506(b) vs 506(c): Which Raise Fits Your Fund

Both are exemptions under Regulation D that let a private fund sell interests without registering the offering. They differ on two axes: who you can talk to, and who can invest.

Under 506(c), "reasonable steps to verify" means documentation: income verification via tax documents for the last two years, net-worth verification via recent bank and brokerage statements (plus a credit report to check liabilities), or a written letter from a third-party professional — a CPA, attorney, registered broker-dealer, or SEC-registered investment adviser — confirming accredited status within the past three months.

This is where 506(c) costs you in practice. Some LPs — especially wealthy, private ones — simply refuse to hand a first-time manager their tax returns or brokerage statements. The third-party letter is the standard workaround: their own CPA or attorney signs one page and no financial documents change hands. Verification services also exist that handle the review for a per-investor fee. Budget the friction into your close timeline: every 506(c) subscription has one more step than the same subscription under 506(b), and the step involves a document LPs don't enjoy producing.

Under 506(b), the same investor checks a box describing which accreditation category they meet. That asymmetry — questionnaire versus paperwork — is most of why managers who can raise under 506(b) usually do.

The honest test is where your next twenty LP conversations come from.

If the answer is your phone — past co-investors, colleagues, family offices you've worked with, people from prior syndications — that is a 506(b) raise. You have the pre-existing relationships, your LPs get self-certification instead of paperwork, and you keep the option of admitting a few sophisticated non-accredited investors (a parent, a longtime operator friend) if you accept the enhanced disclosure that comes with them.

If the answer is your audience — a podcast, a newsletter, an investor community you run, content that brings inbound interest from strangers — that is a 506(c) raise, because the thing that makes your raise work (talking about it publicly) is exactly what 506(b) prohibits. The verification overhead is real but per-investor and solvable; a muzzled raise is not. Audience-driven managers who choose 506(b) to avoid verification usually end up either raising slowly or drifting into solicitation they can't undo.

The sequencing rule is one-directional. An offering that started under 506(b) can generally transition to 506(c) — with counsel's guidance on how to paper the switch, and with the discipline that every investor admitted after the switch is verified as accredited. The reverse does not work: once you have generally solicited, you cannot retroactively claim 506(b) for that offering, because the investors you'd be admitting were, by definition, found through advertising.

The practical consequence: if you're unsure, start quiet. Run the raise under 506(b) discipline — no public statements about the offering — while you work your existing network. If you later conclude you need the audience, switch to 506(c) deliberately and verify from that point forward. The mistake that forecloses options is casual public mention of the raise early: one post naming your fund, its terms, and that you're raising can constitute general solicitation, and 506(b) is then unavailable whether or not the post produced a single investor.

The rule you pick is embedded in your subscription paperwork, which is why you decide before documents are finalized, not after.

The accredited investor certification does different work under each rule: under 506(b) it records the investor's self-certified accreditation category; under 506(c) it anchors the verification file — the tax documents, statements, or third-party letter that evidence your reasonable steps. The subscription agreement's investor representations shift in parallel: 506(b) subscription documents include the sophistication and disclosure acknowledgments that matter if non-accredited investors participate, while 506(c) documents represent accredited status and consent to verification. Your PPM's offering-procedures language also states which exemption the fund relies on.

On Fund Launch, Legal Canvas prepares the subscription agreement and accredited investor certification matched to whichever path you choose — so switching your Reg D election before launch is a settings change, not a re-drafting engagement. Independent counsel reviews the package either way.