Reg D 506(c) Explained: The Securities Rule That Lets Us Market Publicly

If you are reading this chapter on our website, you are seeing something that, for most of the history of American private capital, was not allowed. Until 2013, a company or fund raising money in a private placement under Regulation D generally could not advertise. No public website describing the offering, no social media posts, no articles inviting readers to invest. Capital was raised through existing relationships, introductions, and placement agents — quietly, and by design.

That changed when the Securities and Exchange Commission implemented a provision of the Jumpstart Our Business Startups Act of 2012 — the JOBS Act — by adopting Rule 506(c). The new rule allowed issuers to use general solicitation and general advertising in a private offering, as long as they accepted a tighter set of conditions. Prime Dealer Equity Fund is offered under Rule 506(c), which is why we can publish educational content like this series and discuss the Fund openly.

For an investor, understanding the rule matters for two reasons. First, it explains why you will be asked for more than a checked box before you can invest in any 506(c) offering. Second, it clarifies what the rule does not do: an exemption from registration is not a government endorsement, review, or approval of any offering. This chapter walks through how Regulation D is structured, how 506(b) and 506(c) differ, who qualifies as an accredited investor, what "reasonable steps to verify" means in practice, and the filing and disqualification rules that apply to every Rule 506 offering. As with every chapter in this module, what follows is general education about how these rules typically work. It is not legal, tax, or investment advice, and the Fund's actual terms and procedures are governed solely by its offering documents.

Why Private Offerings Need an Exemption at All

Under Section 5 of the Securities Act of 1933, every offer and sale of securities must be registered with the SEC unless an exemption applies. Registration is the process public companies go through — an extensive disclosure document, audited financials, SEC review, and ongoing reporting obligations. It is expensive and slow, and for a fund or a private company raising capital from a limited group of sophisticated investors, it is usually impractical.

Section 4(a)(2) of the Securities Act exempts "transactions by an issuer not involving any public offering." The difficulty is that the statute doesn't define what a public offering is, and decades of case law left issuers uncertain about where the line sat. Regulation D, adopted in 1982, solved that by creating safe harbors — specific conditions that, if met, give issuers confidence that their offering qualifies. Rule 506 is by far the most widely used of those safe harbors, accounting for the large majority of capital raised under Regulation D each year. Rule 506 offerings carry another important feature: securities sold under Rule 506 are "covered securities" under Section 18 of the Securities Act, which preempts state-level registration requirements. States can still require a notice filing and a fee, and they retain full authority to pursue fraud, but an issuer does not have to register the offering separately in every state where an investor lives.

Rule 506(b) vs. Rule 506(c)

Rule 506 now comes in two versions. The original, Rule 506(b), prohibits general solicitation. An issuer relying on 506(b) generally needs a pre-existing, substantive relationship with prospective investors — or an intermediary who has one — before discussing the offering. In exchange, 506(b) is flexible about who can invest: it permits an unlimited number of accredited investors and up to 35 non-accredited purchasers, provided each non-accredited purchaser (alone or with a purchaser representative) has enough knowledge and experience in financial matters to evaluate the investment. If any non-accredited investors participate, the issuer must furnish them with specific disclosure, including financial statement information, under Rule 502(b).

Rule 506(c), effective September 23, 2013, flips the trade-off. Issuers may broadly solicit and advertise — websites, articles, webinars, social media, public events. But every purchaser must be an accredited investor, and the issuer must take reasonable steps to verify that each purchaser is accredited. Under 506(b), an issuer can generally rely on an investor's own representation of accredited status absent red flags. Under 506(c), self-certification alone is not enough.

Who Counts as an Accredited Investor

The accredited investor definition lives in Rule 501(a) of Regulation D. For individuals, the two best-known tests are financial. The income test is met by a natural person with income above $200,000 in each of the two most recent years — or joint income with a spouse or spousal equivalent above $300,000 — with a reasonable expectation of reaching the same level in the current year. The net worth test is met by a natural person whose net worth, alone or together with a spouse or spousal equivalent, exceeds $1 million, excluding the value of the primary residence. Since the Dodd-Frank Act, the primary residence has been excluded from the calculation, and mortgage debt on it generally counts as a liability only to the extent it exceeds the home's value (or was taken on within 60 days before the investment, other than to buy the home).

In 2020, the SEC amended the definition to recognize financial sophistication, not just wealth. Individuals holding certain professional certifications in good standing — currently the General Securities Representative license (Series 7), the Investment Adviser Representative license (Series 65), and the Private Securities Offerings Representative license (Series 82) — qualify regardless of income or net worth. The amendments also added "knowledgeable employees" of a private fund for investments in that fund, and recognized spousal equivalents for the joint tests.

Entities can qualify too. Common categories include banks, registered broker-dealers and investment advisers, and insurance companies; corporations, LLCs, partnerships, and certain trusts with more than $5 million in assets that were not formed for the specific purpose of making the investment; entities in which all of the equity owners are accredited investors; entities owning more than $5 million in investments; and family offices with at least $5 million in assets under management, along with their family clients. Directors, executive officers, and general partners of the issuer itself are also accredited. The income and net worth thresholds for individuals have not been indexed to inflation since they were first set, a point the SEC has studied but not changed.

What "Reasonable Steps to Verify" Means

The SEC deliberately made 506(c) verification principles-based. Whether an issuer's steps are reasonable depends on the facts — the nature of the purchaser, the information the issuer has, the manner of solicitation, and the terms of the offering, including any minimum investment. To give issuers certainty, the rule lists several non-exclusive methods that are deemed to satisfy the requirement for natural persons.

For the income test, an issuer can review IRS forms that report income — W-2s, 1099s, Schedule K-1s, or filed Form 1040s — for the two most recent years, together with a written representation that the investor expects to reach the threshold this year. For the net worth test, an issuer can review documentation of assets, such as bank and brokerage statements, dated within the prior three months, along with a consumer credit report to identify liabilities and a written representation that all liabilities have been disclosed. Alternatively, an issuer can rely on a written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney, or a certified public accountant that the professional has taken reasonable steps to verify accredited status within the prior three months. The 2020 amendments added that an issuer that previously verified an investor can, within five years, rely on that investor's written representation that they remain accredited, absent contrary information.

In March 2025, the staff of the SEC's Division of Corporation Finance added another path. In a no-action letter and accompanying interpretive guidance, the staff indicated that a high minimum investment can be part of a reasonable verification approach. In general terms, where a natural person commits at least $200,000 (or an entity qualifying on a total-assets basis commits at least $1 million), represents in writing that they are accredited and that the investment is not financed by a third party for the specific purpose of making it, and the issuer has no actual knowledge to the contrary, the issuer may conclude it has taken reasonable steps without collecting tax returns or bank statements. This is staff guidance rather than a rule change, and it is one option among several; issuers and investors should look to their own counsel for how it applies to any particular offering.

Form D, Notice Filings, and the Antifraud Backstop

Every Rule 506 issuer must file a Form D with the SEC through its EDGAR system no later than 15 calendar days after the first sale of securities in the offering. Form D is a short notice — it identifies the issuer, its related persons, the exemption claimed, the offering size, and the amount sold — not a disclosure document and not an application for approval. Form D filings are public, and anyone can look them up on EDGAR. Issuers file amendments annually while the offering continues and when certain information changes. Most states then require a copy of the Form D as a notice filing, with a fee.

Being exempt from registration does not mean being exempt from liability. The antifraud provisions of the federal securities laws — including Section 17(a) of the Securities Act and Rule 10b-5 under the Securities Exchange Act — apply fully to private placements. Any statement made in a general solicitation, on a website, or in an offering document must not contain a material misstatement or omit a material fact necessary to make it not misleading. This is a major reason responsible 506(c) issuers keep public content educational, avoid projections or promises of returns, and direct investors to the offering documents for actual terms.

The Bad Actor Rules

Rule 506(d), adopted under the Dodd-Frank Act and effective at the same time as 506(c), disqualifies an offering from Rule 506 if the issuer or certain "covered persons" have a disqualifying event. Covered persons include the issuer and its predecessors and affiliated issuers; its directors, executive officers, and other officers participating in the offering; general partners and managing members; beneficial owners of 20% or more of the issuer's voting equity; promoters; the investment manager of a pooled investment fund; and anyone paid to solicit investors, along with that solicitor's directors and officers.

Disqualifying events include certain criminal convictions and court injunctions related to securities, certain final orders of state and federal regulators, SEC disciplinary and cease-and-desist orders, suspension or expulsion from a self-regulatory organization, SEC stop orders, and U.S. Postal Service false representation orders — generally with five- or ten-year lookback periods depending on the event. Events that occurred before September 23, 2013 do not disqualify an offering but must be disclosed to investors under Rule 506(e). The rule includes a reasonable care exception, and issuers typically run questionnaires and background checks on covered persons before and during an offering. For an investor, the practical takeaway is that a Rule 506 offering carries a built-in screen on the people running it — but the screen is only as good as the issuer's diligence. You can and should do your own: search the sponsor's Form D filings on EDGAR, check FINRA BrokerCheck and the SEC's Investment Adviser Public Disclosure site for any individuals or firms involved, and ask the sponsor directly how it conducts its bad actor review.

What the Rule Means for You as an Investor

Securities purchased in a Rule 506 offering are "restricted securities." They cannot be freely resold, and in a private fund, the partnership or operating agreement typically adds its own limits on transfer. Investors should approach any 506(c) offering expecting an illiquid, long-term commitment — the Fund, for example, has a 10-year term — and should only invest money they can afford to have tied up for that period. Expect, too, that verification will involve some paperwork. That is a feature of the rule, not friction for its own sake: the obligation to verify is the price the SEC set for allowing public discussion of private investments. Finally, remember that neither Form D nor the 506(c) exemption means the SEC or any state has reviewed the merits of an offering. That evaluation is the investor's job, which is why the next chapter in this series walks through the document where it should begin — the private placement memorandum.