What Is Rule 506(c)?
Rule 506(c) is a safe harbor under Regulation D that permits issuers to use general solicitation and general advertising in private offerings, provided that all purchasers are accredited investors and the issuer takes reasonable steps to verify their accredited status. It was adopted by the SEC in 2013 pursuant to the JOBS Act, which directed the Commission to remove the ban on general solicitation for certain private offerings.
Before 506(c), every private fund raise operated in the shadows. You could not post about your fund on a website, mention the raise at a public conference, or reach out to investors without a pre-existing relationship. The JOBS Act changed that, but with a significant trade: if you want to market publicly, you must verify every investor independently rather than relying on their word.
The Key Difference from 506(b)
Under Rule 506(b), you cannot publicly market your fund or approach investors without a pre-existing relationship. Under 506(c), those restrictions are lifted. You can advertise on your website, post about the raise on social media, present at conferences to unscreened audiences, and send offering materials to investors you have never met.
The tradeoff is verification. Under 506(b), an issuer can rely on investor self-certification (a checkbox in the subscription agreement). Under 506(c), self-certification is not enough. The issuer must independently verify that each investor actually meets the accredited investor thresholds.
Here is how the two exemptions compare side by side:
| Feature | Rule 506(b) | Rule 506(c) |
|---|---|---|
| General solicitation allowed | No | Yes |
| Non-accredited investors permitted | Up to 35 (with additional disclosure) | No, all must be accredited |
| Verification of accredited status | Self-certification acceptable | Independent verification required |
| Pre-existing relationship required | Yes (practically speaking) | No |
| Form D filing required | Yes | Yes (must indicate 506(c)) |
| State blue sky compliance | Yes | Yes |
| Typical adoption | ~90% of Reg D offerings | ~10% of Reg D offerings |
Verification Methods: What the SEC Requires
The SEC outlined four non-exclusive safe harbors for verifying accredited status of natural persons:
Income test. Review IRS forms (W-2s, K-1s, tax returns) for the two most recent years showing income exceeding $200,000 (or $300,000 jointly), plus a reasonable expectation of reaching that threshold in the current year.
Worked example: An investor claims $250K annual income. To verify:
- Request 2024 and 2025 tax returns (or W-2s/K-1s)
- Confirm income exceeded $200K in both years
- Obtain written representation that the investor reasonably expects $200K+ in the current year
- If 2024 showed $180K and 2025 showed $270K, the investor does not meet the two-year test despite the higher recent year
Net worth test. Review bank statements, brokerage statements, and appraisal reports demonstrating net worth exceeding $1 million (excluding primary residence), combined with a consumer credit report to check liabilities.
Worked example: An investor claims $1.5M net worth.
- Brokerage statements: $900K in securities
- Bank accounts: $200K
- Investment real estate: $600K (appraised)
- Credit report reveals: $150K in student loans, $50K auto loan
- Net calculation: $1.7M assets - $200K liabilities = $1.5M (qualifies, barely)
- Note: Primary residence equity is excluded from both the asset and liability sides, with special rules for underwater mortgages
Third-party verification letter. Obtain written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed CPA, or licensed attorney that the person is accredited. This has become the most popular method because it shifts the documentation burden to a professional the investor already works with.
Existing investor certification. For investors who previously invested in the issuer’s 506(c) offerings and remain accredited, a written representation of continued status at the time of the new investment. This streamlines re-ups for returning investors but applies only if they originally invested in a 506(c) offering.
For entities, verification is generally simpler. If the entity’s accredited status is based on total assets exceeding $5 million, the issuer can review audited financial statements or other documented evidence. For entities that qualify because all equity owners are accredited individuals, each owner must be individually verified.
When 506(c) Makes Sense for Fund Managers
Most private fund managers do not use 506(c), but there are scenarios where it is the right choice:
Platform-based fundraising. Managers raising through online platforms or syndicates where investors are sourced publicly rather than through personal networks benefit from the general solicitation permission. If your primary fundraising channel is a website or digital marketplace, 506(b) does not work.
First-time managers without LP networks. An emerging general partner who lacks deep institutional relationships may need to cast a wider net. 506(c) permits outbound marketing that 506(b) does not. If your Rolodex has 20 potential investors and you need 50, general solicitation opens doors that cold outreach under 506(b) would close.
Funds targeting individual accredited investors. If your LP base is primarily high-net-worth individuals rather than institutions, and you want to scale outreach beyond warm introductions, 506(c) opens that channel. This is common in real estate funds, syndications, and smaller private credit vehicles.
Thought leadership as a fundraising strategy. Some managers want to publish detailed content about their investment strategy, post performance data publicly, and use content marketing to attract LP interest. Under 506(b), any of this could be construed as general solicitation. Under 506(c), it is explicitly permitted.
The Practical Cost of 506(c) Verification
The reason 506(c) adoption remains modest relative to 506(b) is the investor experience. Asking a prospective LP to hand over two years of tax returns or a net worth verification letter before they can invest creates friction at exactly the moment you want the process to feel smooth.
Worked example: Verification cost and timeline
A fund targeting 40 individual LPs under 506(c):
| Cost Item | Per Investor | Total (40 LPs) |
|---|---|---|
| Third-party verification service | $50-$150 | $2,000-$6,000 |
| Legal review of verification files | $200-$500 | $8,000-$20,000 |
| Administrative time (staff hours) | 2-4 hours | 80-160 hours |
| Investor drop-off due to friction | 10-20% of pipeline | 4-8 lost investors |
The direct cost is manageable. The indirect cost (lost investors who find the process intrusive) is the real concern. Institutional limited partners (pension funds, endowments, funds of funds) find the exercise unnecessary since their accredited status is beyond question. Individual investors, particularly those who are not regular alternative investment participants, may balk at sharing sensitive financial documents.
Third-party verification services have emerged to reduce this friction. Platforms like Verify Investor, VerifyInvestor.com, and Parallel Markets collect and review documentation on behalf of the issuer, providing a verification letter within 24-48 hours. These services cost $50 to $150 per investor and handle the sensitive document review so the fund manager never sees the LP’s tax returns directly.
506(c) in Practice: Who Uses It and Why
The 506(c) universe skews toward certain fund types and fundraising strategies:
Real estate syndications. Individual deal sponsors raising $2M to $20M for specific property acquisitions are heavy 506(c) users. Their investor base is individual accredited investors found through online platforms, social media, and content marketing. They cannot rely on institutional relationships because institutional investors do not participate in individual deal syndications at this scale.
Emerging fund managers. First-time fund managers who have not built institutional LP relationships often need general solicitation to reach enough investors. A 506(c) filing allows them to market at conferences, through LinkedIn, and on their website without the pre-existing relationship constraints of 506(b).
Online investment platforms. Crowdfunding and syndication platforms (AngelList, Republic, Fundrise) operate under 506(c) because their business model depends on marketing offerings to a broad audience. The platforms handle verification as a core service.
Larger institutional funds almost never use 506(c). When a $500M buyout fund raises capital, it does so through a network of established LP relationships and placement agents. General solicitation is unnecessary, and the verification burden would add friction to a process that works smoothly under 506(b).
The Form D Filing
The Form D filing with the SEC must indicate which exemption the offering relies on. Checking the 506(c) box has consequences beyond the verification requirement. It signals to regulators and to the market that the issuer engaged in general solicitation. If you file under 506(c) but failed to properly verify any investor, the entire exemption could be lost, potentially making the offering an unregistered securities offering in violation of Section 5 of the Securities Act.
The Form D must be filed within 15 days of the first sale of securities. Some states require notice filings as well, and certain states impose additional requirements on 506(c) offerings. Fund counsel should handle these filings as part of the closing process.
Choosing Between 506(b) and 506(c)
The decision should be made at the outset of your fundraise, not mid-process. Switching between exemptions is legally treacherous.
Choose 506(b) when:
- Your LP base is established institutional investors and family offices
- You have pre-existing relationships with most of your target LPs
- You do not need to market the fund publicly
- You want to minimize closing friction and administrative cost
- You want the option to include up to 35 sophisticated but non-accredited investors
Choose 506(c) when:
- You need to reach investors beyond your existing network
- Your fundraising strategy includes content marketing, social media, or public events
- Your LP base is primarily individual accredited investors
- You are raising through an online platform or syndication model
- You are willing to invest in the verification infrastructure
For most fund managers raising institutional capital, 506(b) remains the right choice. The benefits of general solicitation simply do not outweigh the verification cost when your LP base is pension funds, endowments, and family offices that you already know. But for emerging managers building an LP base from scratch, or for strategies that target individual investors at scale, 506(c) is a powerful tool that did not exist before 2013.
Frequently Asked Questions
What does it mean to 'verify' accredited investor status under Rule 506(c)?
The issuer must take reasonable steps to verify that each investor meets the accredited investor definition. Acceptable methods include reviewing tax returns for the prior two years, obtaining bank or brokerage statements, or getting a written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed CPA, or attorney. Self-certification alone is not sufficient.
Can a fund switch from Rule 506(b) to 506(c) mid-raise?
It is extremely risky. If you conducted any general solicitation activities before formally relying on 506(c), and you had been operating under 506(b), you may have already violated the no-solicitation requirement of 506(b). The exemption should be determined at the outset, and any switch requires careful legal analysis of all prior communications.
Why don't more funds use Rule 506(c)?
The verification burden adds friction to the closing process, particularly for high-net-worth individuals who may be reluctant to share tax returns or financial statements. Institutional investors find it unnecessary since their accredited status is self-evident. For most fund managers, the benefits of general solicitation do not outweigh the operational cost of verification.
What is the difference between Rule 506(b) and Rule 506(c)?
Rule 506(b) prohibits general solicitation but allows up to 35 non-accredited investors and relies on investor self-certification. Rule 506(c) permits general solicitation (advertising, public marketing, social media promotion) but requires that all investors be accredited and that the issuer independently verify their status. Most private funds use 506(b) because the verification requirements of 506(c) add friction and cost without meaningful benefit for managers with established LP networks.
Can you advertise a 506(c) offering on social media?
Yes. Rule 506(c) explicitly permits general solicitation, which includes social media posts, website announcements, email campaigns to unscreened audiences, conference presentations, and traditional advertising. The key constraint is not on the marketing itself but on the investor qualification: every person who actually invests must be a verified accredited investor. You can advertise widely, but you must verify rigorously before accepting capital.
