506(b) vs. 506(c): What’s the Difference in Real Estate Fundraising?
If you’re raising capital for real estate or private equity deals in the U.S., chances are you’ve heard of Regulation D, specifically Rule 506(b) and Rule 506(c). These rules govern how you can raise money from investors while staying compliant with the SEC. But what exactly is the difference between the two, and how do you know which one is right for your deal?
What Are 506(b) and 506(c)?
Both 506(b) and 506(c) are exemptions under Regulation D that allow companies to raise unlimited capital without registering the offering with the SEC. That means less red tape and faster access to funding.
But while they may seem similar on the surface, the differences between them can have a huge impact on your fundraising strategy.
General Solicitation: Who Can You Market To?
This is one of the biggest differences.
- Rule 506(b) does not allow general solicitation. That means you can’t advertise your deal publicly. You can only share it with people you already have a pre-existing, substantive relationship with. Think friends, family, and close business connections. (U.S. Securities and Exchange Commission)
- Rule 506(c) does allow general solicitation. You can promote your offering on social media, podcasts, email campaigns, anywhere however, you can only accept accredited investors, and you have to verify their status.
Who Can Invest?
Rule 506(b) allows you to raise capital from an unlimited number of accredited investors, as well as up to 35 non-accredited but sophisticated investors. This provides a bit more flexibility, especially when you’re working with friends or family members who may not meet the accredited investor criteria. On the other hand, Rule 506(c) is more restrictive as you can only raise funds from accredited investors, with no exceptions.
How Is Accreditation Verified?
Under Rule 506(b), investors can self-certify that they’re accredited—no paperwork, income verification, or third-party validation is required. It’s a faster and more private process, but the tradeoff is that you’re not allowed to advertise the offering, per the U.S. Securities and Exchange Commission (SEC).
In contrast, Rule 506(c) requires you to take “reasonable steps” to verify that each investor is accredited. This could include reviewing tax returns, bank or brokerage statements, or obtaining a letter from a CPA or attorney, according to the SEC.
The good news is that, as of 2024, the SEC issued updated guidance that simplifies this process. You can now verify accreditation through minimum investment thresholds combined with a written representation from the investor. For instance, a $200,000+ individual investment or a $1,000,000+ entity investment can be sufficient. This update helps streamline compliance while still ensuring investor protection. (U.S. Securities and Exchange Commission)
Capital, Compliance, and Conversions: What You Need to Know
Both Rule 506(b) and 506(c) allow you to raise an unlimited amount of capital. Whether you’re looking to raise $500,000 or $50 million, there’s no cap on how much you can bring in under either exemption.
From a compliance standpoint, both rules require that you file a Form D with the SEC within 15 days of receiving your first investment. Additionally, both 506(b) and 506(c) are subject to the SEC’s “bad actor” disqualification rules. This means that if anyone involved in your offering, such as a sponsor or manager, has a problematic regulatory history, it could disqualify your exemption entirely.
It’s also important to understand that you can’t switch between 506(b) and 506(c) mid-offering. Once you begin marketing publicly, you’ve entered 506(c) territory and cannot claim it’s a 506(b) deal. If you want to pivot, you’ll need to officially close the 506(b) offering, start a new raise under 506(c), and file a new Form D to reflect the change.
Which One Should You Choose?
It depends on your goals and network.
Choose 506(b) if:
- You already have strong investor relationships.
- You want to include a few non-accredited investors.
- You prefer less compliance and don’t need to publicly market your offering.
Choose 506(c) if:
- You want to reach new investors through public marketing.
- You’re okay with verifying investor accreditation.
- Your network is mostly (or exclusively) accredited investors.
Final Thoughts
Both 506(b) and 506(c) can be powerful tools for raising capital but they come with very different requirements and strategies.
- 506(b) is all about relationships, discretion, and flexibility.
- 506(c) is built for growth, scale, and exposure.
As with any legal decision, it’s wise to consult a securities attorney before launching your offering. But understanding the basics of these rules can help you make the right call for your business and your investors
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