Rule 506(b) is a securities regulation exemption under Regulation D that allows private companies to raise unlimited amounts of capital from accredited investors without registering with the SEC. The rule permits up to 35 sophisticated non-accredited investors to participate, but prohibits any form of general solicitation or advertising to find investors.
This exemption represents one of the most widely used pathways for startups and growth companies to secure funding. Companies relying on 506(b) must have pre-existing relationships with potential investors before soliciting their participation. The prohibition on general solicitation means no advertising through social media, websites, or public events specifically designed to attract investors. Instead, companies typically raise capital through warm introductions, existing networks, and direct outreach to investors they already know.
Why It Matters
Rule 506(b) provides the foundation for most angel and early-stage venture capital deals in the United States. For angel investors, this exemption offers access to high-growth private companies while maintaining investor protections through accreditation requirements. The ability to raise unlimited capital makes 506(b) particularly attractive for companies seeking Series A rounds and beyond, where funding needs often exceed $5 million. Understanding this rule helps investors recognize why they receive investment opportunities through specific channels rather than public advertisements.
Example
A software startup needs to raise $3 million for its Series A round. The founders reach out to 25 accredited investors they met at industry conferences and through mutual connections over the past year. They also include three sophisticated non-accredited investors who are experienced entrepreneurs with relevant technical expertise. The company cannot post about the fundraising on LinkedIn or send mass emails to investor databases. After conducting individual meetings and due diligence calls, 18 accredited investors and 2 non-accredited investors commit capital. The company files Form D with the SEC within 15 days of the first sale, successfully completing a 506(b) offering without registration costs or public disclosure requirements.