Rule 506(b) vs. Rule 506(c):
Which Reg D Exemption Fits Your Raise?

The central trade-off is marketing versus investor access. Rule 506(b) prohibits general solicitation - you can only raise from people with whom you have a substantive pre-existing relationship - but it allows up to 35 sophisticated non-accredited investors and only requires self-certification of accredited status. Rule 506(c) allows broad public advertising and marketing, but limits the offering strictly to verified accredited investors, and the issuer must take reasonable steps to verify that status through third-party documentation. Both allow unlimited capital raises and both require a Form D filing within 15 days of first sale.

No. Once you make a general solicitation - posting on social media, running ads, speaking at a public conference, or sending cold emails about the offering - you have irrevocably moved into 506(c) territory. You cannot retroactively claim 506(b) status for prior investors. If you advertise publicly and then try to accept a non-accredited investor, the entire offering loses its exemption. The choice of which exemption to use must be made before any marketing activity begins.

General solicitation includes any communication directed at investors with whom you do not have a substantive pre-existing relationship. This covers: social media posts mentioning the offering, advertisements in any media, public conferences or seminars where you discuss the investment, email blasts to purchased lists, and any public website describing the offering. A 'substantive pre-existing relationship' means you knew the investor before the offering commenced, you have enough information to evaluate their financial sophistication, and the relationship was not established for the purpose of the offering. Many issuers underestimate this requirement and accidentally trigger 506(c) obligations.

Under Rule 506(c), issuers must take 'reasonable steps' to verify each investor's accredited status - self-certification alone is insufficient. Acceptable verification methods include: reviewing IRS tax returns or W-2s from the past two years showing income above $200,000 ($300,000 joint); reviewing brokerage statements or bank statements showing net worth exceeding $1 million (excluding primary residence); obtaining a written confirmation from a licensed CPA, attorney, broker-dealer, or registered investment adviser certifying the investor's accredited status; or using a third-party verification service. The 2025 SEC guidance also allows a written representation from the investor that they remain accredited at the time of investment, provided the issuer has no knowledge to the contrary.

Yes. Both 506(b) and 506(c) are subject to Rule 506(d) bad actor disqualification. If any covered person - including the issuer, directors, officers, 20%+ equity holders, promoters, placement agents, and their directors/officers - has a disqualifying event (felony conviction, SEC enforcement action, certain regulatory sanctions, court injunctions), the exemption is unavailable. Issuers must conduct reasonable inquiry about covered persons before relying on either exemption. This is one of the most overlooked compliance requirements in private placements - securities counsel should run a background check on all covered persons before the offering opens.

Both are widely used in real estate, and the choice depends on your investor sourcing strategy. Operators who want to advertise deals publicly - running webinars, posting deal teasers on social media, or working with crowdfunding platforms - must use 506(c) but must verify every investor. Operators who raise exclusively from their existing investor network and referrals can use 506(b), which is simpler, allows up to 35 non-accredited sophisticated investors, and avoids the verification burden. The practical reality: 506(b) dominates relationship-based raises; 506(c) is necessary if you want to market broadly online.

Technically, Regulation D is an exemption from SEC registration - not an SEC-reviewed approval - so there is no legal requirement that an attorney prepare the offering documents. In practice, however, conducting a private placement without qualified securities counsel is a significant risk. The consequences of a failed exemption include: rescission rights for all investors (they can demand their money back), civil liability under the Securities Act, and potential SEC enforcement action. The PPM (Private Placement Memorandum), subscription agreement, investor questionnaire, Form D filing, state blue sky compliance, and bad actor inquiry all require securities expertise. The cost of a properly documented Reg D offering is a fraction of the cost of defending a failed exemption.