Rule 506(b) vs 506(c): What Investors Should Know

Rule 506(b) and Rule 506(c) are two ways a company can sell a private placement under Regulation D. The main difference: a 506(b) offering cannot be publicly advertised but may include up to 35 non-accredited investors, while a 506(c) offering can be advertised openly but only to accredited investors whose status the company takes reasonable steps to verify.

You found a private investment through an online ad, a webinar or a LinkedIn post, and the subscription paperwork asks for tax returns or a letter from your CPA. A friend in a different deal says they only had to tick a box. Both offerings are legal. They are just using different rules, and the rule tells you a lot about what to expect.

What is Rule 506 of Regulation D?

Rule 506 is the most widely used exemption that lets a company raise money without registering the offering with the SEC. According to the SEC's page on Rule 506(b) private placements, companies using it "can raise an unlimited amount of money." Rule 506(c) was added later, after the JOBS Act directed the SEC to allow general solicitation when every buyer is accredited.

Both versions produce restricted securities, both require the company to file a Form D notice with the SEC within 15 days after the first sale, and both are subject to "bad actor" disqualification rules. Neither one means the SEC has reviewed or approved the investment. For the basics of how these deals work, see our guide on what a private placement is.

How are 506(b) and 506(c) different?

The differences come down to who can invest, how the deal can be marketed, and how investors prove they qualify.

	Rule 506(b)	Rule 506(c)
Public advertising allowed?	No general solicitation	Yes, general solicitation allowed
Who can invest	Unlimited accredited investors plus up to 35 non-accredited investors in any 90-day period	Accredited investors only
Proving accredited status	Investor typically self-certifies in the subscription documents	Issuer must take reasonable steps to verify
Disclosure if non-accredited investors join	Must provide disclosure documents and financial statement information	Not applicable
Amount that can be raised	Unlimited	Unlimited
Form D filing	Within 15 days of first sale	Within 15 days of first sale

Source: SEC pages on Rule 506(b) and Rule 506(c).

What does "no general solicitation" mean in a 506(b) deal?

It means the company can't market the offering to the public, for example through open websites, mass emails, social media posts or public seminars. In practice, 506(b) deals are usually offered to people the company or its placement agent already knows.

That has a practical effect on you. If you are being cold-pitched a 506(b) deal by a stranger, something is off: either the deal is really a 506(c) offering, or the sponsor is not following the rules it says it is using.

Can non-accredited investors join a 506(b) offering?

Yes, up to 35 in any 90-calendar-day period. The SEC says each must have, alone or with a purchaser representative, enough financial and business knowledge to evaluate the merits and risks. If any non-accredited investors participate, the company must give them disclosure documents similar to a Regulation A offering, plus specified financial statements. Many sponsors avoid this extra work by limiting 506(b) deals to accredited investors anyway.

How does accredited investor verification work in 506(c)?

In a 506(c) offering the company has to take "reasonable steps" to verify that every buyer is accredited, rather than relying on the investor's word. The SEC's compliance guide on general solicitation describes this as a principles-based test that weighs the type of investor, the information the issuer has, and the terms of the offering, such as a minimum investment amount.

The same guide lists non-exclusive methods an issuer may use for individual investors.

Income verification

Reviewing IRS forms that report income, such as W-2s, 1099s, Schedule K-1s or a filed Form 1040, for the prior two years.

Net worth verification

Reviewing documents dated within the prior three months, such as bank and brokerage statements and a credit report, plus a written representation from the investor.

Third-party confirmation

A written letter from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney or a CPA confirming they have verified your status within the last three months.

The thresholds themselves are the same under both rules: for individuals, generally $200,000 of income ($300,000 with a spouse or spousal equivalent) in each of the last two years, or more than $1 million of net worth excluding a primary residence. Our explainer on what an accredited investor is walks through the full definition.

Is a 506(b) or 506(c) offering safer?

Neither is safer. The rule only governs how the deal is sold and who can buy, not the quality of the business or the risk of loss. Both are exempt from SEC registration and review, both involve restricted securities that are usually hard to sell, and you can lose your entire investment in either.

What each one tells you is different. A 506(c) sponsor is allowed to advertise, so you may see polished marketing; the advertising itself is not a sign of quality. A 506(b) sponsor should not be marketing publicly at all, so public pitching is a red flag. Private placements are also usually illiquid, which our guide to liquidity risk explains in more detail.

What should you check before investing under either rule?

Check the paperwork and the people, not just the rule. A short checklist:

Find the Form D on EDGAR. Search the issuer's name in EDGAR and confirm which exemption box it checked (506(b) or 506(c)).
Look up the sponsor and any broker. Use FINRA BrokerCheck and the SEC's adviser search to check for disciplinary history.
Read the offering document. The private placement memorandum (PPM) should explain the business, fees, conflicts, use of proceeds and risks.
Ask how you can get your money out. Expect lockups and limited or no resale market.
Be wary of any promised return. A legitimate offering describes risks; it does not guarantee results.

Freedom Merchant Exchange, which publishes this guide, offers its merchant cash advance investment terms to accredited investors only, through a PPM. The checklist above applies to us as much as to any sponsor.

Frequently asked questions

Why would a company choose 506(b) over 506(c)?

Rule 506(b) lets investors self-certify accredited status and allows a limited number of sophisticated non-accredited investors, which can make closing easier with an existing network. The trade-off is that the company can't advertise the offering.

Can I self-certify in a 506(c) offering?

Not on its own. The issuer must take reasonable steps to verify your status, which usually means reviewing tax forms or account statements, or receiving a letter from your CPA, attorney, registered adviser or broker-dealer.

Does a Form D filing mean the SEC approved the offering?

No. Form D is a notice that the company is relying on an exemption. The SEC does not review or approve the merits of Rule 506 offerings.

Do states regulate Rule 506 offerings?

Partly. Federal law preempts state registration for Rule 506 offerings, but the SEC notes that states can still require notice filings and collect fees, and state anti-fraud rules still apply.