For decades, venture capital fundraising happened quietly, built on warm introductions and closed networks. Rule 506(c) changed that by permitting general solicitation, allowing fund managers to publicly advertise offerings, provided every investor who ultimately participates is verified as accredited through defined methods. For fund managers weighing whether to market more openly, understanding the compliance mechanics is essential before making that shift.
What General Solicitation Actually Permits
Rule 506(c) allows fund managers to use public advertising, including websites, social media, webinars, and press coverage, to promote a fund offering. This is a meaningful departure from Rule 506(b), which prohibits general solicitation entirely and limits fundraising to investors with whom the manager has a pre-existing, substantive relationship.
The tradeoff is straightforward: in exchange for the ability to solicit publicly, managers relying on 506(c) must verify that every investor in the fund is accredited, using reasonable steps that go beyond simple self-certification. This verification standard is stricter than under 506(b), where self-certification is generally acceptable when there is no general solicitation involved.
The Verification Standard Under 506(c)
Regulators have outlined several non-exclusive methods that satisfy the verification requirement, though managers are not limited to these approaches.
Income-based verification typically involves reviewing tax returns, W-2s, or other official documentation for the two most recent years, along with a written representation that the investor expects to maintain the required income level.
Net worth-based verification requires reviewing documentation such as bank statements, brokerage statements, tax assessments, and a credit report, all dated within a defined recent window, to substantiate assets and liabilities.
Third-party confirmation allows a manager to rely on written confirmation from a licensed attorney, registered broker-dealer, investment adviser, or certified public accountant, stating that the professional has taken reasonable steps to verify the investor’s accredited status within a recent period.
Prior investment verification permits reliance on an investor’s earlier accreditation in the same or a related fund, provided the investor certifies no material change in status and there is no reason to believe otherwise.
Fund managers should document not just the outcome of verification but the specific method used and the basis for concluding it was reasonable given the circumstances, since this documentation becomes the primary defense in the event of a regulatory examination.
Marketing Considerations Alongside Verification
General solicitation introduces marketing exposure that fund managers should approach carefully. Public materials must avoid misleading performance claims, must include appropriate risk disclosures, and should be reviewed against applicable advertising rules, particularly for registered investment advisers subject to additional marketing regulations. The ability to market publicly does not relax substantive disclosure obligations under the fund’s offering documents.
Practical Steps for Implementation
Fund managers considering 506(c) should build verification into the fundraising workflow rather than treating it as a final gate before closing. This typically means establishing a documented verification method before launching solicitation, selecting a consistent approach across investors to reduce inconsistency, and retaining records well beyond the minimum required period given the potential for delayed regulatory inquiry.
Many managers choose to engage independent verification services or rely on third-party professional confirmation rather than reviewing sensitive financial documents internally. This approach offers two advantages: it reduces the compliance burden on fund staff who may not have expertise in evaluating financial documentation, and it creates a layer of independent verification that can strengthen the manager’s position if verification methods are later questioned. Regardless of the approach chosen, ultimate responsibility for reasonable verification remains with the fund manager.
Common Missteps to Avoid
Fund managers new to 506(c) sometimes assume that a signed accredited investor questionnaire alone satisfies the verification standard. It does not, when general solicitation is used. Others fail to adjust their verification approach when marketing tactics change mid-raise, inadvertently triggering 506(c) obligations for a raise initially structured under 506(b).
General solicitation offers venture capital fund managers a genuine opportunity to expand their investor base beyond traditional networks, but it comes with a meaningfully higher verification burden. Managers who build robust, well-documented verification processes from the outset, rather than retrofitting compliance after marketing has begun, are far better positioned to raise capital publicly while maintaining full regulatory standing.
