifyInvestor, Parallel Markets, EarlyIQ, or similar — to avoid handling sensitive financial records directly. The services typically cost $35–$75 per investor and take a few business days. (For more on what counts as accredited, see accredited investor requirements.)
Under 506(b), no such verification is required. The sponsor collects a subscription agreement and an investor questionnaire in which the investor self-represents their status. The sponsor is entitled to rely on that representation absent a reasonable basis to believe it is untrue. This is the operational friction new 506(c) sponsors underestimate most often: a verification process that feels like friction but is mandatory under 506(c) and unnecessary under 506(b).
The 35-non-accredited cap
A 506(b) offering can admit up to 35 non-accredited investors, provided they are sophisticated — that is, they (alone or with a purchaser representative) have sufficient knowledge and experience in financial and business matters to evaluate the risks and merits of the investment. This sounds permissive. It is not.
The moment a 506(b) offering admits even one non-accredited investor, the disclosure requirements escalate. The issuer must furnish information substantively similar to what would appear in a registered prospectus: two years of audited financial statements for offerings over $7.5 million, a description of the business, management, and use of proceeds, and a risk factors section. Our guide on business plan vs PPM vs prospectus walks through the document hierarchy in more detail.
Most 506(b) sponsors voluntarily close the non-accredited door to avoid this uplift. The rule of thumb among securities lawyers is simple: unless there is a specific strategic reason to admit non-accredited investors (a long-time family friend, a key employee, a sweat-equity contributor), run an all-accredited 506(b) and skip the audited financials requirement.
Fact patterns that point to each exemption
506(b) is the right choice when:
- You have a warm investor list and no intention of advertising the deal publicly.
- Your typical investor is repeat LP money, friends and family, or a tight network of sophisticated contacts.
- You want to keep the capital-raise timeline short and skip verification overhead.
- You may want to admit a small number of non-accredited but sophisticated participants (an operator contributing sweat equity, for example).
506(c) is the right choice when:
- You are building a brand as a sponsor and want to publish your offerings — on your website, social channels, or on a crowdfunding-style portal.
- You are raising from a cold list or expanding beyond your existing network.
- You are comfortable operating third-party verification as part of the subscription process.
- All prospective investors are accredited — or the offering is sized for minimum investments that make non-accredited participation impossible anyway.
How the PPM differs under each exemption
The private placement memorandum itself is similar in structure under both rules — cover page, executive summary, sponsor bios, property or target description, financial projections, risk factors, subscription process, and exhibits. The tuning, however, is different.
A 506(b) PPM includes disclaimers making clear the offering is being made only to persons with whom the issuer has a pre-existing relationship, includes language in the subscription agreement requiring the investor to represent that no general solicitation was used, and contains an accredited/sophisticated investor questionnaire the investor completes directly.
A 506(c) PPM is accredited-only on the cover page, includes explicit language reciting the issuer’s reliance on Rule 506(c), requires verification through approved methods, and typically includes a verification letter template or a referral to a third-party verification service.
A quick decision framework
Ask yourself three questions, in order:
- Do I need to advertise? If yes — if the raise depends on reach, on brand-building, on ads, on public posts — you are doing a 506(c). Full stop.
- Do I have any non-accredited investors I want to include? If yes, you are doing a 506(b), and you need to accept the uplift in disclosure obligations (unless the raise is under the $7.5 million threshold where audited financials are not required).
- If neither — default to 506(b). An all-accredited 506(b) with a warm list is the simplest, fastest path to close a Reg D private placement. Skip the verification friction.
The ultimate tiebreaker is usually go-to-market strategy. Sponsors with audience-driven distribution — newsletters, social, direct response — live in 506(c). Sponsors with relationship-driven distribution — warm intros, family offices, long lunches — live in 506(b). Both are legitimate, both are widely used, and both are inside PPMWizard’s wheelhouse.