What Is a Rule 506(b) Offering?
The Big Picture
Rule 506(b) is the classic private placement exemption under Regulation D of the Securities Act. It is a safe harbor for the statutory exemption that covers transactions which are not public offerings.
In plain English:
Rule 506(b) is how you legally raise private money without going public, if you follow the rules.
A Rule 506(b) offering:
- Lets you raise an unlimited amount of capital
- Lets you bring in an unlimited number of accredited investors
- Lets you include up to 35 non‑accredited but sophisticated investors, with extra disclosure and care
The tradeoff is simple: you cannot publicly advertise it. This is a quiet raise, not a billboard raise.
When 506(b) Is Usually the Right Fit
You usually pick Rule 506(b) when:
- You already have, or can build, a real network of investors you know
- You want the option to add a few non‑accredited but sophisticated investors (friends, family, key partners)
- You would rather avoid the friction of formal verification that comes with 506(c)
It is not about finding random investors. It is about selecting the right investors from relationships you already have.
Common users of 506(b):
- Real estate syndications and funds
- Private equity and venture funds
- Operating businesses doing one‑off project raises
- Funds and sponsors that prefer to keep a low public profile
Core Rule 506(b) Requirements and Limits
No General Solicitation – The Quiet Raise Rule
The first and biggest rule of a 506(b) offering:
No general solicitation and no general advertising.
That means no public posts about the offering on social media, no paid ads pushing the deal, no public website pages that pitch the specific offering, and no open webinars that walk through the deal terms for anyone who shows up.
Rule 506(b) is a relationship game, not a broadcast game. If you want to blast your deal to the world, that is 506(c), not 506(b).
Investor Limits – Unlimited Accredited, Up to 35 Non‑Accredited
Under Rule 506(b):
- There is no limit on the number of accredited investors
- You may include up to 35 non‑accredited investors in any 90 day period
- Those non‑accredited investors must be ‘sophisticated investors’
That “up to 35” is a ceiling, not a target. Many sponsors choose to have zero non‑accredited investors because:
- Disclosure obligations increase
- Complexity, time, and legal risk go up
- Non‑accredited investors may be less able to absorb a total loss
There is also no cap on the size of the raise. You can raise a few hundred thousand dollars or several hundred million dollars under 506(b).
Disclosure Requirements – Especially for Non‑Accredited Investors
If you bring in even one non‑accredited investor under Rule 506(b), you are required to give them disclosure documents that look very similar to what you would see in a registered or Regulation A offering.
That usually means:
- A private placement memorandum (aka a PPM) with detailed risk factors
- Financial statements, sometimes audited depending on the size of the raise
- A full description of the business, management team, conflicts, and fee structures
- Being available to answer questions from investors
Accredited investors can receive less mandated disclosure, but if you give information to accredited investors, you must also make that information available to the non‑accredited investors in the same offering.
Form D and State “Blue Sky” Filings
Raising under Rule 506(b) does not mean “no paperwork.” It means different paperwork.
At a minimum, you must:
- File a Form D with the SEC within 15 days after the first sale of securities in the offering
- Make notice filings in each state where investors reside and pay any required state fees
Form D is short, but it is still a public notice that your raise exists. Do not skip it, and do not forget the state side of the equation.
Bad Actor Disqualification
Rule 506(b) has bad actor rules. If you, or certain other covered persons (such as key managers and 20 percent owners), have specific types of securities‑related criminal or regulatory history, you may be disqualified from using the exemption.
This is why most serious offerings include bad actor questionnaires for managers, key owners, and sometimes placement agents. It is not busywork; it is the foundation under your exemption.
Accredited vs. Sophisticated Investors in a 506(b) Offering
This is the “who” question. Rule 506(b) is all about who you sell to and how you know they are appropriate.
Accredited Investor – The Formal, Number-Based Test
An accredited investor is defined in Rule 501 of Regulation D.
For individuals, common ways to qualify include:
- Net worth over 1 million dollars, alone or with a spouse or partner, excluding the primary residence
- Income over 200,000 dollars for the last two years (or 300,000 dollars with a spouse or partner), with a reasonable expectation of similar income this year
- Certain professional licenses, such as Series 7, 65, or 82
- Serving as a director, executive officer, or general partner of the issuer, or of a general partner of the issuer
Entities can qualify based on:
- Being a regulated financial institution or certain types of investment vehicles
- Having more than 5 million dollars in assets or investments
- Being a family office that meets specific conditions
Accredited status is about wealth, income, or status. It is not about being smart or experienced.
Sophisticated Investor – The 506(b) Workhorse Definition
For 506(b), a non‑accredited investor must be sophisticated.
Sophisticated in this context means that the investor, alone or with the help of a purchaser representative, has sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the investment.
In plain English:
A sophisticated investor may not be rich enough to be accredited, but they are smart and experienced enough to understand what they are getting into.
This is about:
- Understanding financial statements and projections
- Having experience with investments or businesses like the one you are offering
- Being able to ask meaningful questions and understand the answers
Rule 506(b) leans heavily on this definition when you include non‑accredited investors. It is not just a label. You must have a reasonable basis to believe they truly fit it.
Purchaser Representatives
If a non‑accredited investor does not have enough sophistication on their own, Rule 506(b) allows them to rely on a purchaser representative.
A purchaser representative is someone who:
- Has the necessary financial and business knowledge
- Is willing to assist the investor in evaluating the investment
- Discloses any relationships or compensation they receive
In practice, a purchaser representative might be a financial advisor, accountant, or lawyer. They often complete a questionnaire or certification documenting their qualifications and their role.
How to Document Accredited and Sophisticated Status
For a 506(b) offering, you are not required to perform intensive accredited verification like 506(c) does. Instead, you must have a reasonable belief that investors are accredited or sophisticated.
That is usually supported by:
- Investor questionnaires that include accredited status questions
- Background information such as resumes, LinkedIn profiles, and prior investing experience
- Notes of calls and meetings where you discussed the investment
For non‑accredited investors, you will want additional backup:
- Their professional and educational background
- Evidence of their investment experience
- Information about any purchaser representative involved
The paperwork is not about making investors miserable. It is about being able to prove you were careful if anyone reviews your raise later.
Should You Include Non‑Accredited Investors?
Legally, you may include up to 35 non‑accredited investors in any 90 day period. Practically, you may be better off including none.
Reasons to avoid non‑accredited investors:
- You must provide more robust disclosure
- There is more room for misunderstanding and disputes
- They may be less able to absorb a loss, which raises litigation risk
On the other hand, non‑accredited but sophisticated investors can be close friends, family members, or key partners. Sometimes they are exactly the people you most want in your deals.
You do not have to treat it as all‑or‑nothing. Many sponsors adopt a policy such as:
“We normally accept only accredited investors, but we may include a very small number of sophisticated investors where the fit is perfect.”
The Rule 506(b) Quiet Raise – Step-by-Step (No General Solicitation)
The Rule 506(b) Quiet Raise – Step-by-Step (No General Solicitation)
Step 1 — Confirm 506(b) Is Your Best Fit
Ask yourself:
1. Do you have, or can you realistically build, a pre‑existing investor base?
2. Do you want the option to include a few sophisticated non‑accredited investors?
3. Are you comfortable not advertising the offering publicly?
If yes, 506(b) is likely in play. If your capital‑raising strategy depends on ads, podcasts, and cold traffic, you are probably looking at 506(c).
Step 2 — Define Your Offering Terms
Before you talk to investors, get clear on:
– The type of security: equity, LLC units, LP interests, notes, SAFEs, or something similar
– The target raise amount and minimum investment size
– The use of proceeds, so what the money will actually do
– The basic timeline and exit strategy
You do not need a finished 70‑page PPM to have this conversation with yourself, but you do need clarity. Investors will feel any fuzziness.
Step 3 — Build and Document Pre‑Existing, Substantive Relationships
This step is the heart of 506(b).
The SEC expects a pre‑existing, substantive relationship to exist before you start offering securities. That relationship should give you enough knowledge to evaluate the person’s financial situation and sophistication.
In practice:
– You have had real conversations with them before you pitched this specific deal
– You understand their investment goals, risk tolerance, and background
– They know who you are and feel comfortable asking questions
Good habits:
– Keep a simple CRM or spreadsheet logging how and when you met, and when the relationship became substantive
– Use pre‑offering educational content and calls that do not mention a specific live deal
This is not about slapping people into a list and calling it a relationship. It is about actually knowing who they are as investors.
Step 4 — Create Your Core Offering Documents
A real 506(b) raise should have at least:
– A private placement memorandum that lays out the deal and the risks
– An operating agreement or limited partnership agreement that acts as the rulebook
– A subscription agreement where the investor formally commits capital
– An investor questionnaire that gathers key information and how they qualify
You may also use:
– A pitch deck for high‑level overview conversations
– A data room with financials, projections, and supporting documents
The PPM is not sales copy. It is your shield: full, fair disclosure of risks, conflicts, and fees.
Step 5 — Quiet, One-to-One Outreach
Appropriate outreach channels:
– Direct emails to people you already know
– One‑on‑one calls or video meetings
– Small, invitation‑only meetings with existing contacts
Risky or flat‑out bad channels for 506(b):
– Public social media posts describing the offering
– Paid ads that promote the raise
– Public videos or podcasts that go into current offering terms
Talking publicly about your business is one thing. Talking publicly about a specific 506(b) offering is another.
Step 6 — Vet Investor Eligibility
As investors show interest:
1. Have them complete an investor questionnaire
2. Determine whether they are accredited under the formal definition or non‑accredited
3. For non‑accredited investors, evaluate whether they meet the sophisticated investor standard or will rely on a purchaser representative
If someone does not clearly fit any bucket, do not stretch to make them fit. The investor you squeeze in is often the investor who causes the most trouble later.
Step 7 — Provide Disclosures and Answer Questions
Next:
– Deliver the PPM and financial statements, especially to non‑accredited investors
– Make sure all investors have access to the same material information
– Be ready to answer questions and to document significant Q and A
If one investor asks a material question and receives an important answer, treat that answer as part of the offering‑wide disclosure. Others should have access to it too.
Step 8 — Subscriptions, Closing, and Funds Handling
Once investors are ready:
– Collect signed subscription agreements and questionnaires
– Confirm that wires or checks go to the correct bank account or escrow
– Decide whether you will have one closing or multiple rolling closings
Maintain accurate records of who invested, when, and how much, and keep your cap table or ownership ledger up to date.
Step 9 — File Form D and Make State Filings
After the first sale, file Form D with the SEC within the required timeline, and handle the state notice filings for every state where your investors live.
Often this is handled by your syndication attorney or a filing service, but you must make sure it gets done.
Step 10 — Post‑Closing Investor Relations
The offering does not end when the money arrives.
Now you:
– Send welcome letters and final documents
– Begin your reporting cadence, such as monthly, quarterly, or annual updates
– Track distributions, capital accounts, and transfers
The goal is simple: make investors feel informed and respected, not ignored.
What Counts as General Solicitation for 506(b)?
Classic Examples to Avoid
General solicitation includes, among other things:
- Newspaper or magazine ads
- TV, radio, or podcast ads
- Unrestricted websites with offering details
- Public seminars and broad email blasts
- Public social media posts that describe the offering or its terms
If it feels like you are broadcasting your deal to the world, it is probably general solicitation and not allowed under 506(b).
Grey Areas and Safer Practices
Some activities can be acceptable if handled carefully:
- Public content about your business, track record, or general education that does not mention a current offering
- Closed, password‑protected portals for pre‑existing investors
- Certain demo day presentations that meet narrow conditions and avoid specific terms of a live raise
The line is subtle:
Talking about your company is one thing. Talking about your current 506(b) offering is another.
When in doubt, assume it is general solicitation and either do not do it or switch to 506(c).
Documentation and Compliance Checklist for a 506(b) Offering
Core Legal Documents
You will usually have:
- Entity formation documents for the LLC or LP
- An operating agreement or limited partnership agreement
- A private placement memorandum
- A subscription agreement
- An investor questionnaire
That is your legal skeleton. Without it, the body cannot stand up.
Regulatory File
Maintain a separate compliance folder with:
- Filed Form D and SEC acceptance
- State notice filings and confirmations
- Bad actor questionnaires and any background checks
- Copies of all marketing or investor communications related to the offering
If regulators ever knock, this is the box your lawyer will want to grab first.
Investor Records
For each investor, keep:
- Signed subscription agreements
- Completed questionnaires
- Evidence supporting accredited or sophisticated status
- Notes on the pre‑existing relationship and contact history
If someone later claims they never knew something, you want to be able to show where and when it was disclosed.
Ongoing Governance
Your operating agreement should clearly address:
- Voting rights, if any
- The distribution waterfall
- Rules for transfers and redemptions
- How and when the manager can be removed
Your job is to follow your own rulebook.
506(b) vs 506(c) – The Strategic Choice
This is the comparison that often decides your path.
Comparison Table: 506(b) vs 506(c)
Here is a side‑by‑side view:
| Feature | Rule 506(b) | Rule 506(c) |
|---|---|---|
| Advertising Allowed? | No. General solicitation and general advertising are prohibited. | Yes. Broad solicitation and advertising are allowed. |
| Investor Type | Unlimited accredited investors, plus up to 35 non‑accredited (in any 90 day period) but sophisticated investors. | Only accredited investors may purchase; no non‑accredited investors are allowed. |
| Verification Method | Reasonable belief standard; self‑certification questionnaires are typically sufficient. | Must take reasonable steps to verify accredited status using documents or third‑party verification. |
| Speed | Fast to start; capital raising speed depends on the depth of your existing network. | Setup and verification can take longer, but public marketing can scale your reach. |
Both rules allow unlimited offering size and both require Form D and state notice filings.
When 506(b) Makes More Sense
You generally choose Rule 506(b) when:
- You have a real network of potential investors already
- You want flexibility to include a few non‑accredited but sophisticated investors
- You would like to avoid heavy accredited verification
In short, this is the choice for relationship‑driven raises with a quieter public profile.
When 506(c) Might Be Better
You generally choose Rule 506(c) when:
- Your strategy depends on public marketing, such as ads, podcasts, or large online funnels
- Your ideal investors are mostly accredited anyway
- You are prepared to deal with verification, or you plan to outsource it
Rule 506(c) does not make raising money easy, but it widens the top of your funnel.
Common Mistakes, Risks, and Enforcement Issues
Accidental General Solicitation
The most common 506(b) mistake is the innocent‑looking social media post that blows the exemption.
Examples:
- Saying you are raising a specific amount and inviting people to invest
- Posting your offering deck publicly
- Being interviewed on a podcast and walking through a current deal’s terms
Those communications can easily be treated as general solicitation.
Weak Investor Documentation
Another frequent problem is sloppy paperwork.
Warning signs:
- No signed investor questionnaires
- No records of how you know the investor or when the relationship became substantive
- No notes on why a non‑accredited investor was considered sophisticated
If a regulator or plaintiff’s lawyer can portray you as indifferent to who invested, you are in a weak position.
Inadequate Risk Disclosure
If your PPM reads like marketing copy, you have a problem.
Issues include:
- Glazing over clear risks and downside scenarios
- Hiding or downplaying conflicts of interest and fees
- Omitting material facts about the business or deal
Rule 506(b) gives you an exemption from registration, not from antifraud laws. You must tell the whole truth.
Integration and Mixing Exemptions
Be careful with:
- Running 506(b) and 506(c) offerings too close together
- Starting a 506(b) raise and then turning on public ads for what looks like the same deal
The more your offerings look like one continuous financing, the more you risk integration, where they are treated as a single, non‑compliant offering.
Plan your offering sequence with counsel so you do not accidentally blend rules that do not mix.
When to Involve Counsel and Other Professionals
When You Really Need a Securities Lawyer
As a rule of thumb, bring in securities counsel when:
- You are raising more than friends‑and‑family lunch money (and even that is a security too)
- Your structure has multiple entities, complex waterfalls, or unusual features
- You plan to do repeated raises and want a scalable framework
- You want to do this “the right way”
The cost of good counsel is tiny compared to the cost of rescission claims, investigations, or a blown deal.
Broker-Dealers, Portals, and Administrators
Depending on your strategy, you might also work with:
- Registered broker‑dealers, especially if they are actively soliciting investors
- Third‑party fund administrators for capital calls, reporting, and investor service
- Accredited verification providers, more common in 506(c) but sometimes used in 506(b) for institutional investors
Make sure their business model lines up with 506(b). If their marketing looks like 506(c), but your exemption is 506(b), you have a problem.
Standard Disclaimers You Should Use
In any educational or promotional content, it is wise to clarify that:
- It is not an offer to sell or the solicitation of an offer to buy any security
- Any offer can only be made through formal offering documents
- Nothing you are saying is personal investment, tax, or legal advice
It feels repetitive, but it frames expectations and helps keep your communications on the right side of the line.
Frequently Asked Questions About Rule 506(b)
What is the difference between Rule 506(b) and 506(c)?
Rule 506(b):
– Does not allow general solicitation or advertising
– Allows an unlimited number of accredited investors
– Allows up to 35 non‑accredited in any 90 day period but sophisticated investors
– Generally allows self‑certification of accredited status
Rule 506(c):
– Allows general solicitation and advertising
– Requires that all purchasers are accredited investors
– Requires you to take reasonable steps to verify accredited status, with documents or third‑party verification
Both allow unlimited offering size and both require Form D and state notice filings.
How many non-accredited investors are allowed in 506(b)?
Rule 506(b) lets you sell to an unlimited number of accredited investors and up to 35 non‑accredited investors.
Those non‑accredited investors must be sophisticated and must receive the required disclosure. Many issuers still choose to limit or avoid non‑accredited investors to keep the offering simpler and lower risk.
Can I advertise a 506(b) offering on social media?
No.
A 506(b) offering cannot be marketed through general solicitation or general advertising. Public social media posts that mention you are raising money, describe offering terms, or invite the public to invest are likely to be treated as general solicitation.
If you want to promote a raise on social media, you should be looking at Rule 506(c), not 506(b).
You can, however, use social media to:
– Talk about your business in general
– Share educational content
– Invite people to join a newsletter or community
Once you have a pre‑existing, substantive relationship, you can discuss a 506(b) offering privately with them.
Do I have to file anything with the SEC for a 506(b) offering?
Yes.
Rule 506(b) requires you to file a Form D with the SEC within the required time after your first sale, and you must make any required state notice filings for the states where your investors live.
The filings are not optional. They are part of what keeps your exemption intact.
Can I switch from a 506(b) to a 506(c) offering mid-raise?
You cannot simply flip a switch and magically change the rule running under the same offering.
In theory, you can close a 506(b) offering and later run a separate 506(c) offering. In practice, if the two offerings overlap in time, terms, and investors, regulators may treat them as one integrated offering.
If you think you need to change, talk to counsel about how to clearly separate the offerings in time, terms, and investor pools.
Do investors have resale restrictions on 506(b) securities?
Yes.
Investors in a Rule 506(b) or 506(c) offering receive restricted securities. That usually means:
– They cannot freely resell their interests right away
– Transfers generally require issuer consent and must comply with securities laws
– There may be holding periods and other restrictions under Rule 144 and your governing documents
Investors are not buying publicly tradable stock. They are buying illiquid, private interests and should expect to hold them for a significant period.
Final Thought
Rule 506(b) is not about sneaking under the radar. It is about raising capital quietly, from people you know, in a disciplined, fully disclosed way.
If you treat 506(b) as a carefully engineered quiet raise, not a shortcut, it can be one of the most powerful tools in your capital‑raising toolbox.
Tilden Moschetti, Esq., is a highly sought-after syndication attorney with nearly two decades of experience. His clientele ranges from real estate developers and startups to established businesses and private equity funds. Tilden’s expertise in syndication law comes not only from his knowledge of syndication and securities law but from real, hands-on experience as an active syndicator himself in every real estate product type and nearly all markets in the US. His knowledge and experience set him apart and established him as the Reg D legal services leader.
