What it is
Rules 506(b) and 506(c) are two exemptions under Regulation D, issued by the SEC. They allow an issuer, such as a private fund, to offer securities without registering the offering with the SEC in the way a public offering would be registered.
Under Rule 506(b), the issuer may not use general solicitation, which means it generally cannot advertise the offering to the public. Offerings under 506(b) are typically directed to people with whom the issuer or its representatives already have a pre-existing, substantive relationship. Sales are generally made to accredited investors, and the rule also permits a limited number of non-accredited purchasers who meet certain sophistication and disclosure requirements.
Under Rule 506(c), general solicitation is allowed, so an issuer may publicly advertise the offering. In exchange, all purchasers must be accredited investors, and the issuer must take reasonable steps to verify that status. Accredited investor categories are defined in Rule 501(a), and the dollar thresholds are only those stated in the rule.
How it’s traditionally been approached
Traditionally, many private funds have relied on 506(b) because it fits relationship-based fundraising. Managers often connect with prospective investors through existing networks, introductions and prior contact, and investors commonly confirm their status by self-certification or a questionnaire.
Rule 506(c) became available after later rule changes opened the door to public marketing of private offerings. Issuers using it generally gather documentation, such as financial records, third-party letters from licensed professionals, or other evidence, to support the verification step.
Accredited investor status under Rule 501(a) includes several categories. These include certain income or net worth tests, holders in good standing of Series 7, 65 or 82 licenses, knowledgeable employees of a private fund, and spousal equivalents for joint tests added by the August 2020 amendments. Entities and family offices with over $5 million in investments or assets may qualify, as may registered investment advisers and exempt reporting advisers. Which category applies depends on individual circumstances.
How the right fund manager may help
The right fund manager may help you understand which exemption an offering uses and what that means for you as a prospective investor. A conversation can be a useful way to learn how the manager approaches compliance, investor qualification and communication, without any promise of a particular outcome.
A first visit or call is generally informational. You might expect questions about whether you meet an accredited investor category and how you would document it if the offering is under 506(c). You can also ask how the manager explains risks and what the offering documents say.
Good questions to bring include: Which exemption is this offering using, and why? How is accredited status verified? What are the liquidity terms and fees described in the offering documents? Who are the service providers? Consider reviewing everything with your own licensed attorney, tax professional and financial adviser.
The bigger picture
Choosing whether and how to explore private funds touches more than a spreadsheet. Verification paperwork, long holding periods and uncertainty can feel stressful, so it can help to move at a pace that supports your peace of mind and fits your wider financial picture.
Many people find it calming to separate learning from deciding. Taking time to ask questions, talk with trusted advisers and consider your goals and comfort with risk can support clearer thinking. If stress is weighing on you, Providers.plus may help you find wellbeing resources.
Keep in mind
- Private fund investments are speculative and illiquid and can lose all of their value.
- Past performance does not guarantee future results.
- Nothing here is an offer to sell or a solicitation of an offer to buy any security; any offering is made only by the issuer through its own offering documents.
- The Hastings Fund is an independent directory, not a broker-dealer, funding portal or investment adviser, and does not recommend, endorse or rank investments. This is not investment, legal or tax advice, so consult your own licensed advisers; tax treatment, including any K-1 reporting or QSBS (Section 1202) questions, depends on individual circumstances.
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Create an investor account →Frequently asked questions
What is the main difference between Rule 506(b) and 506(c)?
The main difference is general solicitation: 506(b) prohibits it, while 506(c) permits it. Under 506(c), all purchasers must be accredited investors and the issuer must take reasonable steps to verify their status. Under 506(b), the issuer generally relies on pre-existing relationships and may not advertise publicly.
Can non-accredited investors participate in a 506(b) offering?
Rule 506(b) permits a limited number of non-accredited purchasers, provided they meet sophistication requirements and receive specified disclosures. Many private funds choose to sell only to accredited investors anyway. Whether this applies to any offering is set out in that issuer's own documents.
Does Rule 506(c) require verification of accredited investor status?
Yes, Rule 506(c) requires the issuer to take reasonable steps to verify that each purchaser is accredited. What counts as reasonable depends on the facts and circumstances. Verification methods vary, so ask the issuer how it handles this.
Who qualifies as an accredited investor under Rule 501(a)?
Rule 501(a) lists several categories rather than a single test. They include income and net worth tests, holders of Series 7, 65 or 82 licenses in good standing, and knowledgeable employees of a private fund. Spousal equivalents, entities and family offices with over $5 million in investments or assets, registered investment advisers and exempt reporting advisers are also included. Confirm your status with your own licensed adviser.
Is a 506(c) offering riskier than a 506(b) offering?
Not necessarily, because the exemption used describes how an offering is marketed and who may buy, not how risky it is. All private fund investments are speculative and illiquid and can lose all of their value. Review each offering's documents with your own licensed advisers.
Can a private fund advertise under Rule 506(b)?
No, a fund relying on Rule 506(b) generally cannot use general solicitation or public advertising. A fund that wants to advertise publicly would typically look to Rule 506(c) instead. The Hastings Fund is an educational directory and does not make offers or solicit purchases.
Educational resource. The Hastings Fund shares general information and connects people with independent fund managers. It is not professional advice. Talk with a qualified professional about your own situation.