Rule 506 of Regulation D: 506(b) vs 506(c) and Form D Filing

Rule 506 of Regulation D is the most heavily used federal exemption from SEC registration, allowing a company to raise an unlimited amount of capital through a private offering. It comes in two versions. Rule 506(b) bars public advertising but lets up to 35 non-accredited investors participate alongside accredited ones. Rule 506(c) permits open advertising, but every purchaser must be an accredited investor whose status the company has taken reasonable steps to verify. Securities sold under either version are “covered securities” under federal law, so states cannot require their own registration, though they can still collect notice filing fees.¹

The Difference Between Rule 506(b) and Rule 506(c)

Both versions share the same foundation: no registration with the SEC, and no ceiling on how much can be raised. The rule’s full title is “Exemption for limited offers and sales without regard to dollar amount of offering,” which sets it apart from other Regulation D exemptions like Rule 504 that cap the raise.¹ The versions diverge on marketing and investor eligibility.

Rule 506(b) prohibits general solicitation and advertising but allows up to 35 non-accredited investors alongside unlimited accredited investors.² Rule 506(c) flips the trade-off. The company can advertise freely to the public, but every purchaser must be an accredited investor, and the company must take affirmative steps to verify that status.³ Most private placements still use 506(b). The verification burden under 506(c) adds cost and friction, and some investors don’t want to hand over tax returns or bank statements.

Who Counts as an Accredited Investor

Accredited investor status is the gatekeeper for both versions. An individual qualifies by meeting any one of several financial or professional thresholds at the time the securities are sold.

Individual or joint net worth with a spouse or spousal equivalent above $1 million, excluding the primary residence.⁴
Individual income above $200,000 in each of the two most recent years, or joint income above $300,000, with a reasonable expectation of the same level in the current year.⁴
Investment professionals in good standing holding a Series 7, Series 65, or Series 82 license.⁵
Certain directors, officers, and employees of a private fund who participate in the fund’s investment activities, but only for offerings by that fund or related funds managed by the same employer.⁶
Institutional entities including banks, insurance companies, registered broker-dealers, investment advisers, and employee benefit plans with assets above $5 million.⁴

A “spousal equivalent” is a cohabitant in a relationship generally equivalent to a marriage. For the joint net worth and joint income calculations, the couple’s assets don’t need to be held jointly, and the securities don’t need to be purchased jointly.⁷ That matters for unmarried partners pooling finances to hit the threshold.

Non-Accredited Investors Under Rule 506(b)

Rule 506(b) allows up to 35 non-accredited purchasers, and each one must be financially sophisticated. That means the person has enough knowledge and experience in financial and business matters to evaluate the risks of the investment, either directly or through a purchaser representative who meets that standard.¹ In practice, issuers typically require these investors to sign representation letters or provide a professional background summary.

Including even one non-accredited investor triggers significant disclosure obligations. The company must provide financial statements and other disclosure documents containing roughly the same type of information as a Regulation A offering, with the level of detail scaling to the size of the raise.²⁸ Any information provided to accredited investors must also be made available to non-accredited participants, and the company should be prepared to answer their questions.

This is where many smaller issuers make a practical decision. The cost of preparing the disclosure package often outweighs the benefit of including a few non-accredited investors, so most 506(b) offerings are structured to accept only accredited investors even though the rule technically permits broader participation.

General Solicitation and Advertising

Under Rule 506(b), the company cannot use any form of general solicitation or advertising.² No social media posts about the offering, no public seminars pitching the investment, no mass emails to strangers. The company must work within a network of pre-existing, substantive relationships.

A relationship is “pre-existing” when it was formed before the offering began, or was established through a broker-dealer or investment adviser before that intermediary joined the deal. It’s “substantive” when the issuer, broker-dealer, or adviser has enough information to evaluate the investor’s financial status and has actually done so.⁹ A LinkedIn connection made the week before the offering opens does not qualify.

Rule 506(c) removes the restriction entirely. Companies can advertise the offering through any channel, including online ads, public events, media appearances, and crowdfunding platforms, as long as every actual purchaser is a verified accredited investor.³

Verifying Accredited Status Under Rule 506(c)

Because 506(c) opens the door to public advertising, it compensates by requiring the issuer to take “reasonable steps” to verify that every purchaser is accredited. Self-certification alone is not enough. The SEC has identified four non-exclusive safe harbor methods for individual investors:

Reviewing IRS forms reporting income (W-2s, 1099s, K-1s, or filed 1040 returns) for the two most recent years, plus a written representation that the investor expects to meet the threshold in the current year.
Reviewing bank or brokerage statements or similar asset documentation dated within the prior three months, combined with a consumer credit report and a written representation that all liabilities have been disclosed.
Obtaining a written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or CPA stating they took reasonable steps within the prior three months and determined the investor is accredited.
For investors who bought as accredited investors in the issuer’s prior 506(b) offering before September 23, 2013, relying on the investor’s certification that they still qualify.

These are safe harbors, not the only acceptable approaches. Other methods can work if they’re reasonable under the circumstances. The third-party confirmation letter has become the most common choice because it spares investors from handing sensitive tax documents directly to the company.

Bad Actor Disqualification

Rule 506(d) bars a company from using either version of the exemption if the issuer or any “covered person” has certain criminal convictions, regulatory orders, or disciplinary actions in their background.¹⁰ The disqualification applies to events occurring on or after September 23, 2013.

Who Counts as a Covered Person

The net is wide. Covered persons include the issuer, its predecessors and affiliated issuers, directors, general partners, managing members, executive officers, any officer with more than transitory involvement in the offering, beneficial owners of 20% or more of the voting equity, promoters, compensated solicitors, and, for fund issuers, the investment manager and its principals.¹⁰ One bad actor among any of them can disqualify the entire offering.

What Triggers Disqualification

The disqualifying events under Rule 506(d)(1) fall into several categories:

Felony or misdemeanor convictions related to securities transactions, false SEC filings, or conduct in the securities industry, within ten years before the sale (five years for the issuer itself).
Court injunctions entered within the prior five years restraining the person from securities-related conduct or false filings.
Final orders from state securities commissions, banking regulators, or the CFTC within the prior ten years that bar the person from the industry or are based on fraud-related violations.
SEC orders suspending or revoking a broker-dealer or investment adviser registration, or barring association with regulated entities.
SEC cease-and-desist orders entered within five years based on scienter-based anti-fraud provisions or Section 5 registration violations.
Suspension or expulsion from a national securities exchange or association for conduct inconsistent with just and equitable principles of trade.¹

Exceptions and Waivers

If the issuer didn’t know about a disqualifying event and can show it exercised reasonable care to discover one, the exemption is preserved. The SEC has also granted waivers on a case-by-case basis, and the court or regulatory authority that entered the original order can advise in writing that disqualification should not apply. Events that occurred before September 23, 2013 don’t trigger automatic disqualification, but they must be disclosed in writing to investors a reasonable time before the sale. Missing that disclosure makes the exemption unavailable unless the issuer can show it didn’t know and couldn’t have known about the event through reasonable care.¹⁰

Filing Form D With the SEC

After the first sale of securities, the company must file a Form D notice with the SEC no later than 15 calendar days after the date the first investor is irrevocably committed to invest.¹¹ The date of first sale can be the date the company receives the signed subscription agreement or the check, depending on the contract terms.¹²

One detail surprises many issuers. Filing Form D is not itself a condition of the Rule 506 exemption. Missing the 15-day deadline doesn’t automatically destroy the exemption because the SEC treats the Rule 503 filing requirement as separate from the substantive conditions of 506(b) and 506(c).¹³ Failing to file is still a Regulation D violation, can draw SEC scrutiny, and often affects state-level exemptions that do condition their availability on a timely federal filing. File as soon as practicable if the deadline slips.

What the Form Requires

Form D collects basic identifying information about the issuer and the offering:

The issuer’s legal name, jurisdiction of incorporation, and principal place of business
Names and addresses of executive officers, directors, and promoters
The issuer’s primary industry group
The date of first sale
Total offering amount, amount already sold, and any sales commissions or finder’s fees¹²

Filings go through the SEC’s EDGAR system, and new filers must first obtain EDGAR access by submitting a Form ID with notarized authentication.¹⁴ Start that setup early. Waiting until the 15-day clock is already running cuts it close.

Annual Amendments

If the offering is still open on the first anniversary of the most recent Form D filing, the company must file an amendment on or before that date.¹⁵ Multi-year capital raises need an amendment each year until the offering closes. This is an easy deadline to miss for smaller issuers without dedicated compliance staff.

State Notice Filings

Securities sold under Rule 506 are covered securities under Section 18 of the Securities Act, as amended by the National Securities Markets Improvement Act of 1996. That preempts states from requiring their own registration or qualification. States can still require notice filings and collect fees, but they cannot add substantive review or extra conditions on top of federal law.

In practice, the company submits a copy of its Form D to the securities regulator in each state where an investor resides. Fees vary. Some states charge flat amounts as low as $50, others charge based on offering size, and the highest can reach $1,500 or more. Deadlines typically track the federal Form D filing, usually 15 days after the first sale in that state. Missing state notice filings can produce administrative penalties or jeopardize the state-level exemption, even when the federal exemption remains intact.

Resale Restrictions on the Securities

Securities bought in a Rule 506 offering are restricted securities. They cannot be freely resold on the open market, and the issuer must take reasonable care to make sure purchasers aren’t acting as underwriters planning immediate redistribution. At minimum that involves:

Asking whether the purchaser is buying for their own account or on behalf of others.
Informing each purchaser in writing, before the sale, that the securities are unregistered and cannot be resold unless registered or an exemption applies.
Placing a legend on the stock certificate or ownership document stating that the securities are unregistered and subject to transfer restrictions.⁸

When an investor eventually wants to sell, Rule 144 is the most common route. The holding period depends on whether the company files SEC reports. For reporting companies, it’s at least six months. For non-reporting companies, which covers most private issuers using Rule 506, the holding period is one full year from the date the purchase price was paid in full.¹⁶ Investors should understand going in that the money is effectively locked up. There’s no secondary market for most private placement securities, and finding a buyer after the holding period can still be difficult.

Keeping Back-to-Back Offerings Separate

When a company runs multiple offerings close in time, the SEC may “integrate” them, treating them as a single offering. If the combined offering doesn’t qualify for an exemption, the company loses exempt status for both. Rule 152 provides a straightforward safe harbor: an offering that begins more than 30 calendar days after a prior offering completes, or more than 30 days before the next one starts, will not be integrated with the other.¹⁷

There’s a catch. A 506(b) offering that opens within 30 days after completing a 506(c) offering doesn’t automatically get the safe harbor, because the earlier advertising could serve as solicitation for the later private offering. Consecutive raises under different exemptions need adequate spacing or a careful look at whether integration risk applies.

1
eCFR. 17 CFR 230.506 – Exemption for Limited Offers and Sales Without Regard to Dollar Amount of Offering
2
U.S. Securities and Exchange Commission. Private Placements – Rule 506(b)
3
U.S. Securities and Exchange Commission. General Solicitation – Rule 506(c)
4
eCFR. 17 CFR 230.501 – Definitions and Terms Used in Regulation D
5
U.S. Securities and Exchange Commission. Accredited Investors
6
U.S. Securities and Exchange Commission. Amendments to Accredited Investor Definition
7
U.S. Securities and Exchange Commission. Amending the Accredited Investor Definition
8
eCFR. 17 CFR 230.502 – General Conditions to Be Met
9
U.S. Securities and Exchange Commission. General Solicitation
10
U.S. Securities and Exchange Commission. Disqualification of Felons and Other Bad Actors from Rule 506 Offerings and Related Disclosure Requirements
11
U.S. Securities and Exchange Commission. Filing a Form D Notice
12
U.S. Securities and Exchange Commission. Form D – Notice of Exempt Offering of Securities
13
U.S. Securities and Exchange Commission. Frequently Asked Questions and Answers on Form D
14
U.S. Securities and Exchange Commission. Form ID Instructions
15
U.S. Securities and Exchange Commission. Filing and Amending a Form D Notice
16
eCFR. 17 CFR 230.144 – Persons Deemed Not to Be Engaged in a Distribution and Therefore Not Underwriters
17
eCFR. 17 CFR 230.152 – Integration