Reference

506(b) or 506(c): which exemption a first fund actually uses

506(c) lets you advertise. Almost nobody uses it. Here is what the rule says, and what 36,426 filings show about which one funds actually pick.

Almost every private fund in the United States is sold under Rule 506. It is the exemption that lets an issuer raise an unlimited amount without registering the offering. The rule has two doors, and the choice between them is the first real decision in a fund raise.

What the rule says

506(b) is the older door. You may sell to an unlimited number of accredited investors and up to 35 non-accredited purchasers in any 90-day period — but you may not advertise.

506(c) is the door opened by the JOBS Act. You may advertise as loudly as you like. In exchange, two things change: every purchaser must be accredited, and you must actually verify it.

The word that does the work is “verify”

Under 506(b), an investor ticking a box is generally enough. Under 506(c) it is not. The rule sets out non-exclusive methods, and reading them tells you why founders hesitate: the first is

In practice that means asking your first investors — often people who know you — for two years of tax returns. Third-party verification letters from a lawyer, accountant or registered adviser are an alternative, and a small industry exists to provide them.

What funds actually do

That ratio is the most useful thing on this page. The ability to advertise sounds decisive when you have no investors and no list. The filing record says the people actually raising funds trade it away — because the verification burden is real, because a public raise advertises your failures as well as your successes, and because most first funds are raised from people the manager already knows.

How to choose

506(b) fits when your first close comes from existing relationships, when you would rather not ask friends for tax returns, and when you want the option — rarely used — of a small number of non-accredited investors.

506(c) fits when you genuinely need to reach strangers: no network in the asset class, a thesis that needs public explanation, or a raise that depends on inbound. If you are going to write publicly about what you are doing, 506(b) is a constraint you will resent.

The choice is not permanent in principle, but switching mid-raise is awkward: general solicitation under 506(c) can taint a concurrent 506(b) offering, and the analysis is fact-specific. Decide before you speak publicly, not after.