Rule 505 vs. 506 Regulation D: Key Differences Every Investor Should Know
Rule 505 and Rule 506 of Regulation D are SEC exemptions letting private companies raise capital without full public registration; 505 caps at $5 M and limits unaccredited investors to 35, while 506 has no dollar cap and allows unlimited accredited investors.
Startups often file “Form D” late at night, mixing up the two rules because both sound like “friends-and-family” rounds. One founder told me he printed 506 documents, then panicked when investors asked, “Why not 505?”
Key Differences
505 caps total raise at $5 M, restricts advertising, and caps unaccredited investors at 35. 506(b) and 506(c) remove the cap, allow unlimited accredited investors, and 506(c) even permits general solicitation if purchasers are verified.
Which One Should You Choose?
If you need under $5 M and have fewer than 35 unaccredited backers, 505 is cheaper. Raising more or courting strangers? Pick 506(c) for ads or 506(b) for quiet rounds.
Can I switch from 505 to 506 mid-offering?
Yes, file an amended Form D noting the shift; investors must consent.
Does 506(c) require extra paperwork?
Only added “reasonable steps” to verify accredited status—bank letters or CPA confirmations.