What is Rule 506(c) and How Does It Apply to Fund Managers?

When you offer securities (such as interests in a fund), you must either register those securities with the SEC or rely on an exemption.

Many funds have traditionally leaned on Rule 506(b) of Regulation D, which doesn’t allow general solicitation, meaning you can’t publicly market your offering.

But what if you want to spread the word more broadly? Enter Rule 506(c).

Under Rule 506(c), you’re allowed to engage in general solicitation. This means you can publicly market your offering through:

Newspapers, magazines, and online ads.

Podcasts, social media, or television.

Conferences, seminars, or even cold emails/LinkedIn messages.

Now, just because you can legally engage in general solicitation doesn’t mean you should go plastering obnoxious billboard ads everywhere. As a practical matter, you’ll want to create a targeted campaign that reaches the right potential investors (and keeps the wrong ones at bay).

Alright, so we’ve established that 506(c) gives you the freedom to market publicly. That sounds great, but you might be wondering: what’s the catch?

The catch is that every investor must be accredited, and here’s the kicker: unlike 506(b)’s self-certification, 506(c) requires you to “take reasonable steps” to verify each investor’s accredited status.

The good news is that verifying accredited investor status has never been easier. It can be done via a simple letter from an investor’s lawyer, CPA, or by one of the many low-cost third-party service providers available today.

To recap: Why choose 506(c)?

Freedom to Advertise: Expand your reach and attract investors from all over.

Broader Investor Pool: Public marketing opens the door to a wider array of potential LPs.

But remember the following:

Stricter Verification: Every investor’s credentials must be validated, which means additional due diligence and a bit more paperwork (but it’s really not that bad).

And of course, there are still other requirements under Regulation D, such as “bad actor” rules, that still need to be complied with.

If you’re ready to promote your fund publicly, 506(c) is your go-to exemption—just be prepared for the added verification process.