Rule 506: The Line You Cannot Uncross

Rule 506(b)

Under Rule 506(b), a company may sell to an unlimited number of accredited investors and up to thirty-five non-accredited investors, provided each non-accredited investor, alone or with a purchaser representative, has enough knowledge and experience in financial and business matters to evaluate the investment. If any non-accredited investor participates, the company must provide specified disclosure, including financial statement information, that is comparable in many respects to what a registered offering would require. There is no dollar limit on the amount raised.

Under 506(b), a company may generally rely on an investor's written representation of accredited status, absent facts suggesting otherwise, provided it has a reasonable belief that the representation is accurate.

What the company may not do under 506(b) is engage in general solicitation or general advertising. No public advertisements. No public posts announcing the raise. No pitching a room of strangers. Offers should generally be made to people with whom the company, or someone acting for it, has a pre-existing, substantive relationship.

Rule 506(c)

Rule 506(c) permits general solicitation. A company may advertise the offering, post about it online, describe it at a conference, or run it through an online platform. The trade is that every purchaser must actually be accredited, and the company must take reasonable steps to verify that status.

A checked box on a subscription agreement is not verification. Reasonable steps can include reviewing tax returns or brokerage statements, or obtaining a written confirmation from a registered broker-dealer, registered investment adviser, licensed attorney, or certified public accountant who has verified the investor's status. SEC staff guidance issued in 2025 also indicated that, in appropriate circumstances, high minimum investment amounts combined with written representations can support a reasonable-steps conclusion. Whatever method is used, the file should show what was done for each purchaser.

Where Issuers Get Into Trouble

The pattern is consistent. A company begins under 506(b), because that is what counsel advised and it is less burdensome. Then the chief executive posts about the raise on LinkedIn. Or the company emails its deck to a purchased list. Or a founder describes the terms on a podcast, at a demo day, or in an interview.

That is general solicitation. It does not convert the offering into a 506(c) offering, because the investors who already came in were never verified. It jeopardizes the 506(b) exemption. The failure cannot be cured retroactively. The line runs in one direction.

If the exemption fails, the consequences are serious. The company may have conducted an unregistered offering in violation of Section 5 of the Securities Act. Investors may have a right to rescind their purchases and get their money back. State regulators may have their own claims. And the next time the company raises money, or tries to go public, the problem will surface in due diligence.

Choosing the Right Version

The choice should be made deliberately, before the first conversation with an investor, and it should be communicated to every person who will talk about the company. If the founders expect to speak publicly about the raise, if the company plans to use online platforms, or if the investor base will come largely from outside existing relationships, 506(c) is often the better fit, despite the verification burden. If the company will raise from a known circle, and non-accredited friends and family may participate, 506(b) may make sense, provided everyone understands the discipline it requires.

Bad Actors

Rule 506 is unavailable if the company or certain covered persons, including directors, executive officers, significant shareholders, and paid solicitors, are subject to specified disqualifying events, such as certain criminal convictions, regulatory orders, and injunctions. The company should conduct reasonable inquiry of every covered person before the offering and keep a record of it. A disqualification discovered after the fact can destroy an exemption the company thought it had.