Rule 506(b) vs 506(c): Which Exemption Fits?
Rule 506(b) lets you raise unlimited money from accredited investors and up to 35 sophisticated non-accredited investors, but you cannot advertise the offering. Rule 506(c) lets you advertise publicly, but every investor must be accredited and you must take reasonable steps to verify it. Choose 506(b) if you raise from people you already know and want simple paperwork, and 506(c) if you need to reach strangers through public marketing.
The core difference
| Rule 506(b) | Rule 506(c) | |
|---|---|---|
| Public advertising | Not allowed | Allowed |
| Investors | Unlimited accredited plus up to 35 non-accredited who are sophisticated | Accredited investors only |
| Verification | Self-certification is generally acceptable | Issuer must take reasonable steps to verify status |
| Raise limit | None | None |
| Federal filing | Form D after first sale | Form D after first sale |
When 506(b) fits
- You raise money from people who already know you, such as past investors, friends and colleagues.
- You want a lighter documentation burden, since investors can self-certify.
- You do not want to place ads, post the deal publicly or hold open seminars.
The restriction on general solicitation is the biggest trap. A public post about the deal can disqualify a 506(b) offering. See what general solicitation is.
When 506(c) fits
- You want to advertise on social media, a public website, podcasts or at open events.
- You are raising from people who do not have a prior relationship with you.
- You can handle the verification step and your investors will accept it.
Verification can deter some investors who do not want to share financial documents. See verifying accredited investors under 506(c).
Non-accredited investors in 506(b)
If you take even one non-accredited investor, the offering must give them extensive disclosure similar to a registered offering, including financial statements. That cost and liability is why most sponsors take accredited investors only and rely on 506(b) for its flexibility. A non-accredited investor, alone or with a purchaser representative, must also have enough sophistication to evaluate the risks.
Switching between them
A sponsor can start under 506(b) and later decide to advertise by switching to 506(c), but the offering must meet 506(c) from the moment it advertises, and all investors must then be verified accredited investors. Switching in the other direction is harder, since public advertising has already happened. Decide early. See how Form D works and the bad actor rule, which applies to both.
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Book Free ConsultationFrequently asked questions
Can I switch from 506(b) to 506(c)?
Yes, but once you advertise, the offering must meet all 506(c) requirements and all investors must be verified accredited.
Which exemption do most real estate sponsors use?
Many use 506(b) when raising from their own network and 506(c) when they want to market publicly.
Do state laws apply to Rule 506?
Rule 506 offerings are covered securities, so states cannot require registration, but they can require notice filings and anti-fraud rules still apply.
Is there a dollar limit under Rule 506?
No. Neither 506(b) nor 506(c) caps the amount raised.