506(b) vs 506(c) Funds: What Fund Managers Need to Know About Compliance, Automation, and Investor Onboarding

If you're raising capital through a private investment fund, one of the first and most important decisions you'll face is whether to structure your offering under Rule 506(b) or Rule 506(c) of Regulation D. While both provide exemptions from SEC registration, they come with very different rules around investor accreditation, solicitation, and compliance.

In this guide, we’ll break down the differences between 506(b) and 506(c), what’s required to stay compliant, and how automation and digitized processes can help you manage AML/KYC, accreditation, and subscription flows more efficiently—and legally.

What Is Regulation D, Rule 506?

Regulation D under the Securities Act of 1933 provides exemptions that allow private funds to raise capital without registering with the SEC. The two most commonly used exemptions are:

• Rule 506(b) – Traditional, non-public offerings
• Rule 506(c) – Public offerings with strict investor verification

Both allow you to raise an unlimited amount of capital, but the rules on who you can accept money from and how you market the offering are very different.

Rule 506(b): Private Placement with Limited Advertising

Key Features: 

• No general solicitation or advertising allowed.
• You can raise capital from up to 35 non-accredited investors, but they must be sophisticated and receive specific disclosures.
• Accredited investors do not require disclosures but still must meet the SEC's definition.

Compliance Requirements: 

• Must have a pre-existing, substantive relationship with potential investors.
• Cannot publicly promote your offering online, on social media, or in mass emails.
• Must keep detailed records to prove you did not engage in general solicitation.

Common Pitfalls: 

• Accidentally promoting the fund via a podcast, blog post, or social media post could violate 506(b).

Rule 506(c): Public Offering to Accredited Investors Only

Key Features: 

• General solicitation and advertising ARE allowed.
• You can only accept investments from verified accredited investors.

Compliance Requirements: 

• Must take reasonable steps to verify investor accreditation (bank statements, tax returns, W-2s, or third-party verification).
• Cannot rely solely on self-certification

Common Pitfalls: 

• Failing to verify accreditation properly can invalidate your exemption and expose you to enforcement.

What Is Required for Compliance (Regardless of Offering Type)?

Regardless of whether you choose 506(b) or 506(c), all fund managers are responsible for:

AML/KYC Checks

Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance ensures your investors are who they say they are and that funds come from legitimate sources.

Key Steps:

• ID verification (driver's license, passport)
• Watchlist screening (OFAC, PEP, etc.)
• Source of funds and risk scoring

Accreditation Verification (506(c) Only)

Fund managers must collect and retain documentation proving each investor’s accredited status—bank statements, tax forms, third-party letters, etc.

Subscription Document Accuracy

Incorrect or incomplete documents can cause legal delays and investor frustration. Ensuring consistency and compliance across the full process is critical.

Automating Compliance: How Technology Keeps You Out of Trouble

Manual compliance processes are risky, inefficient, and error-prone. Fortunately, today’s fund portals and platforms can automate much of the heavy lifting.

Benefits of a Digitized Subscription Process:

• Streamlined AML/KYC screening
• Automated accreditation verification workflows
• Secure, compliant document storage and e-signatures
• Real-time status updates and tracking
• Error reduction and faster closes

By automating these processes, you not only reduce legal risk but also improve the investor experience—making it easier and faster for them to complete the onboarding process.

What You’re Allowed to Do vs. Not Allowed to Do

Final Thoughts

Choosing between 506(b) and 506(c) depends on your investor network, fundraising strategy, and marketing plans. Either way, fund managers must understand and adhere to strict compliance rules—or risk penalties and investor fallout.

By embracing automation and digital onboarding tools, fund managers can streamline AML/KYC, accreditation, and subscription processes—keeping their raises compliant, efficient, and investor-friendly.

Looking to digitize your capital raise and simplify compliance? Verivest’s fund admin and onboarding solutions have you covered. Contact us today to learn how we can support your next raise.