Reg D Rule 506(b) and 506(c)

Rule 506 of Regulation D : The Cornerstone of Private Capital Raising

Rule 506 of Regulation D is the most widely used exemption from SEC registration for private securities offerings in the United States. It allows issuers—such as private companies, hedge funds, real estate syndicates, and startups—to raise unlimited capital from accredited investors under flexible conditions.

For attorneys, fund sponsors, compliance professionals, and entrepreneurs, understanding the nuances of Rule 506(b) and 506(c) is critical to structuring compliant, investor-ready offerings and executing capital raises with confidence.

What Is Rule 506?

Rule 506 of Regulation D of the Securities Act of 1933, offering two primary exemptions from full SEC registration:

• Rule 506(b): Allows capital raises without general solicitation or advertising.
• Rule 506(c): Allows public marketing but requires verification that all investors are accredited.

Both versions of Rule 506 permit an unlimited amount of capital to be raised, and both preempt state securities laws (except for Blue Sky notice filings), making them highly attractive to issuers.

Rule 506(b): Private Offering Without General Solicitation

Key Highlights:

• Capital Limit: No cap on the amount raised
• Investor Types: Unlimited accredited investors + up to 35 non-accredited (if sophisticated)
• General Solicitation: Not permitted
• Disclosure: Required for non-accredited investors (similar to a PPM)
• Verification: Investors self-certify their status (no third-party verification required)

When to Use:

Rule 506(b) is ideal for issuers who already have a network of investors and prefer a more private, confidential fundraising process. It’s commonly used by:

• Hedge and private equity funds
• Real estate developers
• Early-stage companies seeking “friends and family” rounds
• Fund managers with existing investor bases

Rule 506(c): Public Solicitation with Accredited Investor Verification

Key Highlights:

• Capital Limit: No cap on the amount raised
• Investor Types: Only verified accredited investors
• General Solicitation: Allowed (websites, emails, public events, etc.)
• Disclosure: Not required by rule, but highly recommended
• Verification: Must take “reasonable steps” to verify accreditation status (e.g., tax returns, third-party letter)

When to Use:

Rule 506(c) is perfect for issuers who want to market broadly and attract new investors, including:

• Startups running advertising or email campaigns
• Crowdfunding platforms
• Public-facing funds seeking new accredited leads
• Tech entrepreneurs expanding investor access beyond personal networks

Filing Requirements for Rule 506(b) and 506(c)

Regardless of which exemption is used, issuers must comply with these federal and state-level filings:

1. Form D Filing: Must be submitted to the SEC within 15 days of the first sale.

2. State Blue Sky Filings: Required in each state where investors reside, usually through the NASAA EFD system.

3. Offering Documentation: Includes a Private Placement Memorandum (PPM), Subscription Agreement, and Investor Questionnaire.

Accredited Investor Requirements

Under both 506(b) and 506(c), the cornerstone is the accredited investor definition under Rule 501:

• Income: $200,000+ (individual) or $300,000+ (joint) for the last two years
• Net Worth: Over $1 million (excluding primary residence)
• Professional Licenses: FINRA Series 7, 65, or 82
• Entities: Trusts or companies with $5M+ in assets or all-accredited equity owners

506(c) requires third-party verification (e.g., CPA letter, income proof), while 506(b) allows self-certification via questionnaire.

Which Rule Should You Use?

Why Rule 506 Is the Preferred Exemption

Rule 506 accounts for over 90% of capital raised under Regulation D, making it the industry standard for private securities offerings. It’s favored by legal and financial professionals because it offers:

• Unlimited capital potential
• Streamlined compliance
• State law preemption (with minimal Blue Sky filings)
• Flexibility to reach either known or broad audiences

Final Thoughts

Whether you’re launching a fund, raising growth capital, or advising a client, Rule 506 under Regulation D offers the most powerful and flexible tools for private capital formation. Choosing between 506(b) and 506(c) depends on your investor base, solicitation strategy, and compliance infrastructure.

Need a compliant, ready-to-use solution? Our team offers attorney-drafted PPM templates, Subscription Agreements, Form D filing assistance, and investor questionnaires specifically built for Rule 506(b) and 506(c) offerings.