Rule 506(b) vs. 506(c): Which Reg D Exemption Should Your Startup Use?

By Joe Wallin | Updated April 2026

Introduction: The Two Paths to Raising Capital Without Registration

If you're raising money for your startup, you've probably heard about "506(b)" and "506(c)." These two exemptions from SEC registration are the backbone of startup fundraising in America. Together, they account for the vast majority of private capital raises—from seed rounds on AngelList to Series C rounds with top-tier venture firms.

But here's the problem: they work very differently.

Choose 506(b), and you get to operate quietly, raising from people you know, without needing to prove they're rich. Choose 506(c), and you can advertise your raise to the whole world—but every single investor has to prove they're accredited.

Pick the wrong one, and you could accidentally violate securities laws. Get it right, and you'll run a cleaner, faster fundraise.

This guide cuts through the jargon. I'll explain exactly how each exemption works, when to use each one, and what happens when you mess up.

Rule 506(b): The Traditional Exemption

The Basics

Rule 506(b) is the original private placement exemption. It's been around since before the JOBS Act, and it's the exemption that powered the entire venture capital industry for decades.

Here's what 506(b) lets you do:

• No general solicitation. You cannot advertise your raise. No social media posts, no demo day pitches, no ads on AngelList. You must raise from a pre-existing relationship.
• Unlimited accredited investors. You can take money from as many accredited investors as you want.
• Up to 35 non-accredited investors. You can take money from 35 non-accredited investors (and your founders don't count). But if you do, you have to give them heavily detailed financial disclosures.
• No verification required. You don't have to prove that your accredited investors actually are accredited. You can rely on their representation.

The "Pre-Existing Substantive Relationship" Requirement

The biggest constraint in 506(b) is the ban on general solicitation. But there's a key loophole: if you have a "pre-existing substantive relationship" with someone, you can contact them directly about an investment opportunity.

What counts? A prior business relationship, a personal friendship, prior investment in your company, or any other meaningful prior relationship. The SEC doesn't give a bright-line test—it's fact-dependent. But in practice, if you could pick up the phone and call someone without it being weird, you probably have a pre-existing substantive relationship.

We've written more on this topic here: Understanding Pre-Existing Substantive Relationships in Reg D Offerings

Accredited Investors (No Verification)

Under 506(b), an "accredited investor" is someone with:

• Income over $200,000 (individual) or $300,000 (joint) for the last two years, or
• Net worth over $1 million (excluding primary residence)

You can rely on their representation that they meet this definition. They sign a letter saying "I'm accredited," and you're good. You don't need to verify tax returns or bank statements.

Non-Accredited Investors (Heavy Disclosure)

You can take money from up to 35 non-accredited investors, but if you do, you must provide them with audited or reviewed financial statements, risk disclosures, and detailed business information. This is expensive and time-consuming. For this reason, most startups avoid taking money from non-accredited investors under 506(b).

Why 506(b) Dominates Traditional VC

Here's why venture capital firms love 506(b): it's flexible, it's familiar, and it works for traditional fundraising patterns. Most VC partners already know potential investors through industry networks. They can call someone up, pitch the deal, and close the round without any ads or public announcements. The lack of verification is fine because VCs often know their investors personally and understand their financial situation.

Example: A Series A round where the lead investor is Sequoia, and they bring in 4-5 other VC firms they've worked with before, plus a couple of angel investors the founder knows. That's classic 506(b).

Rule 506(c): The JOBS Act Game-Changer

The Basics

Rule 506(c) was created by the Jumpstart Our Business Startups (JOBS) Act in 2012. It's the new hotness in startup fundraising, and it fundamentally changed what's possible.

Here's what 506(c) lets you do:

• General solicitation allowed. You can advertise. You can tweet about your raise, post on AngelList, hire a PR firm. This was revolutionary.
• All investors must be accredited. Everyone who invests must be verified as accredited. This is the trade-off for being able to advertise.
• No non-accredited investors. You cannot take money from non-accredited investors under 506(c).
• Verification required. You must take "reasonable steps" to verify that investors are actually accredited.

Why It Took Years to Catch On

506(c) was approved in 2012, but it didn't really take off until 2016-2017. Why? A few reasons:

• Verification friction. Asking investors to provide tax returns felt awkward and slowed down deals.
• Platforms needed to be built. It took time for platforms like AngelList, Republic, and Wefunder to build infrastructure to handle 506(c) raises and investor verification.
• Cultural shift. It took a few years for founders and investors to get comfortable with the idea of advertising raises on the internet.

But by 2018-2019, everything changed. AngelList became mainstream. Republic and Wefunder launched. Suddenly, raising money online became normal.

Verification Methods Under 506(c)

This is where 506(c) gets technical. The SEC provides four "safe harbor" methods for verifying accreditation:

• Tax returns. The last two years of tax returns (1040, 1041, Schedule C, K-1, etc.). This is the most common method for income verification.
• Bank/brokerage statements. Recent statements from a bank, broker, or custodian showing net worth.
• Professional letter. A letter from an accountant, lawyer, or financial advisor confirming the investor meets the accredited investor definition.
• Third-party verification service. Using a service like Carta, Ensure, or Broodly that verifies accreditation.

"Reasonable steps" means you need to pick at least one method and actually collect and review the documentation. You can't just take someone's word for it (that's 506(b)). But you also don't need to hire a forensic accountant to audit every number.

The Cost and Friction

Verification takes time and money. Some platforms charge $500-2,000 per investor to verify. And asking investors to send you their tax returns creates friction—some investors don't like it, and some are uncomfortable sharing financial information with a startup.

That said, this friction has decreased over the years. Using a third-party verification service is now standard on most platforms, and investors have become accustomed to it.

506(b) vs. 506(c): Head-to-Head Comparison

When to Use Rule 506(b)

Traditional VC Rounds

If you're raising a Series A or Series B from venture capital firms and angel investors you know, 506(b) is the default choice. Most VC firms expect it, your investors already know each other, and there's no reason to add the friction of verification.

Angel Rounds with Warm Introductions

If you're raising from angel investors through warm intros (your mentor calls someone they know, etc.), 506(b) is perfect. No verification needed, and you're respecting the traditional relationship-based model of angel investing.

Raising from Friends, Family, and Employees

Friends and family rounds are classic 506(b). You know these people. Many of them won't be accredited. You can take up to 35 non-accredited investors (though you'll need to do heavy disclosures if you do).

When You Want to Keep It Quiet

If you want to raise capital without broadcasting to competitors that you're raising, 506(b) is your friend. You can call investors discretely without any public announcement.

Quick Closes

If you need to close fast and don't want verification delays, 506(b) is faster. You can close a deal in a week or two without waiting for investors to round up tax returns.

When to Use Rule 506(c)

Online Fundraising Platforms

If you're using AngelList, Republic, Wefunder, or similar platforms, you're using 506(c). These platforms require it. They handle the verification on the backend, and you just manage your investor relations.

Marketing-Driven Raises

If you want to market your raise—tweet about it, put out a press release, hire a PR firm—you need 506(c). This is especially useful for consumer companies, climate tech, and other sectors where public momentum helps.

Demo Day Fundraising

Pitching at a demo day in front of a crowd? That's general solicitation. You need 506(c) for that to be legal.

Syndicates and Emerging Managers

If you're using a syndicator on AngelList or similar, or if you're being featured in an emerging manager's fund, you're almost certainly under 506(c).

When You Don't Have Relationships

If you're a new founder with no network, 506(c) lets you raise from strangers on the internet. That's the whole point.

Geographic Expansion

If you want to raise from investors across the country or world, without having a pre-existing relationship, 506(c) is the tool. You advertise, strangers find you, they verify, and they invest.

The Hybrid Approach: Doing Both (Carefully)

Some companies run a 506(b) raise first (traditional VC + angels), and then run a separate 506(c) raise on AngelList or similar (more retail/emerging investors). This is perfectly legal, but there are some risks to understand.

Integration Risks

The biggest risk is "integration." The SEC can look at multiple offerings and deem them to be part of the same offering if they're "integrated" in purpose, timing, or terms. If the SEC integrates your 506(b) and 506(c) raises, you could lose the 506(b) exemption (because you advertised in the 506(c) piece, which contaminates the 506(b) piece).

How do you avoid integration? Use different terms, different investor classes, significant time gaps, and clear separate marketing. If you're doing a traditional VC round and then a 506(c) retail round 6 months later for different purposes, you're probably fine. If you're doing them simultaneously with similar terms, you're at risk.

Practical Advice

If you want to do both, talk to your lawyer first. You can do it, but structure matters. Some companies do a 506(b) main round and a 506(c) "pro-rata follow-on opportunity" for existing investors. Others do a 506(b) round closed, then a 506(c) round months later for new investors.

Verification Methods Under 506(c): A Practical Guide

Tax Returns (Most Common)

You ask investors to provide the last two years of 1040 forms (and Schedules C, K-1, etc. if applicable). You review them to confirm income over $200,000 or $300,000. This is straightforward but requires investors to share sensitive financial information.

Pros: Clear documentation, hard to fake, standard method

Cons: Invasive, slow, some investors refuse

Bank/Brokerage Statements

You ask investors to provide recent statements from a bank or brokerage showing account balances. You add them up to verify net worth over $1 million. This is less invasive than tax returns.

Pros: Reasonably easy to obtain, less invasive than tax returns, works for net-worth test

Cons: Requires recent statements, doesn't help with income test

Professional Letter

You ask investors to have a lawyer, accountant, or financial advisor send you a letter confirming they meet the accredited investor definition. The professional attests based on their relationship with the investor.

Pros: Outsources the verification work, professional credibility, investor-friendly

Cons: Costs investor money ($500-1,500 per letter), relies on professional's due diligence

Third-Party Verification Service

You use a service like Carta, Ensure, Broodly, or Gust to verify investors. The service handles the collection and verification of documentation. This is increasingly standard on AngelList and similar platforms.

Pros: Fast, standardized, less friction, handles data security

Cons: Costs $500-2,000 per investor (often paid by investor or platform), introduces another party

Reasonable Steps: What Does It Mean?

The SEC requires "reasonable steps" to verify accreditation. This is flexible, but the basic idea is: you need to actually collect and review documentation. You can't just assume. You also don't need to be paranoid—you don't need to hire a forensic accountant or do a background check.

In practice, using one of the safe harbor methods above = reasonable steps. The SEC has blessed these methods. If you use them, you're protected.

Common Mistakes (And How to Avoid Them)

Mistake #1: Accidentally Triggering General Solicitation Under 506(b)

The most common violation. You post about your raise on social media, pitch at a public event, or run ads—all while claiming 506(b) exemption. This is illegal.

Even a single public mention can blow the 506(b) exemption. The SEC is very strict about this.

How to avoid it: If you're doing 506(b), keep it quiet. No social media posts. No demo days. No ads. Tell investors in private conversations only, or at a closed event for your pre-existing relationships. If you want to advertise, use 506(c) instead.

Mistake #2: Not Properly Verifying Under 506(c)

You say you're doing 506(c), but you don't actually collect verification documents. You just take investors' word that they're accredited. This defeats the whole purpose of 506(c) and puts you at legal risk.

How to avoid it: If you're using a platform like AngelList or Republic, they handle verification. But if you're running your own 506(c) raise, you need to actually collect documents. Use one of the safe harbor methods. Be diligent.

Mistake #3: Mixing 506(b) and 506(c) Without Thinking About Integration

You run a 506(b) raise, close it, and then immediately run a 506(c) raise with identical terms to the same investor base, marketed the same way. The SEC could integrate them, which would blow the 506(b) exemption (because you advertised).

How to avoid it: If you want to do both, think about timing, terms, and purpose. Make them separate. Different investor classes, different terms, or a significant time gap. And definitely talk to your lawyer.

Mistake #4: Taking Non-Accredited Investors and Not Doing Heavy Disclosure

You say you're doing 506(b), and you take money from a non-accredited investor. But you don't provide them with audited financials and detailed business disclosures. This is a violation.

How to avoid it: Either don't take money from non-accredited investors (simplest), or do the heavy disclosure burden if you do. Most startups choose the former.

Mistake #5: Not Understanding the Pre-Existing Relationship Requirement

You think you have a pre-existing relationship with someone, so you pitch them a 506(b) investment. But the SEC says there's no relationship. General solicitation violation.

How to avoid it: When in doubt, ask yourself: "Could I call this person right now without it being weird?" If yes, you probably have a relationship. If you're not sure, ask your lawyer. Or just use 506(c) so you don't have to worry about it.

Mistake #6: Misunderstanding Accreditation

You think someone is accredited because they have a fancy job title. But they don't actually meet the income or net worth threshold. You didn't verify. They're not accredited.

How to avoid it: Under 506(b), you can rely on representation. But make sure you document it—have them sign a letter saying they're accredited. Under 506(c), verify using one of the safe harbor methods.

Special Topics and Related Considerations

SAFE Agreements and Reg D

Many startups raise through SAFE agreements instead of priced equity rounds. SAFEs are not securities under most interpretations, so Reg D exemptions don't technically apply. But if you're raising on AngelList or similar platforms using SAFEs, the platforms often still treat them like 506(c) offerings and verify accreditation. This is overly cautious, but it's the industry standard.

If you want to learn more about SAFEs: SAFE Agreements: A Complete Guide for Startups

Convertible Notes

Convertible notes are debt instruments, and the securities law treatment is complex. Some say they're securities, some say they're not. To be safe, most startups treat them like securities and run them under Reg D exemptions (usually 506(b) for traditional rounds, 506(c) for online raises).

Learn more: Convertible Notes: Complete Guide

Non-Accredited Investor Challenges

Want to take money from non-accredited investors? It's possible under 506(b), but it's a pain. You need heavy disclosures and are limited to 35 investors. Many startups avoid this altogether.

More on this: Why It's So Difficult to Take Investment from Non-Accredited Investors

Frequently Asked Questions

Q: Can I do both 506(b) and 506(c) in the same raise?

A: Not really. You pick one exemption per offering. If you want to do both, structure them as separate offerings (different terms, different timing, clear separation). This is risky, so talk to your lawyer.

Q: What if I accidentally general solicit under 506(b)?

A: You've lost the exemption. Any investors you've brought in under that exemption are now unregistered securities holders, and you could be in serious trouble. The SEC has enforcement authority. In practice, the risk depends on the scope of the violation and whether anyone complains. But this is a serious problem. Don't do it.

Q: How do I verify an investor is accredited?

A: Under 506(b), you rely on their representation (they sign a letter). Under 506(c), use one of the safe harbor methods: tax returns, bank/brokerage statements, professional letter, or third-party verification service.

Q: Do I need a lawyer to do a Reg D offering?

A: You should. Reg D is technical, and the penalties for getting it wrong are serious. If you're using a platform like AngelList or Republic, they often provide legal templates and handle some of the complexity. But for a traditional VC round, you absolutely need a startup lawyer.

Q: Can I raise from friends and family under 506(c)?

A: Yes, but only if they're all accredited and verified. If some of your friends aren't accredited, you can't use 506(c). You'd need 506(b) instead (and provide them with heavy disclosures if there are more than 35).

Q: What if an investor doesn't want to provide verification under 506(c)?

A: You can't take their money. 506(c) requires all investors to be verified accredited. If they won't verify, they can't invest. This is a hard rule. No exceptions.

Q: Is there a cap on how much I can raise under Reg D?

A: No. You can raise unlimited amounts under both 506(b) and 506(c). The limits are on investor types (non-accredited counts for 506(b), investor verification for 506(c)), not on dollars raised.

Conclusion: Choosing Your Path

Here's the bottom line:

Use 506(b) if: You're doing a traditional VC round, raising from people you know, or want to keep the raise quiet. Most traditional venture fundraising happens under 506(b).

Use 506(c) if: You're raising on an online platform, want to advertise your raise, or need to reach investors you don't have a relationship with. This is the future of startup fundraising.

Hybrid approach: If you want to do both, structure them carefully (different terms, different timing, clear separation) and talk to your lawyer first.

The most important thing: don't accidentally violate the rules. The penalties are serious. If you're unsure, ask a lawyer. A 1-hour conversation with a startup attorney will save you from 10 hours of stress later.

And remember: the choice between 506(b) and 506(c) shapes your entire fundraising strategy. Get it right from the start.

Disclaimer: This post is general information about securities law and Reg D exemptions. It is not legal advice. Every startup's situation is different. Before relying on this information, consult with a lawyer licensed in your state who specializes in securities and startup law.