Rule 506c of Reg D – Solicitation & No Non-Accredited Investors

Rule 506(c) sounds simple until you actually try to use it: you get to advertise your raise to the world, but the price is real verification work on every single investor. Get the trade-off backwards and you either kill your marketing plan or blow the exemption entirely.

The Trade-Off: General Solicitation Requires Active Verification

Rule 506(c) lets you advertise your capital raise to the public. In exchange, you have to take reasonable steps to verify that every investor is accredited, and you cannot accept a single non-accredited investor. That is the whole deal in one sentence: you get to market openly, but you lose the ability to bring in anyone who does not meet the accredited standard, and you cannot just take their word for it.

The Immediate Answer: What Rule 506(c) Actually Means

Before 2013, you could not publicly advertise a private placement. Rule 506(c) removed that prohibition. You can post about the offering, run it on your website, talk about it on a podcast, and put it in front of strangers. General solicitation is expressly allowed.

That freedom comes with two hard conditions.

First, every purchaser must be an accredited investor. There is no room for the “sophisticated but not accredited” investor here. Zero.

Second, you cannot rely on the investor simply telling you they are accredited. The issuer has to take “reasonable steps to verify” accredited status. That is an active obligation, not a checkbox. We cover the mechanics of that later, but understand up front that verification is the price of admission for advertising.

The Fundamental Difference from 506(b)

Rule 506(b) and Rule 506(c) sit on opposite sides of one line: whether you can advertise.

Under Rule 506(b), you cannot generally solicit. In return, you get flexibility on who can invest. You can bring in up to 35 non-accredited investors, as long as they are sophisticated and you provide the required disclosure. You can also rely on an investor questionnaire for accredited status because the relationship gives that self-certification context.

Rule 506(c) flips both of those. You can advertise, but every purchaser must be accredited, and self-certification alone does not satisfy the verification requirement.

So the choice is not really “which rule is better.” It comes down to what you are trying to do. If you want to market publicly and your investor base is accredited anyway, 506(c) makes sense. If you need to bring in a few non-accredited people you already know, 506(b) is the tool. Our Rule 506(b) and 506(c) offering guidance walks through how that decision plays out in practice.

What General Solicitation Looks Like in the Real World

If you broadcast your deal to the public, you are in 506(c) territory, whether you meant to be or not. A podcast mention, a social media post, an open webinar, a public landing page – each one counts as general solicitation. And once you have generally solicited, the verification requirements from the last section apply to every investor in that offering.

The trigger is public reach, not intent. You do not get to say “I was just talking about the deal” if you said it to a room, a feed, or a mailing list of people you have no substantive relationship with.

The Definition of Public Advertising

General solicitation means promoting the offering to people you do not already know in a real, substantive way.

In the real world, that looks like: a LinkedIn post describing the raise, a public webinar anyone can register for, talking about the specific deal on a podcast, or a landing page with the offering behind an open URL. If a stranger can find it and respond, treat it as general solicitation.

Here is the operational consequence people miss. Once you have advertised the deal, you cannot pivot back to 506(b) for that same offering. There is no undo button.

That matters because 506(b) is where you are allowed to include up to 35 sophisticated non-accredited investors. The moment you generally solicit, that door closes. Every purchaser now has to be accredited, and you have to reasonably verify it.

The ‘Strict Hygiene’ Requirement for Marketing Materials

When you go public, every asset you put out needs strict hygiene. That means the pitch deck, the webinar slides, the landing page copy, the email blast – all of it gets reviewed like it is going to be read out loud in front of a regulator, because effectively it might be.

The reason is exposure. Under 506(b), your materials go to a limited, known group. Under 506(c), you are broadcasting to the world, and the world includes people looking for a reason to complain.

The anti-fraud rules do not go away just because you used an exemption. A sloppy return projection, a stale number, or a statement that leaves out a material fact is a Securities Act problem. It does not matter that your investors were all accredited.

So before anything goes public, clean it up. Scrub the numbers, check the claims, and make sure the deck matches the PPM. In a 506(c) raise, your marketing material is not just marketing – it is part of your disclosure record, and it will be judged that way.

The Hard Mandate: Verifying Accredited Investors

No, you cannot just have investors check a box in a 506(c) deal. That is the single most dangerous misconception operators carry over from 506(b).

In a 506(c) offering, all purchasers must be accredited, and the issuer has to take reasonable steps to verify that status. A self-certification questionnaire, standing alone, does not meet that standard.

That distinction is easy to miss, because the questionnaire looks the same in both deals. The difference is what the questionnaire is allowed to do.

Why Self-Certification Is Prohibited in 506(c)

In a 506(b) offering, you can generally rely on the investor’s own representations about accredited status, because you are not advertising and you have a substantive relationship with the person. You know them well enough to reasonably believe what they tell you. The questionnaire fits that context.

Rule 506(c) removes that context. Once you advertise publicly, you are taking money from people you do not know, so the SEC does not let you rely on their word alone.

The standard is “reasonable steps to verify.” In plain English, that means proof, not a signature. You need something showing the investor actually meets the thresholds, not just an assertion that they do.

The questionnaire still has a job in a 506(c) deal. It gathers information and sets up the verification. It just is not the verification.

If it were me, I would treat the questionnaire as step one and the verification as step two, and never let the two collapse into each other. Skipping step two is how sponsors blow the exemption.

Who Qualifies as an Accredited Investor Today

Rule 501 defines who counts as accredited. For individuals, the two common financial tests are income and net worth.

The income test is $200,000 in each of the past two years for an individual, or $300,000 in each of the past two years jointly with a spouse or spousal equivalent, with a reasonable expectation of the same in the current year.

The net worth test is $1,000,000, calculated individually or jointly with a spouse or spousal equivalent, excluding the value of the primary residence.

The definition is broader than income and net worth alone. Individuals holding a Series 7, Series 65, or Series 82 license in good standing now qualify based on that professional credential.

The rule also covers a range of entities, including trusts and businesses that meet asset thresholds, and entities where all owners are themselves accredited. If your investor is an entity, verify against the entity category that actually applies, not the individual tests.

The practical takeaway is simple. Know which accredited category each investor falls into before you decide how you are going to verify them, because the verification method follows the category.

The Verification Mechanics: How Sponsors Actually Do This

The practical question every sponsor asks is how to prove an investor is accredited without turning the closing into an audit. The smartest path is to push the verification onto a third party – a CPA, attorney, or verification portal – instead of collecting and storing the investor’s tax returns and bank statements yourself.

You are trying to satisfy the “reasonable steps” standard without creating a sales problem or a data-privacy problem. Those two goals point you toward the same answer.

The Gold Standard: Third-Party CPA or Attorney Letters

A written confirmation from the investor’s CPA, attorney, or registered investment adviser is usually the cleanest way to verify status. The letter states that the professional has reviewed the investor’s finances and reasonably believes the investor is accredited.

The reason this works is that it shifts the burden to someone who already knows the numbers. The investor’s own CPA has seen the returns. You have not, and you do not need to. You keep a signed letter in the file and move on.

There is real-world friction here. Some CPAs and attorneys will not sign a standard verification letter because they worry about their own liability. If that happens, do not fight it – route the investor to a verification portal instead.

Using Third-Party Verification Software

Verification portals like Parallel Markets and VerifyInvestor exist to handle exactly this step. The investor uploads documents to the platform, the platform reviews them, and the platform issues the verification result. The sponsor receives confirmation, not the underlying financial records.

The operational benefit is that the sensitive documents never land on your laptop, your email, or your shared drive. You are not the custodian of someone’s W-2s and account statements. That matters, because holding that data is a liability you do not need, and you gain nothing by holding it.

For most sponsors running a 506(c) raise with more than a handful of investors, a portal is the practical default. It scales, it standardizes the file, and it keeps you out of the document-storage business.

The Friction of Direct Document Review

You are legally allowed to collect the documents yourself. You can ask the investor for W-2s, K-1s, tax returns, brokerage statements, and bank statements, review them, and document your conclusion. The rule permits it.

I would not do it. Two problems come with that path.

The first is a sales problem. From the investor’s point of view, handing their tax returns and bank statements directly to a sponsor they just met is uncomfortable. Some will hesitate. Some will walk.

The second is a data problem. Once those documents are in your inbox, you are now storing highly sensitive financial records, and you are responsible for protecting them. That is an admin and liability burden that a CPA letter or a portal removes entirely.

So the distinction is simple. Direct review is allowed. It is just not smart when a third party can carry the risk for you.

Why a 506(c) Offering Still Requires a Private Placement Memorandum

Yes, you almost always want a PPM in a 506(c) deal, even though every investor is accredited and even though Rule 506(c) does not dictate a specific disclosure format. The reason is not the exemption. The reason is the anti-fraud rules that apply to every securities sale, no matter who buys.

Sponsors hear “accredited only” and assume “no disclosure needed.” That is where the trouble starts.

The 10b-5 Anti-Fraud Reality

Rule 506(c) does not prescribe a mandatory disclosure package when all your purchasers are accredited. That part is true.

But Rule 10b-5 still applies. Rule 10b-5 makes it illegal to make a material misstatement, or to leave out a material fact that an investor needs to make an informed decision, in connection with the sale of a security.

Being exempt from registration is not the same as being exempt from fraud liability. Those are two different things.

So the practical question is not “does the rule require a specific format.” The practical question is “how do I prove I told investors the material facts.” A PPM is how you do that.

Protecting the Sponsor and the Offering

The PPM is your disclosure record. If the deal goes sideways and an investor sues claiming you hid something, the PPM is the document that shows what you actually disclosed and when.

Without it, the fight becomes your word against theirs about what was said in a call, an email, or a webinar. That is a bad position to be in.

A PPM also forces you to write down the risks before you take the money. Sponsors do not like doing this, because listing the risks feels like it hurts the pitch. It does not. It protects you, and honestly it usually makes the offering look more serious to a sophisticated investor.

Whether a formal PPM is strictly required depends on your facts and your investor mix. But even when it is not strictly required, it is usually the center of your disclosure record.

If it were me, I would not run a 506(c) offering without one. A raise with no written disclosure is a large, uncompensated risk sitting on the sponsor. Get the risks on paper.