Choosing the Right Rule 506 Exemption for Real Estate Investing – a or b?

Rule 506 of Regulation D involves the selling of securities without the need to register those securities with the U.S. Securities and Exchange Commission (SEC). Going public is not that easy for the majority of real estate investors. The exemptions available under Rule 506 allows companies to raise funds from investors without registering a public offering. These exemptions provide an alternative to the expensive and complex process of SEC registration.

Rule 506(b) vs. 506(c)
Categorized under the same Regulation D, Rule 506(b) and 506(c) have similarities, but also some important differences. For anyone considering raising capital through one of these Rule 506 exemptions, it is important to understand these differences.

With both Rule 506(b) and Rule 506(c), the amount of capital you can raise is unlimited. Rule 506(b) allows you to have up to 35 non-accredited investors. Rule 506(c) allows none. General solicitation is permitted under Rule 506(c), but not under Rule 506(b). With Rule 506(b), investors must self-verify. With Rule 506(c), issuers must verify the accredited status of investors. Both Rule 506 exemptions require Form D. Under Rule 506(c), state notices are required in some states. They are not required in any states under Rule 506(b).

Choosing Between Rule 506(b) and Rule 506(c)
Determining whether to choose to operate under Rule 506(b) or 506(c) may hinge on whether you know people in your network who would be interested in investing in your opportunity. Rule 506(b) does not permit general solicitation, which leaves only those you already know as potential investors under that Rule. But you are not limited to using only accredited investors under Rule 506(b).

If you need to solicit investors outside of your network, your only Regulation D exemption option is Rule 506(c). You must only receive investments from accredited investors under this Rule.

After selling securities to their network in the first round using Rule 506(b), issuers may choose to raise another round of capital by advertising the offering under Rule 506(c) to bring in accredited investors.

In Conclusion
Both Rule 506(b) and Rule 506(c) give real estate investors a great opportunity to raise funds for the down payment on a real estate deal. If you are a real estate investor, you may be able to scale your business through the use of one or both Regulation D Rule 506 exemptions.