Rule 506(b) vs Rule 506(c): Which Reg D Exemption Fits Your Raise?

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 determines whether general solicitation is permitted, who may purchase, and what the issuer must do to establish accredited investor status.

Choose the wrong exemption for your fact pattern and the consequences can be serious: general solicitation can jeopardize an issuer’s ability to rely on Rule 506(b), while Rule 506(c) has its own accredited-purchaser and verification conditions. Choose correctly, and either rule can provide a path to an exempt offering if every applicable condition is satisfied. A private placement memorandum (PPM) may form part of the disclosure package, but preparing one does not itself establish an exemption.

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 includes Rules 504, 506(b), and 506(c). Rule 506 has no federal offering cap and generally preempts state registration and qualification. Securities sold under 506(b) or 506(c) are covered securities under the National Securities Markets Improvement Act (NSMIA), meaning states can ask for notice and fees and retain antifraud authority, but generally cannot require the offering to be registered or qualified.

State notice filings and fees may still apply where purchasers reside. (Our guide on state blue sky filings covers the notice-filing mechanics.) Rule 504 does not receive the same federal preemption, so state registration, qualification, or an available state exemption must be analyzed.

That leaves the 506 pair. The regulatory distinction between them was created in 2013, when the JOBS Act — through the then-new Rule 506(c) — permitted general solicitation for a subset of Rule 506 offerings that satisfies its accredited-purchaser and verification conditions. Before that change, Rule 506 offerings were subject to Rule 502(c)’s general-solicitation prohibition. That history should not be generalized to every Regulation D pathway: Rule 504 has had limited, state-law-dependent circumstances in which general solicitation is permitted.

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.
• Accredited-status standard. 506(b) requires a reasonable belief that a purchaser treated as accredited qualifies. 506(c) separately requires the issuer to take reasonable steps to verify accreditation.
• How purchasers are reached. A pre-existing, substantive relationship is a recognized way to show that a 506(b) communication was not a general solicitation, but the analysis is fact-specific. Rule 506(c) permits general solicitation.
• Information requirements. If any non-accredited purchaser participates in a 506(b) offering, Rule 502(b) requires specified information and financial statements to be delivered a reasonable time before sale.

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. Whether a communication is a general solicitation remains a fact-specific determination.

Under 506(b), unrestricted social posts, public offering pages, broadly promoted webinars, and similar communications about the deal can create general-solicitation problems. Limiting an offering to persons with whom the issuer or an authorized intermediary has a pre-existing, substantive relationship is one recognized approach, but it is not a substitute for a facts-and-circumstances review.

Accredited status alone does not make general solicitation permissible in a Rule 506(b) offering; the manner of offering matters separately.

Rule 506(c) permits general solicitation, including public online communications, provided the rule’s conditions are satisfied. Offering communications remain subject to antifraud rules and other applicable requirements. All purchasers must be accredited, and the issuer must take reasonable steps to verify that status.

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.

An issuer may use a qualified third party or another service provider as part of its process, but Rule 506(c) also permits a flexible, principles-based analysis. The issuer should document why its steps were reasonable for each purchaser and transaction. (For more on what counts as accredited, see accredited investor requirements.)

Rule 506(b) does not impose Rule 506(c)’s separate reasonable-steps verification requirement. The issuer must still have a reasonable belief that each purchaser treated as accredited meets Rule 501(a). A questionnaire or representation may support that belief, but the appropriate diligence depends on the facts.

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.

If a 506(b) offering includes any non-accredited purchaser, Rule 502(b) requires specified non-financial information and financial statements a reasonable time before sale. For a non-reporting issuer, the current rule distinguishes offerings up to $20 million from those above $20 million and points to the corresponding Form 1-A financial statement requirements. The precise package depends on issuer status, offering size, and the material information involved. Our guide on business plan vs PPM vs prospectus walks through the document hierarchy in more detail.

Some issuers limit a 506(b) offering to accredited investors to avoid Rule 502(b)’s prescribed information requirements. That decision does not eliminate antifraud duties, and counsel should determine the disclosures appropriate for all purchasers.

Fact patterns that point to each exemption

Facts that may point toward 506(b)

• 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 can avoid general solicitation and are prepared to establish a reasonable belief that purchasers treated as accredited qualify.
• You may want to admit a small number of non-accredited but sophisticated participants (an operator contributing sweat equity, for example).

Facts that may point toward 506(c)

• 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 can build a documented reasonable-steps verification process into the subscription workflow.
• Every purchaser will be accredited; a high minimum investment can be relevant to a principles-based verification analysis but does not itself guarantee accredited status.

How the PPM differs under each exemption

Neither rule prescribes a universal PPM form. When an issuer uses a PPM, the disclosure package is typically tailored to the issuer, the security, the purchasers, and the exemption. Antifraud obligations apply under both rules.

A 506(b) disclosure package should reflect the prohibition on general solicitation and the issuer’s purchaser qualification process. If a non-accredited purchaser participates, the issuer must also satisfy Rule 502(b)’s timing, information, financial-statement, and question-and-answer requirements.

A 506(c) disclosure package should accurately reflect reliance on Rule 506(c), the accredited-purchaser limitation, and the issuer’s verification workflow. The rule’s listed methods are non-exclusive and non-mandatory; counsel should align the documents with the method actually used.

A quick decision framework

Ask yourself three questions, in order:

1. Will the offering use general solicitation? If yes, Rule 506(b) is not available for those offers. Counsel can evaluate Rule 506(c) or another pathway that permits the planned communications.
2. Do I have any non-accredited investors I want to include? Rule 506(c) does not permit them. Rule 506(b) may permit up to 35 sophisticated non-accredited purchasers, but Rule 502(b)’s information requirements and other conditions apply.
3. How will accredited status be established? Rule 506(c) requires reasonable steps to verify; Rule 506(b) requires a reasonable belief for purchasers treated as accredited. Design the process before taking subscriptions.

The selection turns on the full offering plan: communications, purchaser eligibility, verification, disclosures, integration with other offerings, and state-law requirements. PPMWizard supports draft workflows for both rules, but securities counsel should select and validate the exemption before offers or sales begin.

Related reading

• Accredited investor requirements — income, net worth, and the 2020 professional tests
• Form D filing — the 15-day deadline and how to hit it
• Raising capital — the first-time sponsor playbook