Private Placements Explained: 506(b) vs. 506(c), Reg D Rules & What Investors Should Know

Private placements sound mysterious, but in reality, they’re simply a way companies raise capital outside of public markets under Regulation D exemptions. For investors—especially accredited ones—understanding the nuances of 506(b) and 506(c) is essential. This guide will explain the basics, highlight key differences, and outline how to evaluate a 506(b) structure with a balanced, educational lens.

What is a 506(b) Private Placement?

A Rule 506(b) private placement is an offering exempt from SEC registration under Regulation D. Here’s what makes it unique:

• Investor Eligibility: Unlimited accredited investors and up to 35 non-accredited but “sophisticated” investors may participate.
• No General Solicitation: Issuers cannot advertise or broadly market the deal.
• Disclosure Obligations: Non-accredited investors must receive detailed disclosure (often similar to a prospectus).
• Verification: Investors self-certify their accredited status.

In short, 506(b) offerings are about quiet capital raising within existing relationships.

506(b) vs. 506(c): What’s the Difference?

While both fall under Reg D, they serve different purposes:

• 506(b)
  • Allows up to 35 non-accredited (sophisticated) investors.
  • Cannot use general solicitation or advertising.
  • Self-certification for accredited status.
• 506(c)
  • Accredited investors only (no exceptions).
  • General solicitation is permitted (advertising, online promotion).
  • Issuers must take “reasonable steps” to verify accreditation (CPA letter, tax returns, financial statements, etc.).

Bottom line: 506(b) = private and relationship-driven; 506(c) = public-facing but accredited-only.

Regulation D Rules for Private Placements

Reg D provides a legal framework that balances capital formation with investor protection. Key elements:

• Exemptions: 506(b) and 506(c) are the most widely used, but 504 also exists for smaller offerings.
• Preemption of State Laws: Federal law largely governs, though issuers must file Form D with the SEC.
• Resale Restrictions: Securities issued in private placements are restricted, meaning investors can’t freely resell without meeting holding periods or other exemptions.
• Disclosure Standards: While not as strict as public markets, disclosures must still avoid misrepresentation or omissions.

How to Evaluate a 506(b) Structure from an Investor’s Lens

From an investor’s perspective, 506(b) offerings require extra diligence:

• Manager/Issuer Background: What is their track record, integrity, and domain expertise?
• Structure & Terms: Equity vs. debt? Voting rights? Distribution waterfalls?
• Risk Factors: Illiquidity, concentration risk, market assumptions—are they clearly spelled out?
• Alignment of Interests: Fee structures and GP/LP commitments matter.
• Exit Strategies: What are the potential liquidity events or time horizons?

Because 506(b) offerings can include sophisticated—but not accredited—investors, clarity of disclosures and investor education are especially critical.

Why Private Placements Matter in 2025

In an era where traditional markets can feel volatile and crowded, private placements remain a vital mechanism for businesses to raise capital and for qualified investors to diversify portfolios. The evolution of 506(c) has expanded accessibility, but 506(b) continues to dominate because of its relationship-driven nature and flexibility.