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.
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.
Verification Methods
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.
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.
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.
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.
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.
When 506(c) Makes Sense
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.
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.
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.
The Practical Friction
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. Institutional limited partners (pension funds, endowments, funds of funds) find the exercise unnecessary since their accredited status is beyond question.
For managers who do choose 506(c), third-party verification services have emerged to streamline the process. These platforms collect and review documentation on behalf of the issuer, reducing the administrative burden while satisfying the SEC’s reasonable steps requirement. The Form D filing must indicate that the offering relies on 506(c) rather than 506(b).
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.
