When it comes to raising capital for real estate investments, there are different avenues available to sponsors and issuers. Two commonly used exemptions under Regulation D of the Securities Act of 1933 are Rule 506(b) and Rule 506(c). Understanding the differences between these two offerings is crucial for both investors and those seeking investment opportunities. In this blog post, we will explore the dissimilarities between 506(b) and 506(c) offerings and their implications in the realm of real estate investing.

1. The Basics: Rule 506(b) Offering

Rule 506(b) is a widely utilized exemption that has been in existence for several years. Under this provision, issuers can raise an unlimited amount of capital from up to 35 non-accredited investors and a total number of accredited investors. However, there are some restrictions that come with this exemption. For instance:

- Non-accredited investors must have a pre-existing relationship with the issuer, emphasizing the importance of prior acquaintance or substantive business relationships.

- Issuers are prohibited from using general solicitation or advertising to attract investors.

- Financial disclosures and certain information requirements must be provided to non-accredited investors to ensure they have sufficient information to make informed investment decisions.

2. The Introduction of Rule 506(c) Offering

Rule 506(c) was introduced as part of the Jumpstart Our Business Startups (JOBS) Act in 2013, allowing for general solicitation and advertising to be used in the fundraising process. The key features of a Rule 506(c) offering include:

- All investors, whether accredited or non-accredited, must be verified as accredited investors through reliable methods.

- There are no limitations on the number of accredited or non-accredited investors that can participate.

- Issuers can openly promote their offerings using various channels, such as websites, social media, and public advertisements.

3. Accredited Investor Verification

One of the major differentiating factors between Rule 506(b) and Rule 506(c) is the verification process for accredited investors. Under Rule 506(b), issuers can rely on self-certification from investors, which typically involves obtaining signed representations or questionnaires. On the other hand, Rule 506(c) mandates that issuers take reasonable steps to verify the accredited status of each investor, requiring more rigorous documentation and validation.

4. Access to Capital and Investor Pool

Rule 506(c) offerings provide greater access to a broader investor pool due to the ability to engage in general solicitation and advertising. By leveraging public marketing strategies, issuers can attract potential investors beyond their existing network, potentially leading to increased visibility and a larger capital pool. In contrast, Rule 506(b) offerings rely on established relationships and personal networks to secure investors, limiting the scope of outreach.

5. Implications for Investor Protection

Rule 506(c) offerings prioritize investor protection by requiring accredited investor verification. This verification process helps ensure that investors meet specific income or net worth thresholds, which are intended to indicate their ability to bear the risks associated with private investments. While Rule 506(b) offerings still require certain disclosures to non-accredited investors, the verification process is less stringent.

Conclusion:

Understanding the differences between Rule 506(b) and Rule 506(c) offerings is crucial for both real estate sponsors and investors. Each exemption has its own set of advantages and considerations. Rule 506(b) offers flexibility in terms of investor relationships but restricts advertising, while Rule 506(c) enables broader outreach through general solicitation but necessitates thorough accredited investor verification. By comprehending the nuances of these exemptions, investors can make informed decisions and sponsors can choose the most suitable method to raise capital for their real estate venture.