How Do the Private-Placement and Verified-Solicitation Paths Differ?

The workhorse safe harbor is where the vast majority of U.S. private capital flows. Hedge funds, venture capital funds, growth-equity deals, and most middle-market private placements use one of its two sub-paths. The choice between them is binary and consequential.

Why Does the Workhorse Safe Harbor Dominate?

Two structural advantages drive the workhorse safe harbor's dominance over the small-offering Reg D tier:

• No dollar cap: A 506 offering can raise $5 million or $5 billion. There is no aggregate offering-size limit.
• Federal preemption: 506 securities are "covered securities" preempted from state registration. States cannot require substantive registration; they are limited to notice filings and filing fees.

This combination makes 506 the default rule for any deal that touches multiple states or involves institutional investors.

What Is 506(b), the Traditional Private Placement Path?

The private Reg D safe harbor (the 506(b) path) is the older of the two sub-rules. It is the path most commonly used by venture funds, hedge funds, and traditional middle-market private placements.

What Is the 35 Non-Accredited Purchaser Limit?

The 35-purchaser cap is one of the most-tested numbers in the Reg D universe.

• The cap is on purchasers, not offerees. An issuer can make private offers to more than 35 people, but it cannot use general solicitation to reach them under this path.
• Non-accredited purchasers must be sophisticated (knowledge and experience to evaluate the investment, alone or with a purchaser representative).
• Bringing in even one non-accredited purchaser triggers information delivery: the issuer must furnish the specified information to each non-accredited purchaser a reasonable time before sale. The rule does not require it for accredited purchasers, though its note says the issuer should consider giving it to them too, given the antifraud provisions.

What Is the Reasonable-Belief Standard for Accredited Status?

For accredited investors in a 506(b) deal, the issuer needs a "reasonable belief" that the purchaser is accredited.

• A signed accredited-investor questionnaire can support that belief, absent contrary information.
• The issuer is not required to independently verify income, net worth, or license documentation.
• This is the looser of the two qualification standards under the workhorse safe harbor.

Exam Tip: Gotchas

• The 35 non-accredited limit is on PURCHASERS, not offerees. Privately sending the deck to 100 non-accredited prospects with pre-existing substantive relationships and selling to 35 can satisfy the purchaser cap. General solicitation is still prohibited, and selling to a 36th non-accredited purchaser exceeds the cap.
• One non-accredited purchaser triggers full information delivery to THAT purchaser, not to every purchaser. The rule does not require delivery to accredited investors.

What Is 506(c), the Path That Permits General Solicitation?

The verified-AI Reg D safe harbor (the 506(c) path) implements the JOBS Act mandate to permit general solicitation in qualifying private offerings.

What Counts as Reasonable Steps to Verify Accredited Status?

The verified-AI standard is a principles-based test, but the SEC has identified non-exclusive safe-harbor methods:

• Review of Internal Revenue Service (IRS) forms reporting income (for the income test)
• Review of bank statements, brokerage statements, credit reports, and tax assessments (for the net-worth test)
• Written confirmation from a licensed attorney, certified public accountant (CPA), registered broker-dealer, or registered investment adviser
• Verification by a credentialed third-party service
• A certification at the time of sale from a purchaser who bought as an accredited investor in the same issuer's earlier 506(b) offering before September 23, 2013 (the date the verified-AI path took effect) and still holds those securities
• For a person the issuer already verified as accredited, a written representation at the time of sale that the person still qualifies; that representation satisfies the verification duty for 5 years from the prior verification, absent contrary information

A 2025 SEC update permits the issuer to rely on purchaser representations that the purchaser is accredited AND that the investment is not third-party financed, provided the minimum investment is at least $200,000 (natural person) or $1 million (entity) AND the issuer has no actual knowledge to the contrary.

Exam Tip: Gotchas

• The verified-AI safe harbor requires VERIFICATION, not self-certification. A signed accredited-investor questionnaire can support the private safe harbor's "reasonable belief" but is NOT enough for the verified-AI path. Issuers using general solicitation must take reasonable steps to verify, such as checking income, net-worth, or license documentation, using a third-party verifier, or another method listed above.

How Do 506(b) and 506(c) Compare Side by Side?

Exam Tip: Gotchas

• Once an issuer takes the verified-AI path and uses general solicitation, it CANNOT later add non-accredited investors to that offering. The verified-AI safe harbor is accredited-only. The choice between the private safe harbor (35 non-accreds OK, but no marketing) and the verified-AI safe harbor (marketing OK, but accredited-only) is binary.
• Both safe harbors yield RESTRICTED securities. The buyer in a verified-AI deal still cannot turn around and resell freely. The restricted-share resale safe harbor's holding period applies just like in a private 506(b) deal.

What Should You Check on Exam Day?

• If the stem mentions general solicitation and a purchaser count above zero non-accredited investors, that fact pattern is impossible; the verified-AI safe harbor is accredited-only.
• Match "a questionnaire can support the belief" to the 506(b) reasonable-belief standard, not the 506(c) verification standard.
• Count non-accredited PURCHASERS, not people who received the offering materials, when checking the 35-purchaser cap.
• Remember both sub-rules produce restricted securities and federal preemption; the choice between them turns on solicitation and non-accredited investor participation, not on preemption or dollar cap.