General Solicitation Rule 506: What It Means for Private Fund Investors

General solicitation means broadly advertising or promoting an offering of securities to people the issuer has no existing relationship with. Examples can include public websites, social media posts, mass emails, or ads. Regulation D, issued under the Securities Act of 1933, sets conditions for private offerings that are exempt from full SEC registration.

Rule 506(b) is the traditional path. It does not permit general solicitation. Issuers generally rely on pre-existing, substantive relationships with the people they approach. Under 506(b), an offering can include accredited investors and a limited number of non-accredited investors who meet certain sophistication and disclosure requirements.

Rule 506(c) permits general solicitation, but all purchasers must be accredited investors, and the issuer must take reasonable steps to verify that status. Self-certification alone is generally not enough under 506(c). Whether an offering uses 506(b) or 506(c) is the issuer's choice, and it is described in the issuer's own offering documents.

Both paths relate to the accredited investor definition in SEC Rule 501(a). Categories include individuals with income over $200,000 (or $300,000 jointly with a spouse or spousal equivalent) in each of the two most recent years with the same expectation for the current year, or net worth over $1 million excluding the primary residence. Since the August 2020 amendments, holders in good standing of Series 7, Series 65 or Series 82 licenses also qualify, as do knowledgeable employees of the fund. Entities and family offices with over $5 million in investments or assets can qualify, as can registered investment advisers and exempt reporting advisers.

For many years, private funds relied on Rule 506(b) and built their investor lists through existing relationships, introductions and referrals. This approach kept offerings quiet and relationship-based. Many managers still prefer it.

Rule 506(c) became available after the JOBS Act of 2012 and the SEC's implementing rules. It allowed managers to describe offerings publicly, while taking on the added responsibility of verification. Some managers choose it, and others stay with 506(b).

Verification has traditionally involved reviewing documents such as tax returns or bank and brokerage statements, or obtaining written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney or CPA that they have taken reasonable steps to verify. The exact method depends on the facts and the issuer's judgment. Neither path is better or worse; they are different structures with different tradeoffs.

The right fund manager may help you understand which exemption an offering uses and what that means for how you were approached and what you will be asked to provide. A good conversation often starts with simple, open questions rather than a decision to act.

Helpful questions may include: Is this offering made under 506(b) or 506(c)? How is accredited status confirmed? What documents will I need to share, and how is that information protected? Where can I read the offering documents myself?

You may also ask how the manager handles communications, what the risks are, how long capital may be tied up, and what fees and conflicts exist. Compare the answers to the offering documents, and review everything with your own licensed attorney, tax professional and financial adviser. Accredited investor qualification and fund due diligence resources can help you prepare.