506(b) vs 506(c): The Two Reg D Exemptions Every Accredited Investor Needs to Know

Under 17 CFR § 230.506, private companies can raise unlimited capital from investors without registering securities with the SEC. Two paths exist: Rule 506(b) and Rule 506(c). In the twelve months from July 2023 through June 2024, operating companies raised $170 billion under 506(b) and $12 billion under 506(c). That is a 14-to-1 ratio. One exemption dominates. You need to know why.

TL;DR

506(b) wins because it is cheaper to run and more flexible on who can invest. 506(c) lets you advertise publicly but forces you to verify every investor's accredited status with documentation. Most angel deals never meet the conditions that make 506(c) worth the burden. The December 2024 SEC enforcement actions (three companies fined between $60,000 and $195,000) show exactly what happens when issuers confuse the two.

The Legal Foundation

Regulation D sits inside the Securities Act of 1933. Section 4(a)(2) of the Securities Act exempts “transactions by an issuer not involving any public offering” from the registration requirements of Section 5. Regulation D, codified at 17 CFR Part 230, operationalizes that exemption through a set of bright-line rules. Rule 506 is the most widely used because it carries no dollar cap on offering size and preempts state blue-sky registration under Section 18(b)(4) of the National Securities Markets Improvement Act of 1996.

Rule 506 existed for decades with a single path. That changed on September 23, 2013, when the SEC made Rule 506(c) effective under SEC Release No. 33-9415. The trigger was Congress. Section 201(a) of the Jumpstart Our Business Startups (JOBS) Act of 2012 directed the SEC to lift the decades-long prohibition on general solicitation for private placements. The SEC complied. Rule 506(b) survived unchanged. Rule 506(c) was added as a new, parallel path. The two rules have coexisted ever since, and they are not interchangeable.

Rule 506(b): The Default Path

506(b) is the original safe harbor. The rule allows an issuer to sell securities to an unlimited number of accredited investors and up to 35 non-accredited investors in any 90-calendar-day period. That 35-investor limit is written directly into the regulation: “There are no more than, or the issuer reasonably believes that there are no more than, 35 purchasers of securities from the issuer in offerings under this section in any 90-calendar-day period.” (17 CFR § 230.506(b)(2)(i))

The hard constraint is general solicitation. 506(b) prohibits it. Under 17 CFR § 230.502(c), the prohibition covers newspaper and magazine advertisements, public websites, television and radio broadcasts, and seminars where attendees were invited by any form of general advertising. The SEC's own guidance makes clear that posting an offering on an unrestricted publicly accessible website constitutes general solicitation. One LinkedIn post about an active 506(b) raise can void the exemption.

The phrase the SEC uses is “pre-existing, substantive relationship.” 506(b) requires that the issuer have such a relationship with each investor before soliciting them. This is not a phone call the day before the pitch. It means the investor was known to you through prior business dealings, an established investment platform registration with completed suitability data, or an ongoing personal relationship before you began this specific capital raise. Courts and SEC staff have rejected relationships manufactured immediately in anticipation of a raise.

When non-accredited investors participate, Rule 502(b) kicks in. You must provide audited financials and material disclosure documents comparable to what a registered offering would require. That disclosure burden alone pushes most issuers to limit their 506(b) raises to accredited investors only, even though the rule technically permits otherwise.

For accredited investors in a 506(b) offering, verification is simple: a subscription agreement with investor self-certification is sufficient. The issuer may reasonably rely on those representations. That is a significant operational advantage over 506(c).

Rule 506(c): The Public Marketing Path

506(c) flips the advertising rule. General solicitation is permitted. You can post on social media, run ads, speak at public conferences, put your offering on platforms that broadcast to broad audiences. The trade is clear: open marketing in exchange for strict investor verification. Under 17 CFR § 230.506(c)(2)(i), “all purchasers of securities sold in any offering under paragraph (c) of this section are accredited investors.” No exceptions. Not one non-accredited investor, regardless of sophistication.

506(c) also dropped the 35-investor cap. You can sell to an unlimited number of investors. But every single one must be verified as accredited, and self-certification alone does not satisfy the standard.

The Verification Burden Under 506(c)

This is where 506(c) gets expensive. The SEC adopted a principles-based approach under 17 CFR § 230.506(c)(2)(ii): issuers must take “reasonable steps” to verify accredited investor status. The regulation provides four non-exclusive safe harbor methods.

Income verification. Review W-2s, 1099s, Schedule K-1s, or Form 1040s for the two most recent years showing individual income over $200,000 (or $300,000 joint with spouse), plus a written representation that the investor expects the same income for the current year.

Net worth verification. Review bank statements, brokerage statements, certificates of deposit, tax assessments, and third-party appraisals (all dated within the prior three months) combined with a credit report to establish liabilities. Net worth must exceed $1,000,000 excluding the primary residence.

Third-party confirmation. Obtain written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney, or a CPA stating they have taken reasonable steps and the investor qualifies. Industry practice treats these letters as valid for 90 days from issuance.

Prior-verified investor. If you previously verified an investor as accredited and have no contrary information, you may obtain a written representation at the time of the new sale. This method is valid for five years from the prior verification date.

Collecting this documentation from every investor in a large raise is operationally intensive. Services like VerifyInvestor.com exist specifically because issuers cannot or do not want to handle the document flow internally. Third-party verification runs $50 to $150 per investor depending on the provider and the method required.

The Comparison Table

Feature	506(b)	506(c)
General Solicitation	Prohibited	Permitted
Non-Accredited Investors	Up to 35 per 90-day period	Prohibited (zero)
Accredited Investor Verification	Self-certification acceptable	Must take reasonable steps to verify (documents or third-party letter)
Offering Size Cap	None	None
Disclosure Requirements	Rule 502(b) applies if non-accredited investors participate	No Rule 502(b) requirement. Standard anti-fraud rules apply.
Form D Deadline	15 calendar days after first sale (17 CFR 230.503)	15 calendar days after first sale (17 CFR 230.503)
State Blue Sky Registration	Preempted by NSMIA. Notice filings and fees still required.	Preempted by NSMIA. Notice filings and fees still required.
Bad Actor Disqualification	Applies (17 CFR 230.506(d))	Applies (17 CFR 230.506(d))
Capital Raised (July 2023–June 2024, Operating Companies)	$170 billion	$12 billion

The December 2024 Enforcement Actions

On December 20, 2024, the SEC announced settled charges against three entities under SEC Press Release 2024-210. The facts are instructive. Each entity engaged in communications that constituted general solicitation while purporting to rely on Rule 506(b). General solicitation disqualifies 506(b) reliance. That reclassified each offering, triggering a separate Form D filing obligation under 17 CFR § 230.503. None filed on time. The three penalties: $60,000, $195,000, and $175,000.

This was the first time the SEC pursued standalone Form D late-filing violations as independent enforcement actions. The signal is clear. If you publicly discuss your raise on social media, at a conference, or in a press release while operating under 506(b), you risk retroactive reclassification as a 506(c) issuer. The verification obligations follow. So do the penalties for missing Form D deadlines you did not know applied to you.

Morrison Foerster's analysis of the actions confirmed the SEC's theory: “The three charged entities, directly or through entities under their control, engaged in certain communications that constituted general solicitation for these offerings — making the offerings ineligible for Section 4(a)(2) of the Securities Act.”

ACA Group documented a parallel case: an unnamed private real estate fund used its unrestricted website, YouTube videos, and press releases while claiming 506(c) protection, then failed to independently verify investor status and admitted non-accredited investors. The result was a cease-and-desist order. AriseBank is the extreme end: $600 million raised via unregistered general solicitation without proper verification. The SEC obtained an emergency court order in January 2018, froze assets, and appointed a receiver. The company shut down entirely.

When to Choose Which: The Practical Decision

Choose 506(b) when you are raising from people you already know. Your existing angel network, prior LP relationships, a family office you have dealt with before — these are pre-existing substantive relationships. You want flexibility to include up to 35 sophisticated non-accredited investors. Your round is under $2 million and the per-investor verification cost of 506(c) is not justified. You have no intention of posting about the raise publicly.

Choose 506(c) when your marketing strategy requires public outreach. You are posting on AngelList or a platform that broadcasts to its general membership. You are presenting at a public conference and referencing your active raise. You are running social media ads. Every investor you expect will be accredited, and your minimum investment is $200,000 or more per person. Your raise is large enough that the compliance cost per investor is immaterial relative to the total raise size.

The SAFE data from Carta (Q1 2024) settles the question for most angel deals: 90% of SAFEs in pre-seed rounds under $250,000 were below $100,000. That is well below the $200,000 threshold that makes the 2025 no-action letter safe harbor available. Most angel checks are 506(b) deals by operational reality, whether the issuer thinks about it explicitly or not.

The March 2025 SEC No-Action Letter

On March 12, 2025, the SEC Division of Corporation Finance issued a no-action letter to Latham & Watkins that changed the 506(c) calculus for larger funds. The letter confirmed that a minimum investment of $200,000 per natural person or $1,000,000 per legal entity, combined with a written investor representation that the investor is accredited and that the investment is not financed by a third party, constitutes “reasonable steps” under 17 CFR § 230.506(c)(2)(ii). No separate document collection is required when those conditions are met.

Cooley's fund practice characterized the shift directly: “More funds will be less constrained on social media... sponsors can use Rule 506(c) with more confidence, knowing the verification process is not as onerous.” (Cooley TheFundLawyer)

Three caveats. First, a no-action letter is not a rule. It carries no legal force and is fact-specific to the requestor's circumstances. Second, the $200,000 minimum per natural person means this safe harbor is irrelevant to the median angel check. Third, the SEC has not confirmed whether it will codify this guidance into the CFR through formal rulemaking. Until it does, issuers relying on this approach should document their reasoning carefully. I track the SEC's regulatory agenda at reginfo.gov for any proposed Reg D rulemaking. As of this writing, no formal rule proposal has been issued to codify the March 2025 guidance.

Actionable Checklist

Before you open any raise:

• Decide 506(b) or 506(c) before the first investor conversation. You cannot switch mid-offering without restarting the process.
• If 506(b): document the pre-existing relationship with every investor you contact. Date-stamp emails. Keep records of when you first met, on what platform, through whom.
• If 506(c): set up a verification workflow before you publish anything. Choose between in-house document collection, a third-party service, or the March 2025 minimum-investment safe harbor if your deal size qualifies.
• File Form D on SEC EDGAR within 15 calendar days of the first sale under 17 CFR § 230.503. The first sale is the date the first investor is irrevocably committed, not the date you receive funds.
• File state-level notice filings in every state where an investor resides. Most states mirror the 15-day federal deadline from first in-state sale. Fees run $100 to $300 per state. Use the NASAA Electronic Filing Depository for participating states. File separately in Arizona, California, Connecticut, Delaware, Florida, Louisiana, Massachusetts, Michigan, Minnesota, New York, North Carolina, and Oregon.
• Run a bad-actor check under 17 CFR § 230.506(d) on all covered persons before the offering launches. One disqualified covered person voids the Rule 506 exemption.
• Never post about an active 506(b) offering on any public platform. A single social media post can reclassify your offering and trigger Form D obligations you did not plan for.
• If you include non-accredited investors in a 506(b) offering, prepare 17 CFR § 230.502(b) disclosure documents, including audited financials, before those investors sign.

Author Disclosure: Jeff Barnes, MBA has no personal position in any company, fund, or platform named in this article. Angel Investors Network has no current commercial relationship with any party mentioned. AIN provides marketing and education services, not investment advice. Past performance does not guarantee future results. All investments involve risk, including loss of principal.