Yes, but you almost never should. Rule 506(b) is the exemption most startups use. It lets you sell to any number of accredited investors and up to 35 sophisticated non-accredited investors. But taking even one non-accredited investor triggers disclosure requirements that usually cost more than the check is worth. If you want many small checks from the public, Regulation Crowdfunding (up to $5 million in 12 months) is built for that.
Key takeaways
- Most seed rounds rely on Rule 506(b) and take money only from accredited investors.
- One non-accredited investor in a 506(b) round means preparing financial statements and an offering document for that investor.
- Rule 506(c) lets you advertise your round publicly. In exchange, every investor must be accredited, and you must verify it.
- If a friend doesn’t qualify, the honest options are to wait, have an accredited person invest in their own name, or run a Reg CF campaign.
Why does the SEC care who invests in my startup?
Selling stock, SAFEs or convertible notes is selling securities. You must either register the offering with the SEC, which is impractical for a startup, or fit within an exemption. Almost every startup round uses Regulation D, and Regulation D is built around the “accredited investor.”
What is an accredited investor?
Individuals qualify if they meet any one of these tests:
- Income: more than $200,000 in each of the last two years ($300,000 together with a spouse or spousal equivalent), with a reasonable expectation of the same this year.
- Net worth: more than $1 million, alone or with a spouse or spousal equivalent, not counting their primary residence.
- Professional license: holds a Series 7, 65 or 82 license in good standing.
- Insider: is a director, executive officer or general partner of the company selling the securities.
- Fund employee: is a “knowledgeable employee” of a private fund, for investments in that fund.
Entities are tested on their own:
- A corporation, LLC, partnership, trust or 501(c)(3) with more than $5 million in assets, not formed to make this investment
- Any entity owning more than $5 million in investments, not formed to make this investment
- An entity whose equity owners are all accredited
- A family office with at least $5 million under management, and its family clients
The dollar thresholds have not been raised since the 1980s, apart from excluding the primary residence. Congress has considered bills to widen the definition, but as of this writing the tests above are the law.
Who is a non-accredited investor?
Anyone who doesn’t meet one of the tests above. That includes most friends and family, early employees who aren’t officers, and entities that don’t qualify on their own (for example, a family trust with $2 million in assets).
Can I take money from someone who is not accredited?
Under Rule 506(b), you can include up to 35 non-accredited investors in an offering, but only if:
- They are sophisticated. Each one, alone or with a purchaser representative, has enough financial and business experience to evaluate the investment.
- You get the required disclosure to them before they invest (see the next section).
- You don’t advertise. 506(b) bars general solicitation, so investors should come from your existing relationships.
What does one non-accredited investor cost me?
Rule 502(b) requires you to give every non-accredited investor, before the sale, a disclosure document similar to a Regulation A offering circular. That includes financial statements, which may need to be reviewed or audited depending on the size of the raise. You also have to give them any information you give your accredited investors, and a chance to ask questions.
It isn’t IPO-level disclosure, but it is a real project with accountant fees and weeks of work. For a $25,000 check, it almost never makes sense. Westaway’s advice is to keep your round accredited-only.
What’s the difference between 506(b) and 506(c)?
| Rule 506(b) | Rule 506(c) | |
| Public advertising | Not allowed | Allowed |
| Non-accredited investors | Up to 35, sophisticated, with disclosure | None |
| Proving accredited status | Investor self-certifies (questionnaire) | You must take reasonable steps to verify |
| Typical use | Most seed rounds | Rounds raised by public pitching (demo days, social media, platforms) |
Verifying under 506(c) used to mean collecting tax returns or a letter from the investor’s CPA or attorney. Since March 2025, SEC staff guidance has also let a company rely on a high minimum investment, generally $200,000 for individuals and $1 million for entities, together with the investor’s written statement that they are accredited and aren’t financing the investment with borrowed money. That makes 506(c) more practical for rounds with large checks.
What is the accredited investor questionnaire?
It’s a short form in which each investor states which accredited test they meet. Under 506(b), it documents your reasonable belief that the investor is accredited. On its own, it is usually not enough verification for 506(c). Never help an investor complete a questionnaire they don’t actually qualify for. The exemption for your whole round depends on it.
Whichever exemption you use, the anti-fraud rules still apply. Anything you tell investors, in a deck, an email or a call, must be accurate and can’t leave out something that makes it misleading.
When does equity crowdfunding make sense?
Regulation Crowdfunding (Reg CF) lets anyone invest, including non-accredited investors:
- You can raise up to $5 million in 12 months.
- The raise must go through an SEC-registered funding portal or broker-dealer.
- You file a Form C with financial statements, reviewed or audited depending on how much you raise, and then file annual reports.
- Non-accredited investors are subject to annual limits based on their income or net worth. Accredited investors have no limit.
Reg CF works well for consumer brands with a loyal community. It’s more paperwork than a SAFE round, so choose it on purpose and not as a workaround for one friend’s check.
What should I tell a friend or family member who doesn’t qualify?
You have three honest options:
- Don’t take the money now. Thank them, and offer a way to support the company that isn’t an investment.
- An accredited family member invests. For example, a parent who qualifies can invest in their own name. The investment must actually be theirs. A stand-in investing for someone who doesn’t qualify is not allowed.
- Run a Reg CF campaign if many supporters want in.
See What Do I Tell My Friends and Family Interested in Investing in My Startup?
What filings follow the raise?
Depending on the type of fundraise, you may need to file a Form D with the SEC and make required state “blue sky” filings. See What Comes After Fundraising?
Related: Startup Funding: SAFE · Equity Crowdfunding: What Startup Founders Should Know
