A 506(c) is a federal securities rule that lets companies raise money from investors while publicly advertising the offering. Under most private fundraising rules, companies can’t run ads or post on social media to attract investors. Rule 506(c), part of the SEC’s Regulation D, removes that restriction with two major conditions: every investor must be accredited, and the company must take real steps to verify each investor’s financial status.
This rule matters most to startup founders, real estate syndicators, fund managers, and anyone raising private capital who wants to cast a wide net rather than relying solely on personal connections.
How 506(c) Offerings Work
In a standard private offering, a company sells securities (equity, debt, fund interests) without registering them with the SEC the way a publicly traded company would. Registration is expensive and time-consuming, so most private companies use an exemption. Rule 506(c) is one of the most popular exemptions because it has no cap on how much money a company can raise and no limit on the number of investors who can participate.
The defining feature of 506(c) is general solicitation. That means the company can promote the offering through online ads, social media posts, pitch events, email campaigns, podcasts, webinars, or any other public channel. Before this rule was adopted in 2013, virtually all private offerings had to stay quiet, reaching investors only through pre-existing relationships.
Securities purchased through a 506(c) offering are “restricted,” meaning investors generally can’t resell them on the open market right away. The company must also file a Form D notice with the SEC within 15 days of its first sale. States can require their own notice filings and fees as well, even though 506(c) offerings are exempt from state-level registration requirements.
Who Qualifies as an Accredited Investor
Every single buyer in a 506(c) offering must be an accredited investor. For individuals, that means meeting at least one of these financial thresholds:
- Income: Over $200,000 individually (or $300,000 with a spouse or partner) in each of the prior two years, with a reasonable expectation of the same in the current year.
- Net worth: Over $1 million, not counting the value of your primary residence, individually or jointly with a spouse or partner.
Certain professionals also qualify regardless of income or net worth, including holders of specific securities licenses (Series 7, Series 65, Series 82) and knowledgeable employees of private funds. Entities like banks, insurance companies, registered investment companies, and trusts with over $5 million in assets can qualify too.
How Verification Works
This is where 506(c) differs most sharply from other fundraising exemptions. The company raising money can’t just take your word for it. Simply checking a box on a form saying “I’m accredited” is not enough. The SEC requires the issuer to take “reasonable steps to verify” that every purchaser meets the accredited investor standard.
The SEC provides several safe harbor methods that companies can use, though they’re free to use other reasonable approaches:
- Income verification: Reviewing IRS forms that report income, such as W-2s, 1099s, K-1s, or tax returns for the prior two years, plus getting a written statement that the investor reasonably expects to meet the threshold in the current year.
- Net worth verification: Reviewing bank statements, brokerage statements, certificates of deposit, or tax assessments dated within the prior three months, combined with a credit report from a major consumer reporting agency and a written representation from the investor.
- Third-party confirmation: A letter from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or CPA confirming they’ve recently verified the investor’s accredited status.
- Prior verification: If the company previously verified an investor’s status, it can rely on a written representation from that investor for up to five years, as long as the company has no reason to believe their status has changed.
In practice, many issuers use third-party verification services that handle the document review and produce a confirmation letter. This streamlines the process for both the company and the investor, though it adds cost to the offering.
How 506(c) Differs From 506(b)
Rule 506(b) is the older, more traditional version of the same exemption, and it works under nearly opposite trade-offs. Under 506(b), a company cannot advertise or generally solicit investors. It can only reach people with whom it has a pre-existing, substantive relationship. In exchange for that restriction, 506(b) allows up to 35 non-accredited investors to participate alongside unlimited accredited investors, and it doesn’t require the same formal verification process.
That said, accepting even one non-accredited investor in a 506(b) offering triggers significant additional disclosure requirements: audited financial statements, detailed information about resale limitations, and other materials that can be expensive to prepare.
The choice between 506(b) and 506(c) usually comes down to distribution strategy. If you already have a network of wealthy investors and want to keep things simple, 506(b) may be the easier path. If you want to advertise widely, reach new investors through marketing, or list on an online fundraising platform, 506(c) is the only option.
Bad Actor Disqualification Rules
Not every company or individual can use the 506(c) exemption. Under Rule 506(d), an offering is disqualified if the company or any “covered person” (which includes directors, officers, significant shareholders, and promoters) has certain legal or regulatory black marks. These include criminal convictions related to securities fraud or false SEC filings, court injunctions tied to securities violations issued within the preceding five years, final orders from state or federal regulators barring someone from the securities or banking industries, and SEC disciplinary actions that revoke registrations or bar someone from participating in offerings.
These disqualification rules apply to events that occurred on or after September 23, 2013. Companies using 506(c) need to conduct background checks on all covered persons before launching an offering.
What Investors Should Know
If you’re an investor evaluating a 506(c) opportunity you found through an ad, social media post, or online platform, the public marketing doesn’t mean the investment has been vetted or approved by the SEC. Filing a Form D is a notice, not a seal of approval. You’re still investing in a private, illiquid security with real risk of losing your entire investment.
Expect to share financial documentation during the verification process. Depending on the method the company uses, you may need to upload tax returns, provide bank or brokerage statements, or have your financial adviser write a verification letter. This is a normal and legally required part of participating in a 506(c) offering, not an unusual request.
Because these are restricted securities, you typically won’t be able to sell your shares or interests easily. Most 506(c) investments in real estate syndications, venture funds, or private equity come with holding periods that can stretch several years. Make sure you’re comfortable locking up capital before committing.