Regulation D Online Offerings: Comparing Reg D 506(b) with Reg D 506(c)
Following the SEC's 2013 implementation of Title II of the JOBS Act permitting general solicitation, private companies now have two principal pathways for raising capital online under Regulation D: Rule 506(b) and Rule 506(c). Understanding the strategic and compliance implications of each exemption is critical for effective fundraising.
Rule 506(b): Relationship-Based Capital Formation
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Verification Process: Investors may self-certify their accredited status by providing income or net worth representations. Issuers are not required to independently verify accreditation status. This is a big advantage for the Issuer because it makes the investment process easy for the investor.
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Marketing is Restrictive: General solicitation and advertising are strictly prohibited. Issuers may only approach investors with whom they have a pre-existing, substantive relationship. This is highly restrictive. No advertising. No rented or purchased email lists of investors may be used.
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Some non accredited investor friends and family are allowed: Up to 35 investors in a Reg D 506(b)offering can be unaccredited - this flexibility can be helpful.
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Optimal Use Case: Best suited for smaller capital raises or for issuers with mature networks of accredited investors, family offices, or institutional relationships. This method does not work well if you have few contacts that are accredited investors.
Rule 506(c): General Solicitation Framework
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Verification Requirements: Issuers must take "reasonable steps" to verify that all purchasers are accredited investors, typically requiring third-party verification by a service headed up by an attorney. This requirement puts some investors off.
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Marketing Flexibility: Permits unrestricted general solicitation, including digital advertising, social media campaigns, press coverage, and other public-facing outreach efforts. This is a big advantage.
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Strategic Advantage: Ideal for companies seeking to broaden their investor base, increase visibility, and leverage modern marketing tools for capital raising.
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Can be Costly: Advertising and marketing costs can be significant, so this method is best used when the size of the capital raise justifies the costs involved.
Critical Compliance Considerations
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Capital Limitations: Neither Rule 506(b) nor 506(c) imposes limits on the amount of capital raised or on the number of investors
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Investor Thresholds: Issuers must remain vigilant of the 2,000 accredited investor threshold (or 500 non-accredited), which could trigger Section 12(g) of the Exchange Act, requiring public company reporting obligations.
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Typical Investment Amounts: Individual commitments in Regulation D offerings range from $10,000 to $50,000, while institutional investment sizes can range into tens of millions and up.
Strategic Framework for Selection
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Rule 506(b) is optimal for issuers with pre-existing investor relationships seeking lower compliance burdens and avoiding public solicitation.
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Rule 506(c) enables broader investor outreach and marketing scale, making it appropriate for startups, growth-stage companies, or platforms focused on digital capital formation, albeit with greater compliance overhead.
