Rule 506 of Regulation D: 506(b) vs. 506(c), Investors, and Filings

Rule 506 of Regulation D is the SEC exemption most private companies use to raise capital without registering their securities. It comes in two versions. Rule 506(b) lets you sell to an unlimited number of accredited investors plus up to 35 non-accredited ones, but bars you from advertising the offering. Rule 506(c) lets you advertise openly, but every purchaser must be a verified accredited investor. Both versions allow unlimited fundraising, and both require you to meet a set of conditions that, if broken, can void the exemption entirely.

The Two Paths: 506(b) vs. 506(c)

The choice between the two versions usually comes down to how you plan to find investors.

Rule 506(b) is the traditional private placement. There is no cap on how many accredited investors can buy in and no ceiling on the total raise. You may also include up to 35 non-accredited purchasers in any 90-calendar-day period, provided each of them has enough financial and business knowledge to evaluate the investment’s risks, either on their own or through a representative.¹ The trade-off is a hard ban on general solicitation. You cannot promote the deal through websites, social media, seminars, cold calls, or any other mass channel. Investors must come through pre-existing, substantive relationships: a relationship that was formed before the offering began and where you have enough information to evaluate the person’s financial situation and have actually done so.² Posting about the raise on LinkedIn would break this requirement.

Rule 506(c) flips the formula. You can advertise the offering anywhere, through any channel. In exchange, every single purchaser must be an accredited investor, and you must take reasonable steps to verify that status. No non-accredited buyers, no exceptions.¹

Who Counts as an Accredited Investor

Both versions turn on the accredited investor definition, so this is the starting point.

An individual qualifies by income if they earned more than $200,000 in each of the last two years, or $300,000 jointly with a spouse or spousal equivalent, and reasonably expect to hit the same level this year. Alternatively, an individual with a net worth above $1 million, excluding their primary residence, qualifies regardless of income.³ These dollar thresholds have not been adjusted for inflation since they were set.

Professional credentials also qualify. Holders of an active Series 7, Series 65, or Series 82 license qualify on expertise alone, without meeting any income or net-worth test.⁴ Knowledgeable employees of a private fund qualify when their employer is the issuer.³

Entities have their own rules. Banks, registered broker-dealers, insurance companies, and registered investment advisers automatically qualify. Corporations, LLCs, partnerships, and trusts with more than $5 million in total assets qualify, so long as they were not formed for the specific purpose of buying the offered securities. Any entity in which every equity owner is individually accredited is itself accredited.³

How Verification Works Under 506(c)

Under Rule 506(c), you cannot rely on an investor’s self-certification alone. The SEC provides safe harbor verification methods that vary with the basis the investor is claiming:

For income, review IRS forms showing the investor’s income for the two most recent years (W-2s, 1099s, K-1s, or tax returns) and obtain a written statement that they reasonably expect to meet the threshold this year.
For net worth, review bank statements, brokerage statements, or independent appraisals dated within the prior three months, pull a consumer credit report to check liabilities, and obtain a written representation that the investor has disclosed all relevant liabilities.
For third-party confirmation, obtain a written letter from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or CPA confirming they have verified the investor’s accredited status within the past three months.

These methods are non-exclusive, and other reasonable approaches are permitted.⁵ What is not permitted is checking a box on a subscription agreement and calling it a day.

Disclosure When Non-Accredited Investors Are Included

Including even one non-accredited investor in a 506(b) offering sharply increases the paperwork. You must furnish disclosure documents comparable to what a registered offering would require, typically packaged as a private placement memorandum describing the business, its risks, and the terms of the securities.⁶

Financial statement requirements scale with the size of the raise. For offerings up to $20 million, financial statements at the level required for smaller Regulation A filings are required. For offerings above $20 million, a more detailed set is required. Everything must follow U.S. GAAP, or IFRS for foreign private issuers.⁶ When every investor is accredited, these disclosure obligations do not apply as a legal requirement, though most issuers still provide substantial documentation to close the deal.

Bad Actor Disqualification

Rule 506(d) blocks a company from using either version if the issuer or certain associated people have serious regulatory or criminal histories. Covered persons include the company’s directors and executive officers, anyone owning 20% or more of the voting equity, and any promoter or investment manager involved in the raise.¹

Lookback periods vary by event:

Criminal convictions involving securities, fraud, or false government filings: ten years, shortened to five for the issuer and its affiliates.
Court injunctions or restraining orders related to securities fraud: must be currently in effect and entered within the past five years.
Final orders from state or federal regulators barring someone from the securities, insurance, or banking industries, or based on fraud: ten years.
SEC cease-and-desist orders: five years, and the order must still be in effect.
SEC stop orders against a registration statement or Regulation A filing: five years.
U.S. Postal Service fraud orders: five years.

⁷

Disqualification is not always permanent. The SEC can grant a waiver upon a showing of good cause, and the court or regulatory body that issued the original order can advise the SEC in writing that disqualification should not apply.⁵ Run background checks on every covered person before launching. Discovering a disqualifying event after you have already taken money is a much harder problem to fix.

Filing Form D

Every company using Rule 506 must file a Form D notice with the SEC through EDGAR. The deadline is 15 calendar days after the date of first sale, which is the date the first investor becomes irrevocably committed, not the date money changes hands. If the deadline lands on a weekend or holiday, it moves to the next business day.⁸

The form asks for the issuer’s legal name, jurisdiction of incorporation, and entity type; the names and addresses of all executive officers, directors, and people in similar roles such as managing members of an LLC; the issuer’s industry group; the total dollar amount being offered; the amount already sold; and the intended use of proceeds. Commissions paid to finders or placement agents must be reported as well.⁹

Annual Amendments

If the offering is still ongoing one year after the original Form D was filed, you must file an amendment on or before the anniversary of the initial filing, or the most recent amendment, whichever is later. The amendment must give current information for every field on the form, not just the items that changed.¹⁰ This is easy to overlook in a long-running raise. A court injunction for failure to file could trigger disqualification from using Rule 506 entirely under Rule 507.¹¹

State Blue Sky Notice Filings

Rule 506 securities are covered securities under federal law, so states cannot require you to register the securities themselves. States can still require notice filings and collect fees when a Rule 506 offering is sold to their residents. Most states want a copy of the federal Form D, a consent to service of process, and a filing fee. Fees vary widely; some states charge nothing while others charge over $1,000 depending on offering size. Missing a state notice filing can lead to fines or administrative action in that state, so issuers selling across multiple jurisdictions need a system for tracking each state’s requirements and deadlines.

Resale Restrictions Buyers Should Expect

Securities purchased in a Rule 506 offering are restricted securities. Investors cannot turn around and sell them on the open market.¹² The most common resale path is Rule 144, which imposes a holding period: at least six months when the issuer files regular reports with the SEC, and at least one year when the issuer is not a reporting company.¹³ Most private companies using Rule 506 are not reporting companies, so investors should expect their capital to be locked up for at least a year, and typically much longer, since there is rarely a liquid market for the shares even after the holding period expires.

Integration With Other Offerings

Running a 506(b) offering today and a 506(c) offering next month risks having the SEC treat both as a single offering. If the combined offering fails the conditions of either exemption, the whole thing becomes an unregistered sale. Rule 152 provides a general safe harbor: offerings separated by more than 30 calendar days are generally not integrated. When a publicly advertised 506(c) offering is followed by a 506(b) offering, the issuer must reasonably believe that each 506(b) purchaser was not solicited through the earlier advertising, or that the company had a substantive relationship with each buyer before the 506(b) offering began.⁶ The safest practice is to clearly end one offering before starting another and document the timeline.

What Happens If You Get It Wrong

Losing a Rule 506 exemption is not a minor problem. When a company sells securities without a valid exemption or registration, the SEC can bring civil or criminal enforcement actions carrying financial penalties, and in serious cases prison time for company leadership. Investors can sue directly, and their most powerful remedy is rescission: the company must return every dollar invested, plus interest.¹⁴

The damage compounds. A compliance failure in an early round can scare off sophisticated investors later. Venture capital firms and institutional investors routinely demand representations that prior offerings were properly conducted, legal opinion letters confirming compliance, and sometimes indemnification for past violations as a condition of investing.¹⁴ A company that cut corners on a seed round can find itself unable to raise a Series A, not because the business failed, but because the legal foundation was cracked from the start.

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. General Solicitation
3
eCFR. 17 CFR 230.501 – Definitions and Terms Used in Regulation D
4
U.S. Securities and Exchange Commission. Accredited Investors
5
eCFR. 17 CFR 230.506 – Exemption for Limited Offers and Sales Without Regard to Dollar Amount of Offering
6
eCFR. 17 CFR 230.502 – General Conditions to Be Met
7
U.S. Securities and Exchange Commission. Disqualification of Felons and Other Bad Actors from Rule 506 Offerings and Related Disclosure Requirements
8
U.S. Securities and Exchange Commission. Filing a Form D Notice
9
U.S. Securities and Exchange Commission. Form D – Notice of Exempt Offering of Securities
10
eCFR. 17 CFR 239.500 – Form D
11
eCFR. 17 CFR 230.507 – Disqualifying Provision Relating to Exemptions Under 230.504 and 230.506
12
U.S. Securities and Exchange Commission. Private Placements – Rule 506(b)
13
U.S. Securities and Exchange Commission. Rule 144 – Selling Restricted and Control Securities
14
U.S. Securities and Exchange Commission. Consequences of Noncompliance