What is the Difference Between Rules 506(b) and 506(c)?

Often, in social forum discussions concerning offerings under Rules 506(b) and 506(c) you only find good partial explanations. Here are the complete rules:

506(b) allows you to raise an unlimited amount of money from an unlimited number of Accredited Investors and up to 35 Sophisticated Investors. Investors can self-certify by attesting that they meet the definitions. However, you cannot use any means of general advertising or solicitation to promote the offering. To prove this, you must be able to demonstrate that you have a substantive, pre-existing relationship with every investor before you make any of them an offer to invest.

The pre-existing relationship has been further defined as knowing whether the investor is Sophisticated or Accredited before you make the offer. That means you must have already had a conversation about the investor’s finances and his or her business, finance, or investing experience to know if that person is Sophisticated or meets the qualifications as an Accredited Investor (for individuals: $1 million net worth or $200,000 income if single; $300,000 income if married).

506(c) allows you to raise an unlimited amount of money from an unlimited number of verified Accredited Investors. You can freely advertise your offering to everyone (including on a crowdfunding platform), but you must be reasonably assured that all investors are Accredited before accepting their funds.

The SEC has suggested that someone with a license (CPA, Registered Investment Advisor, Attorney, Broker-Dealer, etc.) or you can review the investor’s financial records (within 90 days of the investment) to determine if that person is Accredited and provide you with a certification letter. The investor must provide further assurance that he or she is accredited, which is usually done through a Subscription Agreement where the individual certifies that he or she meets the definition of an Accredited Investor.