506(b) vs. 506(c) overview
When forming a venture fund under Regulation D, Leads can choose between two commonly used exemptions—506(b) and 506(c). Both allow you to avoid a public offering registration, but they differ in how you can solicit investors and the verification requirements for your LPs.
506(b)
- No public advertising: You cannot publicly market or advertise your fund.
- Accredited investor verification: While you should ensure your investors are accredited, the verification process can be more flexible, as LPs often self-certify.
Why choose 506(b)?
Leads who already have a close network of potential accredited LPs and do not plan to advertise publicly often choose 506(b). This option simplifies onboarding because investors generally self-verify their accreditation status.
506(c)
- Public advertising allowed: You can openly market your fund to a broader audience via social media, press releases, and other channels.
- Strict accreditation verification: Every investor must provide evidence of their accreditation status (e.g., third-party verification, CPA letter, etc.).
- Rolling funds: Rolling funds are always set up as 506(c), allowing for ongoing fundraising and the ability to publicly advertise.
Why choose 506(c)?
Leads looking to broaden their reach and market more publicly often choose 506(c). Although it requires stricter verification, the ability to publicly solicit can help Leads attract a larger pool of potential LPs. This is attractive if you plan to solicit investors through X, a newsletter, etc.