By Yoan Valiente, Founder & CEO · Updated · Part of the CRE investment glossary
How Rule 506(c) works
Rule 506(b) forbids advertising the offering. Rule 506(c), added under the JOBS Act, removes that prohibition for offerings where the issuer limits sales to accredited investors and verifies them. The SEC’s plain-language summary has three parts: all purchasers are accredited, the issuer takes reasonable steps to verify accredited status, and the other conditions of Regulation D are met.
The exemption still sits inside Section 4(a)(2) and Regulation D, so the issuer remains subject to the anti-fraud provisions, bad-actor disqualification, the Form D filing and the resale limits on restricted securities.
What “reasonable steps to verify” means
The rule requires reasonable steps, and then offers a non-exclusive, non-mandatory list of methods that are deemed to satisfy it, provided the issuer has no knowledge that the person is not accredited. The methods differ by the test the investor meets:
- Income: reviewing IRS forms that report the purchaser’s income for the two most recent years, such as a Form W-2, Form 1099 or Schedule K-1, plus a written representation about the current year.
- Net worth: reviewing recent bank, brokerage or other statements and a consumer report, plus a written representation about liabilities.
- A written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney or a certified public accountant that it took reasonable steps to verify.
Verification is a facts-and-circumstances judgment
Because the list of methods is non-exclusive, an issuer can verify another way if the steps are reasonable in the circumstances. How reasonable a step is depends on the facts, such as the type of purchaser and the information the issuer already has. The rule text is the starting point, and SEC staff guidance can change how particular methods are treated, so read the current interpretation on sec.gov and ask counsel before you rely on a shortcut.
Do not accept a subscription until verification is finished and documented. A checkbox on a form is not a reasonable step by itself.
Form D, restricted securities and states
Like 506(b), a 506(c) offering requires a Form D notice within 15 days after the first sale, with no SEC fee. Purchasers receive restricted securities. The Securities Act preempts state registration and qualification for Rule 506(c) offerings, but the SEC notes that states can still require notice filings and collect state fees.
This page does not list state requirements. Ask counsel which states apply to your investors.
Choosing between 506(b) and 506(c)
The decision is about marketing against paperwork: 506(c) buys public marketing and costs verification and an accredited-only investor base. The comparison guide walks through the trade-off with real estate examples. This page is general information, not legal advice. Ask securities counsel before you rely on an exemption.
Primary sources
General information, not legal, tax or investment advice. Your operating agreement, offering documents, counsel and CPA govern your deal.