Legal & Compliance
Rule 506(c)
Last updated
Quick Answer
A securities exemption allowing general solicitation and public advertising of private offerings, but requiring verification that all investors are accredited.
Rule 506(c) of Regulation D, created by the JOBS Act in 2013, allows companies to raise capital through general solicitation and public advertising while maintaining the Regulation D private placement exemption. Unlike Rule 506(b), companies using 506(c) can publicly advertise their offerings through websites, social media, conferences, and other public channels. However, all purchasers must be accredited investors, and the issuer must take reasonable steps to verify accredited status through specific documentation—not just self-certification. Acceptable verification methods include reviewing tax returns (income test), bank/brokerage statements (net worth test), third-party verification letters from attorneys or CPAs, or using SEC-designated verification services. Rule 506(c) is used by some crowdfunding platforms, online syndication platforms like AngelList, and GPs who want to market their funds publicly. However, adoption has been slower than expected because the verification requirement is more burdensome than 506(b)'s self-certification.
In Practice
An emerging GP uses Rule 506(c) to raise Fund I because they lack a network of pre-existing LP relationships. They publicly advertise the fund on LinkedIn, speak about it at conferences, and accept inbound interest from their website. However, every LP must provide verification documents—a letter from their CPA confirming income exceeding $200,000 for the past two years, or brokerage statements showing $1 million+ net worth excluding primary residence. The verification process adds 2-3 weeks to onboarding each LP.
Why It Matters
Rule 506(c) opened the door for emerging managers to publicly market their funds, dramatically expanding access to potential LPs. However, the trade-off is a more rigorous accredited investor verification process that adds friction and cost. Founders and GPs should carefully choose between 506(b) and 506(c) based on their marketing needs and investor relationships.
Further Reading
Qualified Purchaser vs. Accredited Investor: What Fund Managers Need to Know
Qualified purchaser vs. accredited investor — the distinction shapes your entire fund structure. Here's what VC fund managers need to know about 3(c)(1) vs. 3(c)(7) funds.
Venture Fund Compliance: SEC, State, and Ongoing Requirements
A practical guide to VC fund compliance covering SEC registration exemptions, Form ADV requirements, state blue sky laws, and ongoing obligations for emerging fund managers.
Comparisons
Frequently Asked Questions
What is Rule 506(c) in venture capital?
Rule 506(c) of Regulation D, created by the JOBS Act in 2013, allows companies to raise capital through general solicitation and public advertising while maintaining the Regulation D private placement exemption.
Why is Rule 506(c) important for startups?
Understanding Rule 506(c) is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
What category does Rule 506(c) fall under in VC?
Rule 506(c) falls under the legal category in venture capital. This area covers concepts related to the legal frameworks and compliance requirements in venture capital.
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