Understanding SEC Reg D: 506(b) vs 506(c) Explained

What is SEC Regulation D?

Regulation D is a set of SEC rules that provides exemptions from the standard securities registration requirements. For growth-stage companies and fund managers looking to raise capital privately, Reg D offers a streamlined pathway to access investor capital without the time and expense of a full public offering registration.

The two most commonly used exemptions under Regulation D are Rule 506(b) and Rule 506(c). While both allow issuers to raise unlimited capital, they differ significantly in how you can market your offering and who can invest.

Understanding these differences is critical to structuring a compliant and successful capital raise.

Rule 506(b): The Traditional Private Placement

Rule 506(b) has been the cornerstone of private capital formation for decades. It offers flexibility in investor composition but places strict limitations on how you can find those investors.

Key Features of 506(b):

• No general solicitation or advertising permitted
• Unlimited number of accredited investors allowed
• Up to 35 sophisticated non-accredited investors permitted
• Self-certification of accredited investor status accepted
• Pre-existing relationship with investors typically required

Who Should Use 506(b)?

Rule 506(b) is ideal for issuers who already have established networks of potential investors. If you have relationships with high-net-worth individuals, family offices, or institutional investors who know and trust your management team, 506(b) provides a straightforward path to capital.

The inclusion of up to 35 sophisticated non-accredited investors can also be valuable for founders who want to include trusted advisors, early supporters, or strategic partners who may not meet accredited investor thresholds.

The Trade-Off

The prohibition on general solicitation means you cannot publicly advertise your offering. No social media posts about raising capital. No press releases announcing your fundraise. No speaking at conferences about investment opportunities. Your outreach must be limited to people with whom you have pre-existing, substantive relationships.

Rule 506(c): The Modern Approach

Enacted in 2013 as part of the JOBS Act implementation, Rule 506(c) opened new doors for private capital formation by permitting general solicitation and advertising—with important conditions.

Key Features of 506(c):

• General solicitation and advertising permitted
• All purchasers must be verified accredited investors
• Issuer must take "reasonable steps" to verify accredited status
• No non-accredited investors allowed
• Third-party verification often required

Who Should Use 506(c)?

Rule 506(c) is designed for issuers who want to cast a wider net. If you're building a fund, launching a real estate syndication, or raising capital for a venture that would benefit from broader market exposure, 506(c) allows you to market openly.

This exemption is particularly powerful for:

• First-time fund managers building investor bases
• Real estate sponsors marketing specific deals
• Companies with strong brands seeking aligned investors
• Issuers comfortable with rigorous verification processes

The Verification Requirement

The trade-off for marketing freedom is verification rigor. Unlike 506(b), where investors can self-certify their accredited status, 506(c) requires issuers to take "reasonable steps" to verify that each purchaser is accredited.

The SEC has outlined several acceptable verification methods:

• Review of tax returns, W-2s, or other IRS documentation
• Review of bank statements, brokerage statements, or credit reports
• Written confirmation from a licensed attorney, CPA, or investment adviser
• Verification of existing accredited investor status from prior investments

Many issuers engage third-party verification services to streamline this process and create a defensible compliance record.

Side-by-Side Comparison

FeatureRule 506(b)Rule 506(c)

General Solicitation

Not Permitted

Permitted

Accredited Investors

Unlimited

Unlimited (Required)

Non-Accredited Investors

Up to 35

Not Permitted

Investor Verification

Self-Certification

Reasonable Steps Required

Pre-Existing Relationship

Typically Required

Not Required

Marketing Flexibility

Limited

Broad

Form D Filing Requirements

Both 506(b) and 506(c) offerings require the issuer to file Form D with the SEC within 15 days of the first sale of securities. This notice filing includes:

• Basic information about the issuer
• Details about the offering (amount, type of securities)
• Identification of the exemption being claimed
• Information about promoters and related persons

Additionally, most states require notice filings under their "blue sky" laws. The specific requirements vary by state and by where your investors are located.

Failure to file Form D or required state notices can jeopardize your exemption and expose your offering to regulatory risk.

Bad Actor Disqualification

Both Rule 506(b) and 506(c) include "bad actor" disqualification provisions. An issuer cannot rely on these exemptions if certain covered persons have experienced specified disqualifying events, including:

• Criminal convictions in connection with securities
• Court injunctions or restraining orders related to securities
• Final orders from state or federal regulators
• SEC disciplinary orders
• Certain FINRA or exchange suspensions or expulsions

Covered persons include the issuer, its directors, officers, general partners, managing members, promoters, and any person compensated for soliciting investors.

Conducting thorough bad actor checks before launching your offering is not optional—it's essential to maintaining your exemption.

Choosing the Right Pathway

The decision between 506(b) and 506(c) should be driven by your specific circumstances:

Choose 506(b) if:

• You have an established network of potential investors
• You want to include some non-accredited investors
• You prefer simpler investor onboarding with self-certification
• Your offering doesn't require broad market exposure

Choose 506(c) if:

• You need to build an investor base from scratch
• You want the ability to market publicly
• All your target investors will be accredited
• You're comfortable implementing verification procedures

How Marshall Strategies Supports Your Capital Raise

At Marshall Strategies, our Capital Compliance Division manages the operational complexity of Regulation D offerings so you can focus on your business and your investors.

Our services include:

• Form D preparation and SEC filing
• Blue-sky compliance and state notice filings
• Investor documentation and subscription agreement coordination
• Accredited investor verification process management
• Bad actor screening and compliance monitoring
• SPV formation and structural advisory

We work alongside your legal counsel to ensure your offering maintains full regulatory compliance from first investor contact through final closing.

Ready to Structure Your Capital Raise?

Whether you're planning your first private placement or optimizing an existing fund structure, understanding the nuances of Regulation D is essential to a successful capital raise.

Schedule a consultation with our compliance team to discuss your specific situation and determine the optimal pathway for your offering.