Reference
506(b) vs 506(c)
Both let you raise an unlimited amount from accredited investors without registering. The difference is a single trade, and getting it wrong is not a paperwork problem, it is a rescission problem: investors may be entitled to their money back.
The trade, in one line
506(b): you may not advertise, but you may accept a limited number of non-accredited investors and you may generally rely on what investors tell you about their status.
506(c): you may advertise to the world, but every single purchaser must be accredited and you must take reasonable steps to verify it.
| Rule 506(b) | Rule 506(c) | |
|---|---|---|
| General solicitation | Prohibited | Permitted |
| Non-accredited investors | Up to 35 sophisticated investors permitted | None. Zero exceptions |
| Accreditation checking | Written representation generally sufficient | Issuer must take reasonable verification steps |
| Pre-existing relationship | Effectively required to reach investors | Not required |
| Amount raisable | Unlimited | Unlimited |
| State registration | Preempted | Preempted |
What counts as general solicitation
Broader than most founders assume. A public website describing the offering, a post on social media, a mass email to a purchased list, a pitch at an event open to the public, a press interview about the raise: all of it can constitute general solicitation. The test is not whether you called it advertising.
This is why the pre-existing substantive relationship concept matters so much under 506(b). To reach an investor without soliciting, you generally need a relationship that predates the offering and that gives you enough knowledge of their financial circumstances to judge suitability. Meeting someone and pitching them the same evening is the fact pattern that gets picked apart later.
Verification under 506(c), and what changed in 2025
The traditional verification methods are documentary: reviewing two years of tax returns plus a written representation about the current year for the income test, reviewing bank, brokerage and credit reports for the net worth test, or accepting written confirmation from a licensed lawyer, CPA, broker-dealer or registered investment adviser.
On 12 March 2025 the SEC Division of Corporation Finance issued a no-action letter that materially eased this. The staff agreed that an issuer can reasonably conclude a purchaser is accredited through a combination of a high minimum investment amount and the investor written self-certification, without collecting financial documents. As reported, the threshold contemplated for a natural person is an investment of at least 200,000 dollars, with a higher figure for entities, alongside representations that the investor is accredited and that the investment is not financed by a third party for the purpose of making it.
The logic is that someone able to write a cheque that size has effectively demonstrated the wealth the test is trying to establish. For sponsors with large minimums this removes the single most awkward conversation in a 506(c) raise. It does not remove the obligation to take reasonable steps; it supplies a new way of satisfying it, and the specifics matter. Read the letter with your counsel rather than relying on a summary, including this one.
How to choose
Choose 506(b) if
You already know the people you intend to raise from, you want the option of including a handful of non-accredited friends or early supporters, and you would rather not put a verification process between you and a commitment. The cost is that you cannot market, and you carry the burden of showing your relationships predated the raise.
Choose 506(c) if
You need to reach people you do not know, you want to talk publicly about what you are building, and every investor you expect is comfortably accredited. The cost is a verification step on every purchaser, with no tolerance for a single non-accredited one.
Where investor networks fit
A private members community is not a public advertisement, but it is also not automatically a source of pre-existing substantive relationships. What matters is the specific history between you and the specific person, and how long it predates your offering. That is a fact question about your conduct, not a property of the group.
It follows that the useful time to be in a room of investors is well before you are raising, so that when you do raise, the relationships are genuinely old. It also follows that no group membership substitutes for verification under 506(c). Groups record what applicants tell them about themselves; that is self-reporting, not verification, and it is true of every group.
Frequently asked
What is the main difference between 506(b) and 506(c)?
Rule 506(b) prohibits general solicitation but permits up to 35 non-accredited sophisticated investors and generally allows reliance on an investor written representation of accredited status. Rule 506(c) permits general solicitation but requires that every purchaser be accredited and that the issuer take reasonable steps to verify it.
Can I advertise my fund on social media?
Only under Rule 506(c), and then every purchaser must be accredited and verified. Advertising while relying on 506(b) can destroy the exemption for the whole offering.
Did the SEC make 506(c) verification easier?
Yes. A no-action letter dated 12 March 2025 confirmed that a high minimum investment amount combined with written investor self-certifications can be a reasonable verification step, without collecting financial documents. Discuss the specific thresholds and representations with securities counsel.
Does meeting an investor at a networking event create a pre-existing relationship?
Not by itself. A pre-existing substantive relationship generally must predate the offering and give the issuer enough knowledge of the investor financial circumstances to assess suitability. Whether that exists is a question about your specific history with that person.
Is group membership proof that an investor is accredited?
No. Networking groups record what applicants report about themselves. That is self-reporting rather than verification, and it does not satisfy a 506(c) obligation.