What is Regulation D Rule 506?

Regulation D is a set of SEC exemptions from full securities registration: Rule 504, Rule 506(b), and Rule 506(c). Each has its own dollar cap, investor restrictions, and state-law treatment.

chart: rule 506(b) and 506(c)

504: $10 million cap, no investor cap, some issuer limitations, state-level blue-sky requirements

Does "checking the box" prove an investor is accredited?

Many issuers believe that to prove that an investor is accredited, all you need to do is have them sign an accredited investor questionnaire, checking a box describing what type of accredited investor they are (income, net worth, investments in excess of $5 million, etc.). This raises two, fairly nuanced, issues:

(1) is checking the box enough to establish a “reasonable basis” for 506 offerings and

(2) is checking the box enough to show that you had no general solicitation in your 506(b) offering?

Reasonable Basis

Within the definition of “accredited investor” itself (i.e., you won’t find this in 506(c)) is yet another requirement: issuers have to “reasonably believe” that the investor meets one of the accredited investor qualifications. So how do you establish reasonable belief? It depends on the situation. You’ll need to talk to someone who knows this area.

No General Solicitation

506(b) does not allow general solicitation; it does not permit advertising. One way to show that you’ve not done any advertising is to make sales only to investors with whom you have a “pre-existing, substantive” relationship before you started the offering. How do you show this?

Most issuers have investors sign an accredited investor questionnaire, where the investor checks a box next to the type of accredited investor they claim to be. But merely checking the box is not enough to establish a substantive relationship for 506(b); you must go a step further. You have to have some other information about that person. And what that additional information is, as with establishing a “reasonable belief,” depends on the situation.

Here’s how CorpFin puts it: “self-certification alone (by checking a box) without any other knowledge of a person’s financial circumstances or sophistication is not sufficient to form a ‘substantive’ relationship.’” (See CDI No. 256.31.)

506(c) is not popular. It was created by the SEC in 2013 at the direction of Congress (Section 201(a)(1) of the JOBS Act.) It permits general solicitation for offers, but all sales must be made only to accredited investors. To make sure that the investors are accredited, the SEC, again at Congress’ direction, requires that issuers take “reasonable steps to verify” the accreditation status of each 506(c) investor. 

So on paper, 506(c) looks amazing: advertising on the internet, unlimited investors, no offering cap. But year after year after year, it underperforms its older sister, 506(b). Why?

The answer securities lawyers usually give is that reasonable steps to verify is annoying. Like a tectonic plate, it pushes against everything it touches, creating pressure and friction and fault lines in the offering process. Investors don’t want to produce two years’ worth of income statements. Nor do they want to give up bank statements and a credit report. These complaints not only make sense but are (mostly) true. Though, I would note that 506(b) requires an issuer to have a “reasonable basis” that investors are accredited, so I’ve always wondered what daylight really exists between 506(b) and (c). Relatedly, “check the box” verification in 506(b) does not work to show no general solicitation.

What is the Latham No-Action Letter?

Seeking to release the tectonic tension, CorpFin published the Latham No-Action Letter. In essence, it provides that if an entity is making an investment commitment of at least $1 million or a natural person is committing at least $200,000, then issuers may rely on written representations from the investor that (a) the investor is accredited and (b) the investment is not being financed by a third party. In other words, the no-action relief allows issuers to add the required representations to their accredited investor questionnaire and, so long as issuers have no reason to disbelieve the reps, 506(c)’s reasonable-steps-to-verify process is complete.

For what it’s worth, even absent the Latham Letter, I actually really like 506(c) as a funding solution and would be happy to talk with you about using it and the Latham Letter for your next round. (Plus, some broker-dealers, like North Capital, have great accreditation verification tools that make it easy for you to onboard investors in your 506(c).)

What did the Latham No-Action Letter change for 506(c)?

In 2025, an earthquake rocked the world of Regulation D, finally unlocking the long-held promise of 506(c).

Or did it?

Questions about a Reg D offering?

charlie@cguidrylaw.com