Rule 506(b) vs 506(c)

Allocator relevance: High — affects fundraising behavior, reputational risk, onboarding rigor, and the defensibility of the offering process.

Expanded Definition
Under 506(b), sponsors typically avoid broad advertising and rely on pre-existing relationships and controlled outreach; investor qualification is still required, but formal third-party verification is not mandated in the same way as 506(c). Under 506(c), general solicitation is permitted, but the issuer must take “reasonable steps” to verify accredited status—often through documentation or third-party verification services.
Allocators care because the rule choice signals how institutional and process-driven the manager is, especially around marketing controls and investor screening.

Decision Authority & Governance
Governance includes marketing policy controls, verification workflow, counsel sign-off, and audit-ready recordkeeping. Institutions look for consistency across pitch materials, subscription docs, and communications.

Common Misconceptions

• 506(c) is easier (verification creates friction and exposure).
• 506(b) prohibits all outreach (it restricts broad solicitation, not relationship-based process).
• Verification can be informal (it must be defensible).

Key Takeaways

• 506 choice changes compliance obligations materially.
• Verification and records are central under 506(c).
• Institutional allocators value process integrity over labels.