506(c) Guide: What Passive Investors Need to Know

506(c) Guide: What Passive Investors Need to Know

Ever heard of a 506(c) offering and wondered what it meant? I did when I began investing in real estate syndications.  

Imagine you’re starting a new real estate business, and you need money to kick things off. Instead of going through a bunch of complicated rules set by the big financial watchdog (Securities and Exchange Commission aka SEC), there’s a shortcut called the 506(c) offering. It’s like a VIP pass for startups to raise money more easily.

This special pass was created by a law called the JOBS Act in 2012. It lets businesses advertise to the public through ads and promotions. But there’s a catch.

They can only accept money from what’s called “accredited investors.” These are people who have a good chunk of money or earn a lot each year (more on specifics later).

Now, there’s a cousin to 506(c) called 506(b). The main difference? With 506(b), you can’t advertise or promote your offering. But with 506(c), you can, as long as you make sure all your investors are these “accredited” types.

In simple terms, 506(c) is a way for new businesses, like a real estate venture, to raise money by promoting their offering, but only to people with a certain financial status. It’s all about keeping things fair and above board.

Key Takeaways

  • Rule 506(c) is a type of securities exemption under Regulation D, created to assist startups and small businesses in obtaining capital.
  • The primary distinction between 506(b) and 506(c) offerings is the ability to engage in general solicitation and advertising in 506(c) offerings.
  • Only accredited investors are allowed to participate in 506(c) offerings, and issuers must verify their accredited investor status.
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What is Reg D Rule 506?

Regulation D (Reg D) is a Securities and Exchange Commission (SEC) regulation that governs private securities offerings.

Rule 506 of Regulation D provides two distinct exemptions from registration for companies when they offer and sell securities:

  • Rule 506(b)
  • Rule 506(c)

Rule 506(b) allows companies to raise an unlimited amount of capital from an unlimited number of accredited investors and up to 35 non-accredited investors, provided that no advertising or general solicitation is involved. This exemption requires that all investors in the offering are provided with certain information regarding the issuer and the offering.

On the other hand, Rule 506(c) permits issuers to broadly solicit and generally advertise an offering, as long as all purchasers are accredited investors. This exemption requires that the issuer takes reasonable steps to verify the accredited investor status of each purchaser and that certain other conditions in Regulation D are satisfied.

Issuers can choose between these exemptions depending on their fundraising strategy and whether they prefer to keep their offerings private or allow for general solicitation and advertising.

The main difference between Rule 506(b) and Rule 506(c) is the allowance for general solicitation and advertising in Rule 506(c), which was implemented in 2013 as part of the Jumpstart Our Business Startups Act (JOBS Act) as a way to facilitate capital raising for small businesses and startups.

What’s the difference between 506(b) and 506(c)?

When it comes to fundraising under Regulation D exemptions, Rule 506(b) and 506(c) are two common options that issuers must choose from. While both provisions allow companies to raise an unlimited amount of capital, there are key differences between them that are essential to understand.

Accredited Investors vs. Sophisticated Investors

One of the main distinctions between Rule 506(b) and 506(c) lies in the types of investors that issuers can work with.

In Rule 506(b) offerings, issuers can raise capital from accredited and non-accredited investors so long as the number of non-accredited investors does not exceed 35.

However, Rule 506(c) is more restrictive, and issuers can only raise money from accredited investors.

Verification Process

Rule 506(c) requires that issuers verify the accredited investor status of each potential participant through documentation such as tax returns, bank statements, or written confirmations from brokers.

On the other hand, rule 506(b) offerings do not require issuers to undertake such stringent verification, as they can rely on the investor’s self-attestation of their accredited status.


The ability to advertise a securities offering is an aspect that sets Rule 506(c) apart from 506(b).

In 506(b) offerings, issuers are not allowed to advertise their deals in any manner. They can only approach investors with whom they have a pre-existing relationship.

Conversely, Rule 506(c) permits issuers to publicly advertise their offerings through social media and other online platforms.

Here’s an overview of the above information:

  Rule 506(b) Rule 506(c)
Investor Types Accredited and non-accredited (max 35 non-accredited) Only accredited
Verification Process Self-attestation of accredited status Must verify with documentation (e.g., tax returns, bank statements)
Advertising Not allowed; can only approach investors with pre-existing relationship Permitted, including public advertising on social media and online platforms

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What is 506c Accredited Investor?

Under Rule 506(c), companies can promote their investment opportunities everywhere, like on the Internet. But, they can only sell these to “accredited investors.” 

An accredited investor must meet one or more of the following criteria:

  • Possess a net worth of at least $1 millionexcluding their primary residence
  • Have an individual income of at least $200,000 each year for the last two years (or a combined income of $300,000 with a spouse) and reasonably expect the same level of income in the current year.
  • Hold certain professional certifications, designations, or credentials recognized by the SEC, such as Series 7, Series 65, or Series 82 licenses.

If you want to learn more about the “power” of being an accredited investor, check out this video:

Companies offering investments must check your accredited status if you want to invest under Rule 506(c). They might ask for bank records, pay stubs, appraisal reports, brokerage statements, etc. Or, you can get a letter from a lawyer or accountant to prove it.

Understanding the Principles of Rule 506(c)

Rule 506(c) is part of Regulation D under the United States Securities Act, which provides a framework for startup companies and other private issuers to raise capital through the sale of securities to accredited investors.

This exemption allows issuers to raise an unlimited amount of money from accredited investors without registering the securities with the Securities and Exchange Commission (SEC).

One of the key aspects of Rule 506(c) is the principles-based method for verifying the accredited investor status of the potential investors.

This method gives issuers flexibility in determining the best way to verify that their investors meet the SEC’s definition of an accredited investor.

The following are the basic criteria for Rule 506(c) offerings:

  • An issuer can raise an unlimited amount of money under Rule 506(c).
  • Securities can be sold to an unlimited number of accredited investors.
  • Issuers are prohibited from selling securities to non-accredited investors.

Investor Verification in 506c

Investor Verification is one of the essential aspects of Rule 506(c) securities offerings. Here’s an overview of how it works:

Investor Verification in Rule 506(c)
Overview Investor Verification is a pivotal component of Rule 506(c) securities offerings. This rule allows issuers to widely solicit and advertise an offering, provided they adhere to specific guidelines. A crucial requirement is ensuring all purchasers are accredited investors.
Purpose of Verification Ensures all purchasers in the offering are accredited investors. Issuers must take reasonable measures to confirm the accredited status of investors. Adherence to other conditions in Regulation D is mandatory.
Verification Methods Aimed at assessing investors’ net worth and annual income. Issuers must have a reasonable belief that all purchasers are accredited. The process should be objective, considering each purchaser’s specific facts and circumstances.
Safe Harbor Methods Non-exclusive and non-mandatory methods that offer issuers a level of assurance regarding verification requirements. Examples include reviewing tax returns, checking credit reports, and obtaining written confirmations from financial professionals.
2021 Update Targets investors who repeatedly participate in Rule 506(c) offerings. Simplifies the verification process for issuers. However, challenges remain for issuers new to the Rule 506(c) market.

Fundamentals of Accredited and Non-accredited Investors

Accredited and non-accredited investors are two classifications of investors, differentiated based on specified financial criteria.

Understanding the implications and requirements of both types of investors is crucial in securities offerings, particularly in the context of Rule 506(c).

Key Points:

Feature/Type Accredited Investors Non-accredited Investors
Definition Individuals/entities meeting financial criteria set by the SEC. Those not meeting the financial criteria of accredited investors.
Criteria for Individuals – Net worth of $1 million (excluding primary residence).
– Annual income of $200,000 (or $300,000 with spouse) for the past two years.
Do not meet the accredited investor thresholds.
Criteria for Entities Registered investment advisers, broker-dealers, or entities with assets over $5 million. N/A
Verification under 506(c) Issuers must verify accredited status, e.g., through W-2 forms or financial statements. N/A
Participation in 506(b) Can participate without restrictions. Can participate if they qualify as sophisticated investors. Limited to 35 non-accredited investors per offering.

By understanding the distinctions and requirements of both accredited and non-accredited investors, issuers can ensure compliance and make informed decisions in securities offerings.

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Frequently Asked Questions

What are the key differences between Rule 506(b) and 506(c)?

The primary distinction between a 506(b) and 506(c) private offering lies in their advertising and investor verification methods. Under 506(b), issuers can’t use general advertising to promote their private placements to the general public. However, they can accept investments from accredited and unaccredited investors, given that they receive a private placement memorandum with all the necessary details. On the other hand, 506(c) allows for general advertising, but the catch is that they can only accept investments from accredited investors. Additionally, there’s a stricter verification requirement for confirming the purchaser’s accredited investor status, which may involve written confirmation or other types of information.

How does general solicitation work under 506(c)?

Under Rule 506(c), issuers can use general solicitation and advertising to reach potential investors, which was a significant change from the 80-year prohibition under Rule 506(b). Issuers must ensure that all purchasers are accredited investors and take reasonable steps to verify their status.

Can I invest in a 506(c) offering if I’m part of an established angel group or have a prior substantive relationship with the issuer?

Yes, being part of an established angel group or having a prior substantive relationship with the issuer can be beneficial. While 506(c) emphasizes the verification of accredited investor status, having a prior relationship might ease the process. However, the issuer’s rule still mandates a thorough check. It’s essential to understand that past performance of private companies or alternative investments doesn’t guarantee future results. Market participants, especially those new to regulation D offerings, should seek additional information and consult with professionals before making investment decisions.

What are Blue Sky Laws and do they affect 506c investments?

Blue Sky Laws are state securities regulations designed to protect investors from fraudulent offerings. Rule 506(c) offerings are generally exempt from Blue Sky Law registration or qualification requirements because they are subject to federal SEC (Securities and Exchange Commission) regulation under Regulation D. However, issuers must still pay notice filing fees and comply with state anti-fraud laws.

What is required for accredited investor verification in a 506(c) offering?

Issuers must take reasonable steps to verify that all purchasers in a Rule 506(c) offering are accredited investors. Some methods of verification include reviewing tax returns, bank statements or obtaining confirmation from a registered broker-dealer, SEC-registered investment adviser, or licensed attorney or certified public accountant.

Can an issuer switch from 506(b) to 506(c) during an offering?

Yes, issuers that initially file a fundraise as a 506(b) offering are allowed to change the offering’s exemption status to 506(c) if they wish to advertise their fund. However, issuers who originally filed under 506(c) cannot reverse course and retroactively become a 506(b) once they have advertised.

What are the exemptions under Rule 506(b)?

Rule 506(b) exemptions include the ability to raise an unlimited amount of capital without general solicitation or advertising, the permission to sell to an unlimited number of accredited investors and up to 35 non-accredited investors who meet sophistication requirements, and exemption from the SEC’s registration requirements under Regulation D.

Are there any unique filing requirements for a 506(c) offering?

A 506(c) offering requires issuers to file a Form D with the SEC within 15 days of the first sale of securities. The Form D must indicate that the offering is being conducted under Rule 506(c), and issuers must also amend the Form D to reflect any changes in the offering or if the offering has been discontinued.

What is a “bad actor” in a 506(c) offering?

A “bad actor” refers to an individual or entity involved in a 506(c) offering who has had a disqualifying event under the securities laws. Disqualifying events include but are not limited to, criminal convictions, enforcement orders by financial regulators, and court injunctions in relation to securities law violations. If an issuer or any person involved in the offering has a disqualifying event, the issuer may be ineligible to rely on Rule 506(c) exemption.