How Rule 506 Lets Startups Raise Money Without SEC Registration

Regulation D is the SEC exemption that lets a startup sell equity in a private round without registering the offering with the agency, according to the agency's own guidance for small businesses. Almost every seed and early priced round closes under one of two rules inside it — Rule 506(b) or Rule 506(c) — and the choice between them decides whether a founder can post the raise publicly at all.

What does Regulation D actually let a startup skip?

Registering a securities offering with the SEC is expensive and slow, built for public companies. Regulation D exempts private offerings from that process. A company that sells securities under Rule 504 or Rule 506 of Regulation D, or under Section 4(a)(5) of the Securities Act, does not have to register the offering — it only has to notify the SEC after the fact, according to the SEC's own guidance for small businesses.

That notice is Form D, filed electronically through the SEC's EDGAR system. There is no filing fee, but the company needs EDGAR access credentials and a Login.gov account before it can submit one, per the SEC.

What's the difference between Rule 506(b) and Rule 506(c)?

Rule 506(b) is the default most rounds still use. It prohibits general solicitation or advertising of the offering — no public pitch, no cold outreach to strangers — and in exchange it lets a company raise an unlimited amount of money from an unlimited number of accredited investors, plus as many as 35 non-accredited investors, according to the SEC. Any non-accredited investor allowed in must be financially sophisticated enough, alone or with a representative, to evaluate the deal's risks and merits.

Rule 506(c) flips the solicitation rule. It lets a company broadly advertise the raise — a public fundraising announcement, a pitch posted anywhere — but only if every single purchaser turns out to be an accredited investor, and only if the issuer takes "reasonable steps" to verify that status rather than simply taking an investor's word for it, the SEC says. The agency does not specify exactly what those verification steps must look like, leaving room for judgment call.

Both rules still route through the same notice: Form D, due within 15 days of the first investor becoming irrevocably committed to buy in, according to the SEC. Miss that 15-day window and the exemption's paperwork obligation is already in breach, independent of whether the underlying sale itself was proper.

Question	Rule 506(b)	Rule 506(c)
Public advertising allowed?	No	Yes
Accredited investors	Unlimited	Unlimited (all purchasers must qualify)
Non-accredited investors	Up to 35, must be financially sophisticated	None allowed
Accredited-investor verification	Not specified by the rule	Issuer must take "reasonable steps" to verify
Dollar cap on the raise	None	None

Who counts as an accredited investor, and does a startup have to check?

Accredited-investor status is defined by SEC standards covering income, net worth, or professional credentials — the agency's Form D guidance points founders to its separate rule text for the exact thresholds rather than restating them inline. What changes between the two 506 rules is not who qualifies but how hard a company has to work to confirm it. Under 506(b), the rule text the SEC publishes does not lay out a verification procedure at all. Under 506(c), verification is mandatory and the burden sits with the issuer, because the tradeoff for being allowed to advertise publicly is that every buyer who shows up has to actually be accredited, not merely self-declared.

Non-accredited investors change the paperwork load, too. Under 506(b), if a company lets any non-accredited investor into the round, it must hand that investor disclosure documents comparable to what a Regulation A offering would require, plus specified financial statement information, and it has to be available to answer that investor's questions, according to the SEC. Give an accredited investor extra information and the same material has to go to the non-accredited investors as well — the rule does not allow a two-tier information set favoring the bigger checks.

What is Form D, and when does it actually have to be filed?

Form D is the notice, not a registration statement — it tells the SEC an exempt offering happened, not that the SEC has approved it. The deadline is 15 days after the first investor becomes irrevocably contractually committed to invest, and if that date lands on a weekend or federal holiday, the deadline moves to the next business day, per the agency. The filing itself goes through EDGAR, requires no fee, and the SEC notes filers get a one-hour window to complete it once logged in — a detail that matters more than it sounds, since a stalled internet connection mid-filing can mean starting over.

Rule 506(c) offerings carry one more restriction that 506(b) does not spell out in the same guidance: "bad actor" disqualification provisions that can bar certain individuals with disqualifying histories from participating in the round at all, according to the SEC.

Does the exemption change what investors actually receive?

Securities sold under Rule 506(c) are restricted securities, meaning investors take them on with resale limitations rather than freely tradable stock, the SEC's guidance states. That is standard for private-round equity generally and is part of why these rounds are priced and negotiated the way they are — the shares are illiquid by design, not by accident of the exemption chosen.

FAQ

• Can a startup switch from Rule 506(b) to Rule 506(c) mid-raise? The SEC's public guidance describes the two rules as separate exemptions with separate conditions; it does not address converting an in-progress 506(b) round into a 506(c) one, so founders weighing that question are working outside what the agency's own overview covers.
• Does filing Form D mean the SEC has approved the offering? No. Form D is a notice filing after an exempt sale has already occurred, not a registration or approval process, according to the SEC.
• Is there a dollar limit on how much a company can raise under Rule 506? No. Rule 506(b) and 506(c) both let a company raise an unlimited amount, which is what separates them from Rule 504's $10 million cap, per the SEC.
• What happens if a company advertises a 506(b) round publicly? The SEC's guidance states plainly that 506(b) prohibits general solicitation or advertising; the agency's overview does not detail its own enforcement consequences, so that question sits outside what this guidance answers.
• Do non-accredited investors get the same information as accredited ones? Yes, under 506(b) — whatever information a company gives its accredited investors, it must also make available to any non-accredited investors in the round, according to the SEC.

For a related reviews perspective, read How SAFE Notes Actually Work: Caps, Discounts, and the SEC Rules Founders Skip Past.