A Founder's Guide to Rule 506 of Reg D

A Founder's Guide to Rule 506 of Reg D

Our complete guide to Rule 506 of Reg D explains how to raise capital, compare 506(b) vs 506(c), and meet SEC compliance for private offerings.

Domingo Valadez

Aug 30, 2025

Blog

When you're looking to raise capital for a business or a real estate deal, going public with an IPO isn't the only option. In fact, for most startups and syndicators, it's not even the right one. That's where Rule 506 of Regulation D comes in—it’s the SEC's most popular exemption, offering a private pathway to raise unlimited funds without the headache and expense of a full-blown public registration.

Unpacking Rule 506 And Its Role In Private Fundraising

Anytime a company sells ownership stakes, or securities, to raise money, the SEC is watching. The default path involves registering the offering with the SEC, a process that is notoriously expensive, lengthy, and buried in complex paperwork. It’s a mountain many growing businesses simply can't climb.

Thankfully, the SEC created exemptions to this rule for private capital raises. These are all bundled under a framework known as Regulation D, or Reg D for short.

Think of Reg D as the playbook for private fundraising. Within that playbook, Rule 506 is the star player—the most widely used "safe harbor" that allows you to raise an unlimited amount of money, so long as you follow its rules about who can invest and how you find them.

Why Rule 506 Matters For Capital Raisers

At its heart, Rule 506 provides a clear, legal roadmap for private placements. Instead of trying to navigate the choppy waters of a public offering, founders and fund managers can use this exemption to get the capital they need far more efficiently. This is why so many entrepreneurs, including real estate developers, lean heavily on Rule 506 for their fundraising needs.

It opens up a more practical and accessible fundraising environment for ventures that aren't ready for—or interested in—the public markets.

At its core, Regulation D is the rulebook for private offerings, and Rule 506 is the most popular chapter in that book. It provides the structure needed to connect private companies with private capital legally and effectively.

The Two Flavors Of Rule 506

Now, it’s important to understand that Rule 506 of Reg D isn't a one-size-fits-all solution. It’s actually split into two distinct paths, and the one you choose has major implications for your fundraising strategy.

• Rule 506(b): Think of this as the "quiet" or traditional approach. You can't publicly advertise your deal at all. However, it allows you to accept funds from up to 35 non-accredited (but still financially "sophisticated") investors alongside an unlimited number of accredited ones.
• Rule 506(c): This is the "shout it from the rooftops" option, created under the JOBS Act. It lets you publicly advertise your offering—on social media, through email blasts, at conferences, you name it. The catch? 100% of your investors must be verified accredited investors, and you have to take reasonable steps to prove it.

Knowing the difference between these two is the first critical step. Your choice dictates everything from your marketing plan to who can ultimately invest in your deal. To get a better handle on which path fits your goals, you can dive deeper into the specifics of Reg D Rule 506 and see how each one works in practice.

Choosing Your Path: Rule 506(b) vs. Rule 506(c)

Once you’ve decided that Rule 506 of Regulation D is the right vehicle for your capital raise, you’ll hit a critical fork in the road. You have to choose between two very different paths: Rule 506(b), the classic "quiet" offering, and Rule 506(c), the modern "public" one.

This isn't just a minor detail; it’s a decision that will fundamentally shape your entire fundraising strategy. It dictates how you find investors, who you can accept money from, and how you communicate your deal to the world.

Think of it like this: a 506(b) is an exclusive, invitation-only dinner party. You can only invite people you already know and trust. A 506(c) is more like a public gala—you can advertise it everywhere and sell tickets to anyone, but you have to be much stricter about checking IDs at the door.

The Quiet Approach of Rule 506(b)

Rule 506(b) has been the traditional go-to for private placements for decades. Its defining characteristic is a hard-and-fast ban on general solicitation. In plain English, you can't publicly advertise your investment opportunity. That means no social media posts, no mass email blasts, and no public presentations to a room full of strangers.

So, how do you find investors? You have to rely on pre-existing, substantive relationships. This is the absolute cornerstone of a 506(b) offering. You must have a genuine connection with your potential investors before you ever mention the deal. For most real estate syndicators, this means turning to a personal network of contacts they've built carefully over time.

While this certainly limits your marketing reach, Rule 506(b) gives you a huge advantage when it comes to who can invest. You're allowed to raise capital from:

• An unlimited number of accredited investors.
• Up to 35 non-accredited investors, provided they are "sophisticated."

A sophisticated investor is someone the SEC believes has enough financial knowledge and experience to understand the risks of the deal without needing the full-blown protections of a public offering. This flexibility is a game-changer if your network includes smart, savvy people who don't quite meet the high income or net worth thresholds for accreditation.

The whole idea behind Rule 506(b) is built on privacy and trust. The logic is that if you already have a real relationship with someone, there's less need for strict public oversight, which allows for a more flexible pool of investors.

The Public Approach of Rule 506(c)

In stark contrast, Rule 506(c) lets you shout your deal from the rooftops. This rule, a product of the JOBS Act, allows for general solicitation. You can use websites, social media, podcasts, webinars, and pretty much any other public channel to attract investors you’ve never met.

The ability to cast such a wide net is what makes 506(c) so appealing. But, as you might expect, this freedom comes with a very important string attached.

To protect the general public from risky private deals, Rule 506(c) is incredibly strict on one point: every single investor must be an accredited investor. No exceptions. There's no room for those 35 sophisticated investors here.

And you can't just take their word for it. You are legally required to take "reasonable steps" to verify their accredited status. This means collecting sensitive financial documents like tax returns or brokerage statements, or getting a letter from their CPA or attorney. It's a much higher burden of proof.

The image below gives you a good sense of what goes into vetting investors for a private placement.

Whether you're checking documents yourself or using a third-party service, this verification step is non-negotiable and critical for staying compliant.

Rule 506(b) vs. Rule 506(c) at a Glance

Making the right choice for your real estate deal really comes down to seeing the differences side-by-side. Since its adoption way back in 1982, Rule 506 has been a foundational tool for raising capital privately. For more background on Regulation D exemptions, the resources from Thomson Reuters Legal are quite helpful.

Let's break down the core differences in a simple table to make it crystal clear.

Ultimately, your decision comes down to your network and your goals. If you have a strong, established list of contacts you can tap into, the simplicity and flexibility of Rule 506(b) is probably your best bet. But if you need to reach beyond your inner circle to fund a larger project, the public reach of Rule 506(c) is a powerful option—as long as you’re prepared for its tougher verification rules.

Who Can Invest? Accredited vs. Sophisticated Investors

Alright, you’ve decided between a quiet 506(b) or a widely advertised 506(c) deal. Now comes the most important part: figuring out exactly who can invest your money. The SEC has strict rules about this, and getting it wrong is not an option if you're raising capital under Rule 506 of Reg D.

The whole point of these rules is to protect Main Street investors from the inherent risks of private deals. That's why the SEC created specific categories for people they believe are equipped to handle these kinds of opportunities: accredited investors and a special group called sophisticated investors.

What is an Accredited Investor?

The term "accredited investor" is the cornerstone of private placements. In the SEC's eyes, these are people or entities who have the financial capacity and know-how to take a loss without it derailing their lives. The definition used to be pretty rigid, but thankfully, it's expanded over the years.

Here’s how an individual can qualify as accredited today:
* The Income Test: They’ve earned over $200,000 on their own (or $300,000 with a spouse) for the past two years and have a solid reason to believe they'll do it again this year.
* The Net Worth Test: Their net worth is over $1 million, either alone or with a spouse. Important note: you can't include the value of your primary home in this calculation.
* The Professional Test: They hold specific financial licenses in good standing, like a Series 7, Series 65, or Series 82.
* The Insider Test: They are a "knowledgeable employee" of the fund, like a director or executive officer.

For syndicators, this definition is your guidepost. If you’re running a Rule 506(c) offering, every single person who invests must meet one of these criteria. No exceptions.

The Nuance of the "Sophisticated" Investor

This is where Rule 506(b) shows its real flexibility. While you can bring in all the accredited investors you want, a 506(b) deal also lets you include up to 35 sophisticated non-accredited investors. So, what in the world does "sophisticated" mean?

The SEC says it's someone with enough knowledge and experience in business and finance to properly evaluate the risks and merits of your deal. This isn't just a box to check; it’s a judgment call that you, the sponsor, have to make.

Think of a successful small business owner who hasn't quite hit the income threshold but has been analyzing business plans for 20 years. Or maybe a retired accountant who can read a pro-forma in their sleep. They understand the game, even if they don't meet the SEC's net worth test.

This category is a game-changer because it opens your deal to sharp, savvy people who might otherwise be shut out. But there's a catch. If you bring even one sophisticated investor into your 506(b) offering, you trigger a major disclosure requirement: you have to give them the same level of financial information that would be required in a full-blown public offering.

The Critical Step: Verification

Knowing the definitions is one thing, but proving it is another. How you verify an investor’s status depends entirely on which type of offering you’re running.

With a Rule 506(b) offering, the process is built on trust. Because you're required to have a pre-existing, substantive relationship with these investors, you can generally rely on them to self-certify their status via a questionnaire. You aren't obligated to go digging through their financials unless you have a good reason to believe they aren't being truthful.

A Rule 506(c) offering is the complete opposite. You can't just take their word for it. The rules require you to take "reasonable steps" to verify that every single investor is accredited. This is a much higher burden of proof and means you need to see real evidence. This could involve reviewing W-2s or tax returns, or getting a signed letter from their CPA, attorney, or financial advisor confirming their status. Ultimately, the responsibility to get this right falls squarely on your shoulders.

Raising Capital Under Rule 506(c)

If you're going with a Rule 506(c) offering, you're essentially choosing to take your deal public. This is the path for syndicators who want to cast a wide net and advertise their investment opportunity. But this freedom comes with a critical trade-off.

Think of it like this: Rule 506(c) opens the front door for everyone to see your deal, but it puts a strict bouncer in charge of who gets in. You get the power of general solicitation, but in exchange, you take on the non-negotiable duty of accredited investor verification. These two principles are joined at the hip; you can't have one without the other.

Going Public: What General Solicitation Really Means

Under Rule 506(c), the old SEC muzzle on advertising comes off. This gives you a ton of firepower to attract investors from outside your personal Rolodex. For a real estate syndicator, this isn't just theory—it’s a practical toolkit for raising capital.

Here’s what general solicitation looks like on the ground:

• Digital Advertising: Running targeted ad campaigns on LinkedIn or Facebook, zeroing in on people who follow real estate investing trends or work in high-paying fields.
• Public Webinars: Hosting a live online event to walk through the deal specifics. The audience might be full of people you’ve never spoken to before.
• Email Marketing: Blasting out an email newsletter with deal info to a large list, not just your close contacts.
• Content Creation: Talking openly about your offering on a podcast, blog, or YouTube channel to draw in new, interested investors.

This is how you build momentum fast. But remember, every single person who comes in through that public door has to be vetted.

The Verification Mandate: No More Taking Their Word for It

Here's the biggest difference from a 506(b) raise. With a 506(c), you can't just take an investor's word that they're accredited. The SEC requires you to take "reasonable steps" to prove it. This isn't a suggestion; it's the absolute cornerstone of a compliant 506(c) offering.

So, what are "reasonable steps"? The SEC doesn't leave you completely in the dark. They've outlined a few safe-harbor methods you can rely on.

The burden of proof is officially on you, the syndicator. Before you accept a single dollar, you need to collect and review documents that reasonably confirm an investor is accredited. This protects you, your investors, and the deal itself.

How to Actually Verify an Investor

To meet the "reasonable steps" standard, you have a few practical options. These methods are all designed to prove an investor meets the income, net worth, or professional criteria to be considered accredited.

Here are the most common ways to get it done:

1. Review Their Financials: This is the direct approach. You’ll need to look at an investor’s W-2s, tax returns, or 1099s from the past two years to check their income. To verify net worth, you can review recent bank or brokerage statements, but you'll also need a credit report to see their liabilities.
2. Get a Letter from a Professional: An investor can have a qualified third party—like their CPA, attorney, or SEC-registered investment adviser—write a letter confirming their accredited status. This letter must be recent, typically within the last 90 days.
3. Hire a Verification Service: You can outsource the entire headache. There are specialized services that will handle collecting documents, reviewing them, and issuing a confirmation letter directly to you. It costs a bit, but it saves a ton of administrative work.

When the JOBS Act introduced Rule 506(c) back in 2013, it was a huge change, opening the door to public fundraising for the first time in 80 years. Initially, the verification rule seemed daunting, but the industry has since adapted. For a deeper dive into how the SEC's guidance has evolved, legal experts at Morgan Lewis offer great insights.

Ultimately, this rigorous verification is the cost of entry for the massive marketing reach a Rule 506(c) offering provides.

Finishing Strong: Form D Filings and Blue Sky Laws

Closing your fundraising round under Rule 506 of Reg D feels like crossing the finish line, but there's a crucial "cool-down" lap you can't skip. The moment the first investor's capital is committed, a new clock starts ticking on your compliance duties. This next phase is all about notifying regulators, and two items are at the top of that list: filing Form D with the SEC and satisfying state-level Blue Sky laws.

Think of it as officially logging your capital raise with the authorities. These filings inform federal and state regulators that you've conducted a private offering, providing a paper trail that keeps everything transparent and above board. Skipping these steps is a recipe for trouble, leading to potential fines and other headaches you really don't want.

The SEC's Heads-Up: Filing Form D

First up is Form D. This is a mandatory electronic notice you file with the Securities and Exchange Commission for any offering under Rule 506. It’s not a lengthy document; instead, it's a snapshot of your deal, outlining basic details about your company, the total amount raised, and the specific exemption you used.

The deadline is non-negotiable: you have to file Form D via the SEC’s online EDGAR system no later than 15 calendar days after the first "date of first sale." Be careful here—the SEC considers this the day your first investor is legally bound to invest, which is usually when they sign their subscription agreement, not when the money hits your account. You need to be ready to file the moment that first commitment comes in.

Don't mistake this for an approval process. The SEC doesn't vet or sign off on your Form D filing. It's simply a required notification. But failing to file it on time—or at all—can put your entire federal exemption at risk.

State by State: A Quick Guide to Blue Sky Laws

Just because Rule 506 is a federal rule doesn't mean you can ignore the states. While it preempts (or overrides) the need for full-blown registration in every state, you're not completely off the hook. This is where "Blue Sky laws" enter the picture. These are the unique securities laws each state has to protect its residents from fraudulent deals.

So, while you don't have to register the offering itself, you do have to make a "notice filing" in each state where you have an investor. This usually just means sending the state securities regulator a copy of your federal Form D, a filing fee, and a consent to service of process. It’s a way of letting them know you’ve raised capital from one of their residents.

The tricky part? Every state has its own way of doing things. The rules, deadlines, and fees can vary wildly. For instance:

• Timing is Everything: Most states give you 15 days after the first sale in their state to file. But some, like New York, throw a curveball and require you to file before you can accept any money.
• The Cost of Compliance: Fees can be all over the map, from $0 in some states to hundreds of dollars in others.
• One and Done? Not Always: Some states require you to renew your filing every year if your offering is still open, while others are a one-time deal.

The onus is on you to know where your investors are located and what each state requires. A simple spreadsheet tracking investors by state can be a lifesaver. To avoid any missteps, it’s always best to have experienced legal counsel in your corner to help navigate the patchwork of state rules.

Common Mistakes That Can Derail Your Rule 506 Offering

When you're running a Rule 506 of Reg D offering, the devil is truly in the details. A seemingly small misstep can spiral into a major legal headache with serious financial fallout. The good news is that most of these errors aren't malicious—they're just the result of misunderstanding the finer points of the rules.

Learning from the mistakes others have made is one of the smartest things you can do. Let’s walk through the most common traps so you can keep your capital raise clean and compliant from day one.

Accidentally Crossing the Line into General Solicitation

This is, without a doubt, the number one landmine for sponsors using Rule 506(b). This exemption’s power comes from its privacy, and it strictly forbids any form of public advertising. Any action that even looks like general solicitation can put your entire offering at risk.

Think about it this way: a syndicator hosts a public webinar to discuss a new deal, or they get excited and post the specific terms of an open investment on their LinkedIn profile. Boom. They’ve just crossed the line. These actions violate the fundamental requirement of only raising capital from investors with whom you have a pre-existing, substantive relationship.

To steer clear of this, you have to be disciplined:
* Keep Deal-Specifics Private: All conversations about an open 506(b) offering need to happen behind closed doors—in one-on-one calls or private meetings with people you already know.
* Educate Publicly, Solicit Privately: Go ahead and share your market insights and build your brand as an expert. Just don't ever mention a live deal or its terms in a public forum.
* Vet Your Speaking Gigs: If you’re speaking at a conference, make sure your presentation is purely educational. It cannot be a thinly veiled pitch for an investment you’re currently raising money for.

Dropping the Ball on Investor Verification

When you're raising under Rule 506(c), the responsibility to verify that every single investor is accredited falls squarely on your shoulders. Just taking an investor's word for it or having them check a box isn't going to cut it. That's a direct violation of the rule.

The SEC mandates that you take "reasonable steps" to verify an investor's accredited status. If you can't prove you did this, you lose the right to generally solicit, and your entire exemption could be invalidated. This is a non-negotiable part of any 506(c) deal.

I’ve seen it happen. A sponsor feels awkward asking a wealthy investor for personal financial documents, so they just let it slide. That’s a massive mistake. You absolutely must collect the proof, whether that means reviewing tax returns, bank statements, or getting a verification letter from a CPA, attorney, or another qualified third party.

Missing Key Filing Deadlines

The moment you receive your first signed subscription agreement, a stopwatch starts. You have just 15 calendar days to get your Form D filed with the SEC. It’s a common misconception that this timeline starts when the money hits your bank account. In reality, it begins the second an investor is contractually committed to the deal.

And it’s not just the SEC you have to worry about. Every state has its own notice filing requirements, often called "Blue Sky" laws. While many states stick to the 15-day window, some are stricter and require you to file before you can accept a single dollar from an investor in their state. Missing these deadlines can lead to fines and attract unwanted attention from regulators, creating a messy and expensive problem that is entirely avoidable with a good compliance calendar.

Diving Deeper: Your Rule 506 Questions Answered

Once you get past the basics of Rule 506, the real-world questions start popping up. Let's tackle some of the most common "what if" scenarios that syndicators and founders run into when they're in the trenches of a capital raise.

Can I Switch From a 506(b) to a 506(c) Mid-Raise?

It’s a classic scenario: you launch a private 506(b) offering, but the fundraising momentum just isn't there. The temptation to switch to a public 506(c) and open the floodgates is strong. The short answer is yes, you can do this, but it’s not as simple as flipping a switch.

You can't just start advertising the deal you already have in motion. To stay on the right side of the SEC, you have to formally shut down the 506(b) offering completely. Only then can you launch a brand-new 506(c) offering. Think of it as hitting a hard reset. This clear separation is essential to prove you didn't use public advertising to funnel investors into your original private deal. This is tricky stuff, and it's definitely a situation where you want your attorney on speed dial.

What Does a "Pre-Existing, Substantive Relationship" Actually Look Like?

This phrase is the absolute bedrock of a 506(b) offering. It's what keeps your private deal private. But what does it mean in practice?

• Pre-Existing: This is all about timing. The relationship had to be in place before your offering ever began. Connecting with someone on LinkedIn last week or meeting them at a conference yesterday won’t cut it.
• Substantive: This is about depth. You need to know enough about the person to reasonably believe they are a suitable fit for this kind of investment. Do you have a sense of their financial situation, their investing experience, and what they're looking for?

The SEC is trying to prevent you from cold-calling a list of names. A quick chat and a business card swap isn't a substantive relationship. It requires a genuine connection where you’ve gathered enough information to make an informed judgment about their sophistication before you ever bring up a specific investment opportunity.

How Long Do I Need to Keep Investor Verification Records?

Paperwork is rarely the most exciting part of a deal, but with compliance, it's everything. For a 506(c) offering, you're required to take "reasonable steps" to verify that your investors are accredited, and you need to keep proof of how you did it.

The SEC doesn't give a hard-and-fast rule on the timeline, but the industry standard is to hold onto those records for at least five years after the offering is complete. This means keeping copies of W-2s, tax returns, or verification letters from a CPA or attorney. Think of this file as your compliance insurance policy—if a regulator ever comes knocking, you'll have the documentation to back up your process.

Juggling investor verification, subscription documents, and the entire fundraising workflow can feel like a full-time job. Homebase is an all-in-one platform built to take that complexity off your plate, letting you manage deals and investors from a single, secure hub. See how Homebase can make your next capital raise run smoothly.

DOMINGO VALADEZ is the co-founder at Homebase and a former product strategy manager at Google.