When raising capital for real estate investments and investing in private offerings, it is crucial to understand the regulatory framework that governs these offerings. Two of the most commonly used exemptions under Regulation D of the Securities Act of 1933 are Rule 506(b) and Rule 506(c). Each has distinct characteristics that impact how sponsors can raise funds, interact with investors, and maintain compliance with securities laws. Below, I break down the key differences to help you determine which structure may be best for your investment strategy.
506(b) Fund Structure: The Traditional Private Offering
A 506(b) offering is often considered the more traditional approach to raising capital for real estate investments. Here are some defining characteristics:
- No General Solicitation: A 506(b) offering prohibits general solicitation or advertising. This means you cannot publicly market your investment opportunity via social media, websites, or email campaigns.
- Accredited and Sophisticated Investors: While an unlimited number of accredited investors (individuals with a net worth exceeding $1 million, excluding their primary residence, or with an annual income of $200,000 individually or $300,000 jointly for the last two years) can participate, a 506(b) fund also allows up to 35 non-accredited but "sophisticated" investors who have sufficient knowledge and experience to evaluate the investment.
- Pre-Existing Relationships: Since public marketing is prohibited, fund sponsors must have a pre-existing substantive relationship with investors before offering them the investment opportunity.
- Self-Certification for Accreditation: Investors in a 506(b) offering can self-certify their accredited status without requiring third-party verification.
506(c) Fund Structure: The Modern Approach with Public Marketing
A 506(c) offering provides greater flexibility in capital raising but comes with additional compliance requirements. Here are the primary characteristics:
- General Solicitation Allowed: Unlike 506(b), a 506(c) offering allows sponsors to advertise investment opportunities through online platforms, social media, podcasts, and other public channels.
- Accredited Investors Only: Every investor in a 506(c) fund must be accredited, meaning non-accredited investors, regardless of sophistication, are not permitted.
- Mandatory Third-Party Verification: To ensure compliance, investors must provide evidence of their accredited status through third-party verification, such as tax returns, financial statements, or a letter from a registered CPA, attorney, or broker-dealer.
- Increased Transparency and Scalability: Because general solicitation is allowed, a 506(c) fund structure enables sponsors to scale their investor outreach and build a broader investor base more quickly than a 506(b) offering.
Choosing the Right Operator/Fund to Invest In
The choice between a 506(b) and a 506(c) fund structure depends on your investment goals, investor preferences, and market approach. In the end, your real estate investment should be based on the “jockey,” not the horse. Trusting the operator you are investing alongside is essential to ensure they consistently make good decisions regarding the investment(s).
At BPG Holdings, we understand the importance of selecting the right partner for each investment opportunity. Whether you are a seasoned investor or new to private placements, reach out to learn more about the process of how investing alongside BPG works. We are a 506(b) Reg D fund, so you will not see advertising. Our business grows as our relationship with our partners grows.
We look forward to partnering with you.
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