Reg D 506(c) Private Placement Rules: What Changed in 2013

Reg D 506(c) Private Placement Rules: What Changed in 2013

Rule 506(c) of Regulation D allows companies to raise unlimited capital through private placements using general solicitation and advertising—but only if all investors are accredited and their accredited status is verified. This exemption, finalized by the SEC on July 10, 2013, fundamentally changed how private companies can market securities offerings while maintaining exemption from full SEC registration requirements.

Angel Investors Network provides marketing and education services, not investment advice. Consult qualified legal, tax, and financial advisors before making investment decisions.

What Is Rule 506(c) and Why Does It Matter?

Before 2013, private companies raising capital under Regulation D Rule 506(b) couldn't advertise. No blog posts, no pitch events, no demo days. The SEC considered public solicitation incompatible with "private placement" status. Founders relied entirely on existing relationships—warm introductions, angel networks, personal connections.

According to the Securities and Exchange Commission (2013), Rule 506(c) eliminated the ban on general solicitation for issuers willing to accept one critical trade-off: every single investor must be accredited, and the company must take reasonable steps to verify that status.

This isn't a minor administrative detail. Rule 506(b) offerings can include up to 35 sophisticated non-accredited investors. Rule 506(c) offerings cannot. Zero non-accredited investors allowed. Period.

The verification requirement matters because self-certification doesn't cut it anymore. Investors can't just check a box claiming accredited status. Companies must obtain third-party verification letters, review tax returns, or use SEC-approved verification services.

How Rule 506(c) Differs from Rule 506(b)

The distinction comes down to three factors: who can invest, how you can market, and what verification you need.

Rule 506(b):

• Unlimited accredited investors
• Up to 35 sophisticated non-accredited investors allowed
• No general solicitation or advertising permitted
• Self-certification acceptable for accredited investor status
• Must provide detailed disclosures to non-accredited investors

Rule 506(c):

• Unlimited accredited investors only
• Zero non-accredited investors permitted
• General solicitation and public advertising allowed
• Reasonable steps required to verify accredited status
• No disclosure requirements since all investors are accredited

Both exemptions allow unlimited capital raises. Both result in restricted securities that can't be freely resold. Both require Form D filing within 15 days of the first sale.

The choice isn't obvious. Most private placements still use 506(b) despite the advertising restriction. Why? Because verification adds friction, legal liability, and operational overhead that many issuers don't want to manage.

What Counts as General Solicitation Under 506(c)?

The SEC doesn't provide an exhaustive list, but case law and staff guidance clarify the boundaries.

Clearly permitted:

• Social media posts about your fundraise
• Email campaigns to cold investor lists
• Pitch competitions and demo days
• Crowdfunding platform listings (crowdfunding">equity crowdfunding sites like StartEngine or Wefunder use Reg CF or Reg A+, but 506(c) could theoretically work)
• Press releases announcing funding rounds
• Website investor portals open to the public

Still gray area:

• LinkedIn posts that mention fundraising without explicit solicitation
• Podcast appearances where the host asks about current fundraising
• Blog content that provides company updates and happens to mention open rounds

The distinction matters because if you accidentally trigger general solicitation rules, your entire offering might lose 506(b) exemption status—even if you filed under 506(b) and never intended to use 506(c). The safe approach: pick your lane before you start marketing.

Companies already comfortable with Regulation D, Regulation A+, or Regulation CF should understand that 506(c) sits in a unique position—more flexible than 506(b) on marketing, more restrictive on investor eligibility, and more demanding on verification than both.

What Are the Verification Requirements for Accredited Investors?

This is where most issuers stumble. The SEC doesn't mandate specific verification methods, but it provides four safe harbor approaches that automatically satisfy the "reasonable steps" standard.

Safe Harbor Method 1: Income Verification

Review copies of IRS forms (W-2, 1099, K-1, or tax returns) for the two most recent years showing income exceeding $200,000 individually or $300,000 jointly. Obtain written representation that the investor reasonably expects similar income in the current year.

Safe Harbor Method 2: Net Worth Verification

Review bank statements, brokerage statements, tax assessments, appraisal reports, and credit reports dated within 90 days. Calculate net worth excluding primary residence. Confirm it exceeds $1 million. Obtain written representation confirming liabilities.

Safe Harbor Method 3: Third-Party Verification

Use a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or CPA to verify status. The third party must provide written confirmation dated within 90 days stating they took reasonable steps to verify and concluded the investor qualifies.

Safe Harbor Method 4: Existing Accredited Investor Certifications

For investors who previously invested in a 506(b) offering within the past five years and were verified as accredited at that time, obtain written confirmation they remain accredited. This only works if you have documentation of prior verification.

Outside these safe harbors, issuers can use alternative methods—but they bear the burden of proving reasonableness if the SEC challenges them. Most attorneys recommend sticking to safe harbor methods to avoid regulatory risk.

When Should You Use 506(c) Instead of 506(b)?

Rule 506(c) makes sense in specific situations. Not every private placement benefits from public advertising.

Use 506(c) if:

• Your target investors are all accredited and you're comfortable verifying them
• You want to run paid ads, post on social media, or pitch at public events
• You're raising from a dispersed investor base without warm introductions
• Your industry benefits from brand visibility (consumer products, tech platforms)
• You're using an online portal or platform that requires public listings

Stick with 506(b) if:

• You have sophisticated non-accredited investors who want to participate (founders' family members, early employees, strategic partners)
• Your investor base comes from existing relationships and referrals
• You want to avoid verification liability and operational overhead
• Your raise is relatively small and you don't need broad market exposure
• You're in a regulated industry where public fundraising creates unwanted attention

Many Series A and later-stage rounds default to 506(b) because the investor pool is already known, introductions happen through VCs and institutional channels, and verification creates unnecessary friction. Early-stage companies raising smaller amounts from distributed angel networks sometimes prefer 506(c) for marketing flexibility.

What Happens If You Get Verification Wrong?

The SEC doesn't play games with accredited investor verification failures. If an issuer sells securities to a non-accredited investor in a 506(c) offering, the entire exemption can be lost—potentially requiring a costly and time-consuming rescission offer to all investors.

In practice, this means:

Best case: You catch the error before closing, refund the investor, and refile documentation. Minor legal fees, no regulatory exposure.

Moderate case: The SEC notices during routine Form D review, issues a comment letter, and requires corrective action. You might need to offer rescission rights to affected investors, amend filings, and pay legal fees to resolve the matter.

Worst case: The entire offering loses exemption status. You're deemed to have conducted an unregistered public offering in violation of Section 5 of the Securities Act. The SEC can pursue enforcement action, impose fines, and require you to offer rescission to all investors regardless of their accredited status. Investors can sue for rescission damages. Your company's ability to raise future capital gets severely damaged.

The verification requirement isn't a suggestion. Issuers who treat it casually create existential legal risk. This is why most companies using 506(c) rely on third-party verification services or experienced securities counsel to design compliant processes.

How Does Rule 506(c) Interact with State Securities Laws?

One of the most powerful features of both 506(b) and 506(c) is federal preemption. According to the National Securities Markets Improvement Act (1996), offerings conducted under Rule 506 are "covered securities" that preempt state registration requirements.

This means you don't need to register the offering in every state where you have investors. You don't need to comply with individual state merit review or disclosure standards. You don't need to pay state filing fees in 50 jurisdictions.

But. States can still:

• Require notice filings (usually just a copy of your federal Form D)
• Charge notice filing fees (typically $100-$500 per state)
• Enforce anti-fraud provisions under state law
• Investigate suspicious offerings and coordinate with the SEC

Most states have adopted the uniform notice filing system, making multi-state compliance relatively painless. But a handful of states (looking at you, California) maintain additional requirements that can complicate 506(c) offerings.

California, for example, requires companies to meet minimum disclosure standards even for federal covered securities. Texas requires affirmative consent from non-accredited investors before they can participate in certain exempt offerings. These state-level nuances don't eliminate the federal exemption, but they add compliance layers that many issuers overlook.

If you're raising capital across multiple states, budget for state notice filings and consult counsel licensed in your key investor jurisdictions. The federal exemption protects you from state registration, but it doesn't make state securities regulators disappear.

What About Resale Restrictions on 506(c) Securities?

Securities sold under both 506(b) and 506(c) are restricted securities. Investors can't immediately flip them on public markets. They can't sell to the general public without registration or another exemption.

The most common resale exemption is Rule 144, which allows restricted securities to be resold if:

• The investor holds the securities for at least six months (for reporting companies) or one year (for non-reporting companies)
• The company is current on SEC reporting requirements (if applicable)
• The sale meets volume limitations (generally 1% of outstanding shares or average weekly trading volume)
• The sale is conducted through a broker or market maker

For early-stage companies that aren't SEC reporting companies, the one-year holding period effectively locks investors in. This matters when structuring seed rounds and early equity dilution—investors need to understand they're buying illiquid securities with no near-term exit.

Some issuers use secondary market platforms like Forge Global or EquityZen to provide liquidity for restricted securities. These platforms often require company approval and facilitate transfers between accredited investors under additional exemptions. But they don't eliminate the fundamental restriction on public resale.

The key point: 506(c) doesn't create more liquid securities than 506(b). Both result in restricted holdings that require careful exit planning.

Real-World Use Cases: When Companies Choose 506(c)

Despite the verification burden, certain industries and business models favor 506(c) for strategic reasons.

Real estate syndications: Commercial real estate sponsors frequently use 506(c) to market property investments through webinars, email campaigns, and investor portals. The investor base is entirely accredited, verification is standard practice in the industry, and broad marketing generates deal flow that warm introductions can't match.

Consumer product launches: Brands that want to create investor evangelism sometimes use 506(c) to combine fundraising with marketing. A craft brewery raising expansion capital through a 506(c) offering can simultaneously build its customer base by advertising the investment opportunity. The raise becomes a brand-building exercise.

Technology platforms: Some fintech and blockchain companies prefer 506(c) because their customer acquisition strategy already involves digital advertising and content marketing. Adding investment opportunities to the marketing mix feels natural. Just be careful—promoting your product is different from soliciting securities investments, and the line can blur quickly.

Fund managers: Private equity and venture capital funds raising capital from LP investors increasingly use 506(c) to advertise on industry platforms, attend conferences, and build broader LP relationships beyond traditional institutional channels. The verification requirement aligns with standard fund onboarding processes anyway.

The common thread: these issuers already have systems to verify accredited status, their business model benefits from public visibility, and their target investors are exclusively accredited anyway. For them, 506(c)'s advertising flexibility outweighs its verification overhead.

Common Mistakes That Invalidate 506(c) Exemptions

The SEC doesn't publish a list of common violations, but securities attorneys see patterns in enforcement actions and comment letters.

Mistake 1: Starting with 506(b) then switching to 506(c) mid-raise. Once you begin a private placement under 506(b) relying on pre-existing relationships, you can't switch to 506(c) and start public advertising without risking integration issues. The SEC might view it as a single offering that violated both exemptions.

Mistake 2: Using general solicitation before establishing 506(c) intent. If you publicly advertise an offering but file Form D under 506(b), you've created a registration violation. Intent matters less than actions. Public marketing triggers 506(c) requirements whether you planned it or not.

Mistake 3: Accepting self-certification without verification. Investors will claim they're accredited. They'll sign attestations and check boxes. That's not enough for 506(c). You must take reasonable steps to verify through one of the safe harbor methods or a defensible alternative approach.

Mistake 4: Relying on outdated verification. Accredited investor status can change. Income drops. Net worth fluctuates. Verifications dated more than 90 days before the sale don't satisfy safe harbor requirements (except for the five-year lookback under Safe Harbor 4). Keep documentation current.

Mistake 5: Mixing 506(c) and other exemptions. You can't run simultaneous offerings under 506(c) and Regulation CF for the same securities without careful integration analysis. The SEC views concurrent offerings of the same class of securities as potentially integrated, which can destroy both exemptions if not structured correctly.

Most of these mistakes stem from companies trying to avoid legal fees by DIY-ing complex securities regulations. Rule 506(c) isn't a fill-in-the-blank form. It's a federal exemption with enforcement teeth. Budget for competent securities counsel or risk building legal liabilities you can't afford to fix later.

Related Reading

• Reg D vs Reg A+ vs Reg CF: Which Exemption Should You Use?
• Raising Series A: The Complete Playbook
• Founders Are Giving Away Too Much Too Fast: The Complete Guide to Seed Round Equity Dilution

Key Terms from This Article

Expand your investment vocabulary with definitions of terms used above:

• accredited investor
• equity crowdfunding
• venture capital
• private equity
• crowdfunding
• Series A
• Reg A+
• Reg CF

View complete glossary →

Frequently Asked Questions

Can I use Rule 506(c) to advertise on social media?

Yes. Rule 506(c) explicitly permits general solicitation including social media posts, paid advertising, and public pitch events. However, all purchasers must be verified accredited investors, and you must take reasonable steps to verify their status before accepting investments.

What is the difference between Rule 506(b) and Rule 506(c)?

Rule 506(b) prohibits general solicitation but allows up to 35 sophisticated non-accredited investors. Rule 506(c) permits public advertising and general solicitation but requires all investors to be accredited and verified. Both allow unlimited capital raises and result in restricted securities.

How do I verify accredited investor status for Rule 506(c)?

The SEC provides four safe harbor methods: reviewing tax documents showing qualifying income, reviewing financial statements proving net worth over $1 million, obtaining third-party verification from licensed professionals, or relying on prior verification from another 506(b) offering within five years. Documentation must be current within 90 days in most cases.

Can non-accredited investors participate in a 506(c) offering?

No. Rule 506(c) requires all purchasers to be accredited investors with verified status. If you want to include non-accredited investors, you must use Rule 506(b), which allows up to 35 sophisticated non-accredited investors but prohibits general solicitation and advertising.

Do I need to register my 506(c) offering in each state?

No. Rule 506(c) offerings are federally covered securities that preempt state registration requirements. However, most states require notice filings (typically just a copy of your Form D) and charge notice filing fees. You must still comply with state anti-fraud provisions.

How long must investors hold 506(c) restricted securities before reselling?

For non-reporting companies, investors typically must hold restricted securities for at least one year before reselling under Rule 144. Reporting companies have a six-month holding period. Resales must also comply with volume limitations and other Rule 144 conditions.

What happens if I accidentally use general solicitation in a 506(b) offering?

Using general solicitation in a 506(b) offering can invalidate your exemption, potentially requiring you to offer rescission to all investors and exposing your company to SEC enforcement action. If you plan to advertise publicly, you must structure the offering under Rule 506(c) from the beginning.

Can I switch from 506(b) to 506(c) during an ongoing offering?

Switching exemptions mid-offering creates significant integration risk. The SEC may view the entire offering as a single transaction that violated both exemptions. If you want to use public solicitation, structure the offering as 506(c) from day one and ensure all documentation reflects that intent.

Ready to raise capital the right way? Apply to join Angel Investors Network.