Member education
Accredited Investors & Capital-Raising Rules
The evolution of private market regulation — and how it shapes who gets access to opportunity.
Where the private market line was drawn
Private offerings rely on securities-law exemptions to avoid SEC registration. The goal is to prevent a sale from becoming a public offering by controlling both solicitation and buyer eligibility.
“Transactions by an issuer not involving any public offering.”
Reg D basics: 504, 505 and 506
Regulation D provides the primary framework for private capital raises. Each rule carves out a different path.
Rule 504
Up to $1M in 12 months
Commonly used for friends, family, and seed-stage rounds.
Rule 505
Up to $5M
Unlimited accredited investors plus up to 35 other persons.
Rule 506
No dollar cap
Unlimited accredited investors plus up to 35 sophisticated non-accredited investors. Reduces state “blue sky” friction.
The accredited investor definition
Eligibility sets the playing field. The SEC defines accredited status through specific financial thresholds and professional categories.
Net worth test
$1M or more, excluding the value of a primary residence.
Income test
$200K individually, or $300K jointly with a spouse, in each of the last two years.
Entity & professional categories
Directors, executive officers, certain trusts, and entities holding $5M or more in assets.
Rule 506(b) vs Rule 506(c)
Rule 506(b)
- Solicitation
- General advertising and public solicitation are prohibited. Outreach must be private and relationship-based.
- Investor mix
- Unlimited accredited investors plus up to 35 non-accredited “sophisticated” investors.
- Documentation
- Investors typically self-certify; issuers maintain a “reasonable belief” standard with supporting records.
Rule 506(c)
- Solicitation
- General solicitation and advertising are permitted — the inflection point for how deals are marketed.
- Investor mix
- Every purchaser must be a verified accredited investor. Non-accredited participation is eliminated.
- Documentation
- Issuers must take “reasonable steps” to verify accreditation — a higher bar than self-certification.
“Reasonable steps” to verify: from checklists to proof
Under 506(c), relying on questionnaires alone may not suffice. Verification must be documented and substantive.
Income verification
Review tax returns and written certifications covering the relevant period.
Net worth verification
Document assets and liabilities; a commercial credit check may supplement the review.
Third-party verification
A registered broker-dealer, investment advisor, attorney, or CPA can provide qualifying verification.
Bad actor rules: compliance risk becomes deal risk
SEC disqualification rules can block an issuer from relying on Rule 506 exemptions entirely, which makes due diligence a deal-level concern. Issuers must exercise reasonable care and collect disqualification questionnaires from all covered persons.
- 1Identify covered persons — the issuer, directors, officers, and promoters.
- 2Conduct a reasonable care review using questionnaires and background checks.
- 3Determine eligibility: cleared to proceed, or disqualified from relying on Rule 506.
What this means for offering strategy
Restricted access
506(c) eliminates non-accredited participation. The investor pool narrows, but verification rigor increases.
Higher compliance burden
Verification adds cost, time, and process complexity compared with 506(b) self-certification.
Strategic choice
506(b) preserves flexibility in investor mix; 506(c) unlocks public marketing. The right path depends on deal size, audience, and resources.
The practical takeaway for accredited investors
Rule 506(c) is the “advertise-with-proof” path. It expands deal discovery, but compliance is now part of the product.
- 1
Expect documentation
Issuers will request income, net-worth, or third-party verification as a standard step before participation.
- 2
Prioritize transparency
Favor opportunities where verification and disclosure processes are clearly stated upfront.
- 3
Understand the rules
Knowing the difference between 506(b) and 506(c) helps you assess deal quality, access, and issuer credibility.
Members receive briefings, verification guidance, and deal-flow access built around these rules.
Request membershipThis page is general information for association members and is not legal, tax, or investment advice. Rule 505 was rescinded in 2017 and appears here for historical context. Consult qualified counsel before relying on any exemption.