Exploring Rule 506(b) vs. 506(c) for Capital Raising

real estate syndication rules

Exploring Rule 506(b) vs. 506(c) for Capital Raising

In the realm of multifamily syndication, the nuances between Rule 506(b) and 506(c) play a pivotal role in shaping the landscape of capital raising. Understanding these distinctions is not just essential for compliance; it forms the bedrock for strategic decision-making that directly influences the trajectory of multifamily ventures. Multifamily syndicators, tasked with orchestrating the capital raising from diverse investors to fund real estate projects, must navigate these regulatory intricacies to optimize their fundraising efforts effectively.

Now, delving into the specifics:

  • Rule 506(b): This rule allows multifamily syndicators to raise money privately, meaning they don’t have to advertise to the public. It provides flexibility for including a few investors who may not be accredited (have high income or net worth). However, the catch is that the syndicator must have a pre-existing relationship with all investors before inviting them to invest.
  • Rule 506(c): In contrast, Rule 506(c) lets multifamily syndicators advertise their investment opportunities to the public. However, the investors targeted under this rule must be accredited, meaning they meet certain financial criteria. There’s no need for a pre-existing relationship, but the accreditation status of investors is verified through a strict process.
  • Regulation Crowdfunding (RegCF): This is another option for multifamily syndicators, providing a way to attract funding from a broader audience, including non-accredited investors. It’s governed by the JOBS Act, offering an alternative, but it comes with its own set of rules and limitations.

In this guide, we explore these rules to help new investors in multifamily syndication make informed choices that suit their capital-raising goals. Whether it’s understanding the private nature of 506(b), the publicity of 506(c), or the alternative avenue of RegCF, we aim to empower investors with the knowledge needed to navigate the complexities of real estate capital raising.

Deciphering Regulation D: Navigating Its Influence on Private Offerings 

For businesses and real estate syndicators seeking private capital, the Securities Act’s Regulation D has introduced new possibilities. Among its provisions, Rules 506(b) and 506(c) have emerged as popular choices for real estate syndications. However, understanding the nuances between these rules is crucial, as the suitability of each depends on the unique characteristics of your business and the type of investors you aim to attract.

This article focuses on demystifying the differences between Rules 506(b) and 506(c) to help you determine the most effective approach for raising capital in your specific situation.

Background on Regulation D

To understand how Regulation D came into existence, let’s take a quick look back. In 1982, the Securities and Exchange Commission (SEC) introduced Regulation D to facilitate funding for small businesses by granting them access to capital through exempt securities offerings, eliminating the need for a public offering. The framework also ensures investor protection by imposing limits on accredited investors, mandating disclosure of essential information, and prohibiting general solicitation.

Quick Overview of Rules 506(b) & 506(c)

Under Rule 506(b), you can raise an unlimited amount of money from accredited investors and up to 35 non-accredited investors, provided they meet specific sophistication requirements within 90 days, all without resorting to general solicitation.

  • Can accept accredited investors: YES
  • Can accept non-accredited investors: YES (up to 35)
  • Can advertise: NO

Conversely, Rule 506(c) permits advertising, but exclusively for accredited investors. Verification of each investor’s accreditation status is mandatory before they can participate in your investment opportunity.

  • Can accept accredited investors: YES
  • Can accept non-accredited investors: NO
  • Can advertise: YES

This guide aims to empower new investors by unraveling the intricacies of Regulation D and its associated rules, helping you make informed decisions for successful capital raising endeavors.

Rule 506(b): Open To Non-Accredited Investors, But No Advertising

For real estate syndicators, the decision to opt for Rule 506(b) when raising capital is often driven by its unique advantages. This rule not only welcomes accredited investors but, perhaps more notably, allows for the inclusion of up to 35 non-accredited investors in each offering.

Especially beneficial for those just starting in the capital-raising journey, Rule 506(b) provides an excellent opportunity to involve individuals from your existing network who may not be accredited investors. This inclusivity can be instrumental in securing investments while simultaneously building a favorable track record.

Investor Eligibility Breakdown under Rule 506(b):

Rule 506(b) extends its invitation to both accredited and non-accredited investors. Non-accredited investors, however, are required to meet specific financial sophistication criteria. This ensures that even those without high net worth or substantial income possess the necessary understanding of the investments they are considering.

In the context of a 506(b) offering, investors can often self-certify their accredited status without the need for extensive documentation, streamlining the process and reducing administrative hurdles. This flexibility makes Rule 506(b) particularly attractive for those who are just embarking on their capital-raising journey.

However, it’s essential to note some restrictions and considerations:

Solicitation Restrictions and Pre-Existing Relationships:

One drawback of Rule 506(b) is the prohibition on advertising or general solicitation. This means you cannot promote 506(b) deals on social media, use Facebook ads, or present them at conferences.

Moreover, all investors participating in a 506(b) offering must have a significant and pre-existing relationship with you as the issuer which can make raising large amounts of capital nearly impossible. This safeguard is implemented by the SEC to ensure that you are familiar with the investors and have a clear understanding of their financial situation.

How to maintain clear lines: To comply with this requirement, maintain clear and up-to-date records of your relationships with investors. Keep track of how you met them, notes from conversations, shared resources, and details about their investing experience and background. This diligence not only ensures compliance but also strengthens your professional relationships within the realm of real estate syndication.

Rule 506(c): Accredited Investors Only, But You Can Advertise

Now, let’s delve into Rule 506(c), an alternative avenue for real estate syndicators that brings distinct advantages. Unlike Rule 506(b), Rule 506(c) allows you to openly promote your investment opportunities, providing a significant opportunity to expand your outreach and attract capital. However, it’s important to understand the nuances and considerations associated with this option.

Open Advertising under Rule 506(c):

A standout feature of Rule 506(c) is the freedom to openly advertise your investment opportunities, leveraging online platforms and social media to reach a wider audience. Whether you’re considering posting your deal on professional networks like LinkedIn or running ads on platforms like Facebook, the possibilities are vast.

However, the trade-off is that you can only accept verified accredited investors into your deals. Each investor must undergo a verification process to confirm their accreditation status, either through a third-party service or by providing documentation from their CPA or attorney.

Verifying Accredited Investor Status:

While this verification process may seem like an additional step and potentially burdensome for investors, it’s a standard requirement. Many seasoned private placement investors are familiar with this procedure, and once you integrate it into your process and educate your investors about it, they typically view it as a routine part of the investment journey.

To comply with securities regulations and facilitate capital raising efforts under Rule 506(c), you must take reasonable steps to verify the accredited investor status of each participant. This involves reviewing financial documents such as tax returns, bank statements, or brokerage documents, or obtaining verification from a registered broker-dealer, certified public accountant, or attorney. Alternatively, third-party verification tools can be utilized, with careful consideration of associated expenses.

While the accredited verification process adds a layer of diligence compared to Rule 506(b), it is a necessary step for Rule 506(c) offerings. To address potential concerns from investors, provide early education about this process, ensuring they are well-informed and comfortable with the expectations.

Choosing Between Rule 506(b) And Rule 506(c) for Capital Raising

When choosing between Rule 506(b) and Rule 506(c) for capital raising, consider the following factors:

Existing Investor Pool:

  • Evaluate the composition of your current investor pool—accredited vs. non-accredited.
  • Assess the investors’ level of investing and financial experience.
  • Determine if there is sufficient capital within your existing pool or if you need to attract new investors.
  • Consider your investors’ familiarity with the accredited verification process.


  • Plan your strategy for spreading the word about your investment opportunity.
  • Decide if you intend to advertise the deal to individuals outside your current network.
  • Set an advertising budget if you plan to promote the opportunity.


  • Assess the time you have to raise the required capital.
  • Evaluate your investors’ readiness to participate in the proposed deal.
  • Determine the duration for which your offering will be open and whether it aligns with your advertising plans.

Real-World Examples:

Example #1 (Short-Term Goal – $500k in 30 Days):

  • With a short timeline and a goal of $500k in 30 days, a 506(b) offering is suitable.
  • Utilize existing relationships, especially with non-accredited investors.
  • Limited time for advertising, so relying on established connections is crucial.

Example #2 (Longer Timeline – $2 Million in 60 Days):

  • For a $2 million goal with a 60-day timeline, a 506(c) offering may be considered.
  • Leverage advertising to attract more accredited investors.
  • Focus on expanding the overall investor base for future opportunities.

These examples illustrate how your specific circumstances and goals can guide the choice between Rule 506(b) and Rule 506(c) for effective capital raising.

Legal Implications And Compliance Issues

Non-compliance with Rules 506(b) and 506(c) can lead to severe consequences, including fines and legal action. Understanding your legal responsibilities regarding these offering types is crucial to maintaining compliance and ensuring your ability to offer future deals to investors.

To adhere to compliance best practices for 506(b) and 506(c), meticulously document interactions with each investor, encompassing emails, conversations, and notes on their financial background. Utilizing a CRM tool like ActiveCampaign or HubSpot can aid in organizing and automating communications, facilitating ongoing education for investors.

When sharing deal information, explicitly communicate the type of offering, eligibility criteria for investors (accredited, non-accredited, or both), and whether they can openly share the opportunity. If opting for a 506(c) offering, proactively educate investors about the accredited verification process to avoid surprises.

Bonus: Regulation Crowdfunding (RegCF) – Open To Non-Accredited, Can Advertise, Raise Up To $5M

Fund managers have an additional avenue beyond Rules 506(b) and 506(c) known as Regulation Crowdfunding (RegCF) for acquiring capital from non-accredited investors through registered crowdfunding platforms.

RegCF operates under the JOBS Act, providing an alternative method for companies to offer securities for sale and raise capital from both accredited and non-accredited investors. This approach exempts securities-based crowdfunding from certain registration requirements, distinguishing it from private placements under Regulation D.

With RegCF, fund managers can raise up to $5 million for each acquisition, including both accredited and non-accredited investors without a pre-existing relationship requirement. However, utilizing a registered third-party platform and completing additional SEC filings introduce additional time and costs.

Utilizing RegCF allows fund managers to tap into a diverse pool of investors, offering an alternative funding option to expand the investor base and diversify capital-raising strategies. Combining a diversified fund via a 506(c) offering with a companion RegCF offering allows for flexibility in setting minimum investment amounts and provides investors with choices.

Considering the pros and cons of RegCF is essential when planning capital raising efforts, alongside understanding the nuances of 506(b) and 506(c) offerings. While RegCF allows the inclusion of non-accredited investors and advertising, it comes with limitations, including a $5 million cap and additional time, costs, paperwork, and legal considerations.

Addressing frequently asked questions, switching from a 506(b) to a 506(c) offering is possible, but fundraising for the former must cease at least thirty days prior. A 506(b) relationship, under SEC Reg D Rule 506(b), requires a substantive and pre-existing relationship with each investor, limiting the ability to approach new investors quickly.

The main difference between Rule 506(b) and Rule 506(c) lies in investor eligibility and advertising permissions. Rule 506(b) allows up to 35 non-accredited investors without general solicitation, while Rule 506(c) is designed for offerings that allow public advertisement but are restricted to accredited investors.

In summary, understanding the distinctions between Rule 506(b), Rule 506(c), and RegCF is crucial for real estate syndicators seeking to raise capital through private placements. Each offering type presents unique benefits and restrictions, helping syndicators tailor their approach to achieve success in capital-raising endeavors. A quick recap provides clear guidance on which offering type to choose based on specific objectives, whether it involves including non-accredited investors, publicly advertising deals, raising amounts exceeding $5 million, building relationships, or allowing self-certification for investor accreditation.