If you are raising money from investors for a real estate project, a fund or an operating business, you are almost certainly selling securities. Unless an exemption applies, securities offerings must be registered with the Securities and Exchange Commission, a process that is far too expensive and time-consuming for most private deals. That is why most private capital raises rely on Regulation D, and in particular on Rule 506. Rule 506 comes in two versions, 506(b) and 506(c), and the choice between them affects who you can raise from, how you can find investors and what paperwork you need. Here is a plain-English overview.
What the two exemptions have in common
Both Rule 506(b) and Rule 506(c) let an issuer raise an unlimited amount of money without registering the offering with the SEC. Both preempt state registration requirements, although states, including Ohio, still require a notice filing and fee. Both require the issuer to file a Form D with the SEC, and both are subject to the “bad actor” rules, which can disqualify an offering if the issuer or certain people connected to it have specified securities-related violations or sanctions in their background.
Securities sold under either exemption are generally “restricted,” which means investors usually cannot freely resell them. And neither exemption excuses anyone from the antifraud rules. Whatever you tell investors, whether in a pitch deck, an email or a private placement memorandum, must be accurate and must not leave out important facts.
Rule 506(b): the traditional private placement
Rule 506(b) is the long-standing “quiet” private placement. Its defining feature is that the issuer may not use general solicitation or general advertising to find investors. In practice, that means no public advertising of the offering, no open posts on social media or websites inviting people to invest, and no cold outreach to strangers. Instead, 506(b) offerings are typically made to people with whom the sponsor or its representatives have a pre-existing, substantive relationship.
Who can invest
A 506(b) offering can include an unlimited number of accredited investors and up to 35 non-accredited investors. Each non-accredited investor must be “sophisticated,” meaning that, alone or with a purchaser representative, the investor has enough knowledge and experience in financial and business matters to evaluate the merits and risks of the investment.
Disclosure obligations
If even one non-accredited investor participates, the issuer must provide that investor with substantial disclosure, including financial statement information, comparable to what would be required in a registered or Regulation A offering. That is one of the main reasons many sponsors limit 506(b) offerings to accredited investors only. When all purchasers are accredited, the rule does not prescribe specific disclosure, although a well-drafted private placement memorandum is still the best way to manage antifraud risk.
Confirming accredited status
In a 506(b) offering, issuers typically rely on investor questionnaires and representations to establish accredited status, together with a reasonable belief that those representations are true. The rule does not require the extra verification steps that 506(c) demands.
Rule 506(c): raising money with general solicitation
Rule 506(c) was created to allow issuers to advertise their offerings. Under 506(c), a sponsor can talk about the raise publicly, including on a website, on social media, at events and in media interviews, subject always to the antifraud rules. That flexibility comes with two important trade-offs.
Accredited investors only
Every purchaser in a 506(c) offering must be an accredited investor. There is no room for non-accredited investors, no matter how sophisticated they are.
Reasonable steps to verify
The issuer must take “reasonable steps to verify” that each purchaser is accredited. A check-the-box questionnaire is not enough on its own. The rule lists non-exclusive methods, such as reviewing IRS forms reporting income for the two most recent years, reviewing recent account statements and a credit report to confirm net worth, or obtaining a written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney or CPA. An investor who has been verified by the same issuer within the past five years can generally provide a written certification instead of going through the process again.
In March 2025, SEC staff issued a no-action letter indicating that high minimum investment amounts can support a reasonable-steps conclusion. Under that guidance, where an investor commits at least $200,000 (for a natural person) or $1 million (for a legal entity), represents in writing that it is accredited and that the minimum investment is not financed by a third party, and the issuer has no actual knowledge to the contrary, the issuer may be able to treat those facts as reasonable verification. The details matter, so this approach should be structured carefully rather than assumed.
A quick refresher on “accredited investor”
For individuals, the most commonly used tests are net worth over $1 million, excluding the value of a primary residence, or income over $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the two most recent years, with a reasonable expectation of reaching the same level in the current year. Individuals holding certain professional licenses in good standing, currently the Series 7, Series 65 and Series 82, also qualify. Entities can qualify under separate tests.
The definition is under review. In late September 2026, the SEC voted to propose a package of private-markets reforms and requested comment on whether additional credentials, such as an accredited investor exam and certain professional designations, should qualify individuals. These are proposals only. Until any changes are finalized, the existing tests continue to apply.
How to think about the choice
There is no universally “better” exemption. The right choice depends on your investor base and your marketing plans. A few common considerations:
- Your network. If you already have enough relationships with accredited investors to fill the raise, 506(b) may be simpler, because it avoids the third-party verification process.
- Non-accredited friends and family. Only 506(b) allows them, and including them triggers significant disclosure requirements.
- Marketing. If you want to promote the offering publicly or reach investors you don’t already know, 506(c) is designed for that, but only accredited investors who are verified may invest.
- Investor experience. Some investors are reluctant to share tax returns or account statements. Verification letters from their own CPA or attorney, or the minimum-investment approach, can ease that friction.
- Timing. Once you have generally solicited, you cannot treat that offering as a 506(b) offering. Decide before any public communication goes out.
Filing obligations: Form D and state notices
Under either exemption, the issuer must file a Form D with the SEC within 15 days after the first sale of securities in the offering. The issuer also needs to look at the states where its investors live. Rule 506 offerings are “covered securities,” so states cannot require registration, but most require a notice filing and fee. In Ohio, the notice filing for Rule 506 offerings is made under R.C. 1707.03(X) and is generally due within 15 days after the first sale in Ohio. Missing these deadlines can create penalties and complications, so build them into your closing checklist.
Common mistakes to avoid
- Posting about a “506(b)” deal on social media or a public website, which can amount to general solicitation.
- Relying on a questionnaire alone in a 506(c) offering instead of taking reasonable verification steps.
- Accepting a non-accredited investor without providing the required disclosure.
- Overlooking bad-actor checks on principals, promoters and compensated solicitors.
- Paying unregistered finders transaction-based compensation, which can create broker-dealer issues.
- Missing Form D or state notice filing deadlines.
Getting started
Before you talk to a single prospective investor, decide which exemption fits your plan, who you expect to invest, how you intend to reach them and what disclosure documents you will need. Having a subscription agreement, investor questionnaire, offering documents and a filing calendar ready before launch helps keep the raise compliant from day one, and it is much easier than trying to fix problems after the fact.
Vincent Esquire advises Ohio businesses and real estate sponsors on securities compliance, private placement structure and offering documents. Learn more about our SEC compliance and capital raising services or reach out to talk through your plans.
This article is for general informational purposes only and is not legal advice. Reading it does not create an attorney-client relationship. Laws change and every situation is different, so consult an attorney about your specific circumstances. Attorney advertising.
