Rule 506(b) vs. 506(c): Solicitation, Verification, and Disclosure

The choice between Rule 506(b) and Rule 506(c) comes down to a single trade-off: Rule 506(b) lets you accept up to 35 non-accredited investors but bans public advertising, while Rule 506(c) lets you advertise freely but restricts every buyer to verified accredited investors. Both are Regulation D safe harbors that allow unlimited capital raises without SEC registration, and both apply to the same universe of private offerings. Which one fits depends on how you find investors, who you want to admit, and how much verification work you’re willing to do.

Advertising and General Solicitation

Under Rule 506(b), a company cannot use general solicitation or advertising to market its securities.¹ No social media posts about the deal, no trade-publication ads, no pitching a room full of strangers. The issuer must already know its potential investors through pre-existing substantive relationships before the offering begins.

Rule 506(c), created after the JOBS Act in 2012, flips that restriction. Issuers can advertise openly: public websites, paid online campaigns, investment seminars, podcast spots, anything that reaches an audience.² You get reach, but you pay for it with tighter rules on the back end.

What “Pre-Existing Substantive Relationship” Actually Means

Because 506(b) rules out solicitation, the SEC’s definition of a qualifying relationship does real work. It must be “pre-existing,” meaning formed before the offering launched (or formed through a broker-dealer or investment adviser before that professional joined the deal). It must also be “substantive,” meaning the issuer or its intermediary has enough information about the person’s financial situation and accredited status to evaluate them.³

A LinkedIn connection or a business card exchange does not clear that bar. The issuer needs meaningful financial information gathered ahead of time. Broker-dealers often build investor networks specifically for this purpose, qualifying leads long before any specific deal materializes. If the SEC later decides you were effectively soliciting the public and calling it a pre-existing relationship, the exemption collapses.

Who Can Invest Under Each Rule

Rule 506(b) allows an unlimited number of accredited investors plus up to 35 non-accredited purchasers in any 90-day period.¹ Those non-accredited investors are not just anyone with a checkbook. Each one must have enough knowledge and experience in financial and business matters to evaluate the investment’s risks alone, or the issuer must reasonably believe they do. That sophistication test is separate from wealth. A seasoned CFO who falls below the accredited thresholds might qualify; a wealthy heir with no investment background would not.

Rule 506(c) draws a harder line: every purchaser must be an accredited investor, no exceptions.² Because the offering can reach the public through advertising, the SEC treats accredited-only participation as the safeguard that replaces the pre-existing relationship requirement.

Accredited Investor Thresholds

For individuals, accredited status under Regulation D requires meeting at least one of several criteria:⁴

Individual income above $200,000 in each of the two most recent years, with a reasonable expectation of the same in the current year. The joint threshold with a spouse or spousal equivalent is $300,000.
Individual or joint net worth exceeding $1 million, excluding the value of a primary residence.
Holders in good standing of a Series 7, Series 65, or Series 82 FINRA license, regardless of income or net worth.⁵
Certain employees of private fund issuers who meet the “knowledgeable employee” definition under the Investment Company Act.

Entities like banks, insurance companies, registered investment companies, and business development companies qualify on their own. Other entities generally need $5 million in assets.

Verifying Investor Status

506(b): Self-Certification

Under 506(b), the issuer needs only a “reasonable belief” that each investor qualifies as accredited.¹ In most offerings that means an investor fills out a questionnaire representing they meet the income or net worth thresholds, and the company accepts the representation at face value. No tax returns, no brokerage statements, no third-party letters. The administrative lift is light, and that is one reason 506(b) remains the more common choice for issuers with existing investor networks.

506(c): Documented Verification

Rule 506(c) requires the issuer to take “reasonable steps” to verify every investor’s accredited status. Self-certification alone is not enough.² The regulation lists several safe-harbor methods that automatically satisfy the requirement if followed:

Reviewing IRS forms reporting the buyer’s income for the two most recent years (W-2s, 1099s, K-1s, or tax returns), plus a written statement that the investor reasonably expects to hit the same income level in the current year.
Reviewing bank statements, brokerage statements, or other asset documentation dated within the prior three months, plus a written representation that all liabilities have been disclosed.
Getting a written letter dated within the prior three months from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney, or a CPA confirming they have verified the investor’s accredited status.

These safe harbors are non-exclusive. An issuer that uses a different reasonable approach can still comply, but the listed methods provide certainty, and many issuers use third-party verification services to remove ambiguity. Getting verification wrong is not just a paperwork issue. If the SEC decides verification was inadequate, the exemption fails for the entire offering, and every investor gains rescission rights under Section 12(a)(1) of the Securities Act, meaning they can demand their money back.

Disclosure Obligations

Admitting non-accredited investors into a 506(b) offering triggers disclosure duties under Rule 502(b) that many issuers underestimate. The company must give those investors detailed financial and business information similar to what a registered offering requires.⁶ The type of financial statements depends on offering size. For non-reporting companies raising up to $20 million, financial statements must follow the format required by Form 1-A (the Regulation A form). Above $20 million, the requirements escalate further, including audited statements. The company must also be available to answer questions from non-accredited purchasers. Accounting and legal fees often surprise issuers who assumed a handful of non-accredited investors would be simple to include.

Because 506(c) offerings are limited to accredited investors, these Rule 502(b) disclosure obligations do not apply.² Federal anti-fraud rules still prohibit material misstatements or omissions, and most issuers prepare a Private Placement Memorandum either way. Skipping one saves nothing if a dispute arises and you have no written record of what you told investors.

Rules That Apply to Both

Bad Actor Disqualification

Rule 506(d) covers both exemptions and can shut down a deal before it starts. If any “covered person” connected to the offering has a disqualifying event in their background, neither 506(b) nor 506(c) is available.⁷ Covered persons include the issuer, its directors and executive officers, anyone owning 20 percent or more of the voting equity, promoters, and any person compensated for soliciting investors.

Disqualifying events include felony or misdemeanor convictions related to securities transactions within the past ten years (five years for the issuer itself), certain regulatory orders from state or federal agencies, SEC disciplinary actions, and cease-and-desist orders involving fraud. Lookback windows vary by event type, but all apply to conduct on or after September 23, 2013. Issuers must conduct a factual inquiry into every covered person’s background before launching. Disqualification is automatic when the event exists, not when the SEC discovers it.

Form D Filing

After the first sale in any Rule 506 offering, the issuer must file a Form D notice with the SEC through EDGAR within 15 calendar days.⁸ If the deadline lands on a weekend or holiday, it rolls to the next business day, and the SEC charges no fee.⁹

Failing to file Form D does not, by itself, destroy the Regulation D exemption. The SEC has confirmed the filing is not a condition of the exemption under Rule 504, 506(b), or 506(c).¹⁰ But Rule 507 lets the SEC seek a court injunction against issuers who violate the filing requirement, and an issuer under such an injunction loses access to Regulation D going forward. File on time.

Resale Restrictions

Securities sold under either exemption are “restricted securities.” Buyers cannot resell them freely on the open market. Rule 502(d) requires issuers to take reasonable care to prevent resale, typically by placing a legend on the securities noting they are unregistered and subject to transfer restrictions.¹¹ Rule 144 governs eventual resales, with a six-month holding minimum for securities of a reporting company and a one-year minimum for non-reporting company securities.¹² Every investor in a Regulation D deal should understand this illiquidity going in.

State Notice Filings

Federal law preempts states from requiring registration of Rule 506 offerings, but states can still require a notice filing and a fee. Most require a copy of the Form D and a fee that varies by state and offering size. Aggregate costs for a nationwide offering can be meaningful.

Running a 506(b) and a 506(c) in Sequence

Issuers sometimes want to run a 506(b) round to their existing network and then a 506(c) round that reaches a broader audience, or the other way around. The risk is that the SEC treats both as a single integrated offering, so the general solicitation in the 506(c) round retroactively taints the 506(b) round.

Rule 152 provides a safe harbor: any offering made more than 30 calendar days before the start of another offering, or more than 30 calendar days after completion of another, will not be integrated with it.¹³ One caveat matters. If a 506(c) round with public advertising runs first and a 506(b) round follows, the 30-day gap alone is not enough. The 506(b) purchasers must not have been solicited by the earlier public campaign, or a substantive relationship must have existed with them before the 506(c) advertising began. Sloppy timing here is one of the fastest ways to lose an exemption.

Choosing Between Them

Rule 506(b) tends to fit issuers with a mature investor network, a tolerance for admitting a limited number of non-accredited but sophisticated investors, and a preference for lighter verification. Rule 506(c) fits issuers who need to reach investors they don’t already know, are comfortable running accredited-only, and can absorb the verification workload (or pay a service to handle it). The advertising freedom of 506(c) is real, but so is the documentation burden, and the penalty for weak verification is losing the exemption for every investor in the deal. Neither rule is uniformly better; each is a set of trade-offs matched to how you’re actually raising the money.

1
eCFR. 17 CFR 230.506 – Exemption for Limited Offers and Sales Without Regard to Dollar Amount of Offering – Section: (b)
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eCFR. 17 CFR 230.506 – Exemption for Limited Offers and Sales Without Regard to Dollar Amount of Offering – Section: (c)
3
U.S. Securities and Exchange Commission. General Solicitation
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eCFR. 17 CFR 230.501 – Definitions and Terms Used in Regulation D
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U.S. Securities and Exchange Commission. Accredited Investors
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eCFR. 17 CFR 230.502 – General Conditions to Be Met
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U.S. Securities and Exchange Commission. Disqualification of Felons and Other Bad Actors from Rule 506 Offerings and Related Disclosure Requirements
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U.S. Securities and Exchange Commission. Filing a Form D Notice
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eCFR. 17 CFR 239.500 – Form D, Notice of Sales of Securities Under Regulation D and Section 4(a)(5) of the Securities Act of 1933
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U.S. Securities and Exchange Commission. Frequently Asked Questions and Answers on Form D
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eCFR. Regulation D – Rules Governing the Limited Offer and Sale of Securities Without Registration Under the Securities Act of 1933
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U.S. Securities and Exchange Commission. Rule 144 – Selling Restricted and Control Securities
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eCFR. 17 CFR 230.152 – Integration