How to Fund Raise Capital Without Going to Jail: 506(b) vs 506(c)
episode
Making Billions: The Private Equity Podcast for Fund Managers, Alternative Asset Managers, and Venture Capital Investors
32 min
1 speaker
8 chapters
transcribed 1 month ago
Transcript
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Transcript generated automatically by AI and may contain errors.
What is the difference between Regulation D Rule 506(b) and Rule 506(c) for fund managers?
One decision, two letters, and it determines whether you can legally raise capital or whether the SEC comes knocking. See in this episode of Making Billions, I'm gonna show you the difference between a regulation D five oh six B and a five oh six C offering so that you can determine with your attorney which exemption your fund should use, how much it costs, and how to set it up without making the common mistakes that quietly obliterate first time fund managers. Let's dive in. Before we go in, nothing in this episode is legal, financial, or investment advice. This is for educational purposes only. You wanna always work with your licensed securities attorney for your specific situation. Now let's build.
Picture this. You're standing at a fork in the road. Both paths lead to the same destination, raising capital for your investment fund. But they have totally different rules. Break the rules on either path, and the SEC can shut down your raise, force you to return, invest your money, and put your name on a public enforcement letter. That is not a small thing. That is a fund ending, career ending, potentially jail time invoking thing. This is very serious. See, I see managers guess at this decision all the time. They pick one, start raising, and six months later, they find out they have been doing it all wrong. And by then, they have a mess to clean up that costs forty to eighty thousand dollars. And that's if it can even be cleaned up at all.
So we're gonna go deep today. You're gonna leave here knowing which path is right for you, what it costs, how long it takes, what kind of marketing plan it requires, and what your attorney needs to review before you even raise a single dollar. Let's dive in. So here's the short version. If you want to raise private capital within the United States, you normally have to register your fund with the SEC. Registration costs can climb past $200,000 and take six to 12 months. Nobody wants to raise a fund with that type of time frame. But under Regulation D, that is the legal shortcut. The SEC says if you follow our specific rules, you don't need to register like a public company. And for fund managers, those two rules, they matter more than anything.
It's the Rule 506B and Rule 506C. That is it. Regulation D is actually a gift to private fund managers. The SEC created it so that private markets could function without the full weight of public market compliance. You with me so far? Both of these rules let you raise unlimited capital. Both require a form D filing within 15 days of your First close. Your lawyer will tell you that. But the big difference is who you can raise from and how you can find them. Can you see that? Let's go deep on each one. So let's start with the five oh six B. I call this one the workhorse. It's the OG of Fund Formations. This has been around since the early eighties and it has launched more private funds than any other exemption in history.
Most of the funds you admire were built on this rule. It is proven and it is reliable. And when you use it right, it is clean. So here is the workhorse in plain English. You can raise an unlimited amount of money from an unlimited number of accredited investors. You can bring in up to thirty-five non accredited investors, just as long as they are sophisticated, meaning they understand the risks. You do not need to verify anyone's accreditation the hard way. A signed questionnaire is enough. That sounds good, right? But here's the catch. And this is the one that burns most managers. You cannot publicly solicit investors. So think about what that means. You start a company and you can't advertise. Yeah. See the thing about high finance is this is very network heavy.
And so if you have networks that can facilitate at a full raise, let's say a hundred million dollars, not many do, but if you can, then maybe this is a good one. It's a nice and it's clean. So really what that means is you cannot post on LinkedIn saying, We are accepting LP commitments or interested in investing in our fund, please reach out.
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Chapters
8 chapters
1
What is the difference between Regulation D Rule 506(b) and Rule 506(c) for fund managers?
0:00–3:38
2
How does the pre‑existing relationship rule affect 506(b) fundraising?
3:38–7:09
3
When should a manager choose 506(b) over 506(c) based on their network size?
7:09–11:19
4
What are the compliance costs and timelines for a 506(b) offering?
11:19–15:46
5
How does the 2025 SEC no‑action letter change accreditation verification for 506(c)?
15:46–20:10
6
What are the four key questions to decide which exemption to use?
20:10–24:33
7
What are the most common compliance mistakes that can end a fund raise?
24:33–28:28
8
How can a fund manager build a marketing plan that aligns with their chosen exemption?
28:28–31:43
Speakers
1 identifiedMore from Making Billions: The Private Equity Podcast for Fund Managers, Alternative Asset Managers, and Venture Capital Investors
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