506 B vs 506 C: The Definitive Guide to Private Offering Success

506 B vs 506 C: The Definitive Guide to Private Offering Success

Navigate the complexities of Rule 506 B vs 506 C offerings with expert insights on choosing the right exemption. Learn proven strategies for investor verification, marketing compliance, and capital raising success.

Domingo Valadez

Feb 3, 2025

Blog

Understanding The Modern Private Offering Landscape

When raising private capital, Regulation D provides the foundation for how companies can compliantly sell securities. The two most common exemptions, Rules 506(b) and 506(c), offer different paths for connecting with investors. Understanding the key differences between these options helps companies make strategic choices about their fundraising approach.

Key Differences Between 506(b) and 506(c)

The most fundamental distinction lies in how companies can market their offerings. Under Rule 506(b), companies cannot advertise or generally solicit investors - they must rely on existing relationships and networks. In contrast, Rule 506(c) allows broad marketing and advertising to find investors, opening up new possibilities for reaching potential backers.

This expanded marketing freedom comes with stricter investor requirements. While 506(b) allows up to 35 sophisticated non-accredited investors alongside accredited ones, 506(c) is limited to accredited investors only. For instance, under 506(c), companies must thoroughly verify accredited status through financial documents or third-party confirmation from CPAs or attorneys.

Disclosure obligations also vary between the rules. Companies using 506(b) must provide extensive documentation when non-accredited investors participate. When dealing only with accredited investors under either exemption, disclosure requirements are more flexible - though providing detailed information remains good practice for building trust.

The SEC introduced Rule 506(c) in September 2013 as part of the JOBS Act to modernize private offerings. For the first time, this allowed companies to publicly market private securities deals, provided they verify investor accreditation. While this represented an important shift, Rule 506(b) remains more widely used for raising capital. Learn more about both options here.

Navigating the Choice Between 506(b) and 506(c)

Companies must carefully weigh several practical factors when choosing between these exemptions. Key considerations include:

• Size and scope of existing investor networks
• Marketing needs and capabilities
• Resources available for investor verification
• Timeline for raising capital
• Target investor profile

Making an informed choice between 506(b) and 506(c) requires balancing these elements against the company's specific circumstances and goals. With proper planning, either path can provide an effective route to successful private capital formation.

Maximizing Capital Raising Potential

When structuring a real estate syndication, deciding between Rule 506(b) and Rule 506(c) can make a substantial difference in your ability to raise capital. Let's explore how to choose the right option based on your investor relationships and fundraising goals.

Leveraging 506(b) For Established Networks

For syndicators who already have strong connections with investors, Rule 506(b) often proves to be the most practical choice. This exemption allows you to work with both accredited investors and up to 35 sophisticated non-accredited investors without having to verify their accredited status. For example, if you have built trust with a solid group of past investors, you can quickly tap into those relationships to fund new projects under 506(b).

Harnessing 506(c) for Broader Reach

On the other hand, Rule 506(c) shines when you want to expand beyond your current network through general solicitation. This means you can openly market your offering through social media, email, and advertising to find new accredited investors. While this requires more rigorous investor verification, the expanded marketing options can help you connect with a much larger pool of potential investors.

Strategic Considerations for Optimal Results

Recent data shows some interesting patterns in how these exemptions are used. Between July 2019 and June 2020, offerings under Rule 506(b) raised approximately $1.4 trillion compared to $69 billion under Rule 506(c) - a difference of more than 20 times. You can find more details in this comprehensive analysis. These numbers highlight how widely used and trusted 506(b) remains.

Market conditions also play a key role in choosing between the two options. During strong markets, 506(c)'s broader reach may help you take full advantage of investor enthusiasm. In more uncertain times, the relationship-based approach of 506(b) could provide more stability.

To maximize your fundraising success, carefully evaluate your current investor network, marketing capabilities, and ideal investor profile when selecting an exemption. Tools like Homebase can help streamline your investor communications and compliance processes regardless of which path you choose.

Mastering Investor Qualification Strategies

Understanding the investor qualification requirements between 506(b) and 506(c) regulations is essential for developing an effective fundraising strategy. The key differences in who can invest and how they must be verified directly impact how you'll build and manage your investor relationships.

506(b): Balancing Accredited and Non-Accredited Investors

Rule 506(b) offers more flexibility by allowing investments from both accredited investors and up to 35 non-accredited investors. This broader investor pool comes with an important caveat - non-accredited investors must meet specific knowledge requirements. They need to demonstrate sufficient financial and business experience to properly assess investment risks and benefits.

When working with non-accredited investors, clear communication becomes especially important. For instance, providing detailed documentation about risks, terms, and expected returns helps ensure all investors make informed decisions. Using investor management platforms can help organize and share these materials efficiently.

506(c): Focusing on Accredited Investors

Under Rule 506(c), you can only accept investments from accredited investors, but with more stringent verification requirements. Beyond just having investors self-certify, you must take concrete steps to confirm their accredited status. This typically involves reviewing financial records like tax returns and bank statements, or getting verification from CPAs or attorneys.

While the verification process demands more effort, modern tools can help streamline these checks. For example, digital platforms now offer automated accreditation verification services that can save significant time compared to manual reviews.

The core distinctions between these regulations center on investor access and verification standards. With 506(b), you get a mix of accredited and sophisticated non-accredited investors but lighter verification. For 506(c), your pool is limited to accredited investors with strict verification protocols. For more details on these differences, check this comprehensive overview.

Building and Maintaining Compliant Investor Networks

Regardless of which exemption you choose, maintaining a compliant investor network requires ongoing attention. Beyond initial verification, you'll need systems for managing investor communications, tracking distributions, and keeping documentation current.

Here are some key practices for building a strong investor network:

• Create clear processes for initial investor screening
• Maintain organized records of all verification documents
• Set up regular communication channels
• Monitor ongoing compliance requirements
• Review and update investor information periodically

By thoroughly understanding these qualification requirements, you can develop appropriate systems for managing your investor relationships. This foundation helps ensure both regulatory compliance and efficient capital raising for your projects.

Building Effective Marketing Campaigns

How you market your securities offering depends heavily on whether you use a 506(b) or 506(c) exemption. This distinction affects every aspect of your investor outreach strategy and determines what marketing methods you can use to attract potential investors.

Marketing Restrictions Under 506(b)

The 506(b) exemption comes with strict marketing limitations. General solicitation and advertising are not allowed, which means you cannot openly promote your investment opportunity through channels like social media ads, investment-focused webinars, or press announcements.

That said, 506(b) still provides ways to market effectively through existing relationships. You can reach out to people already in your network - previous investors, business contacts, and other established connections. This makes having a strong network and well-maintained investor database essential for success.

Marketing Options Under 506(c)

With 506(c), you have much more freedom to market your offering. Since general solicitation is permitted, you can use diverse marketing channels to find investors. This includes running LinkedIn ad campaigns, hosting public investment webinars, and sending targeted email outreach.

However, this marketing flexibility comes with an important requirement: you must verify that all investors are accredited. Tools from platforms like Homebase can help streamline the verification process while maintaining compliance.

Developing Trust and Recognition

No matter which exemption you select, building credibility and brand awareness is crucial. Content marketing works well for both 506(b) and 506(c) offerings. By sharing valuable industry insights and investment knowledge, you position yourself as a trusted expert and naturally draw interest from potential investors.

For 506(b), focus your content on nurturing existing relationships. With 506(c), you can distribute content more broadly to attract new qualified investors.

Choosing the Right Marketing Strategy

Your ideal marketing approach should match your offering type and target investors. A 506(b) offering might work better if you have strong existing networks and prefer relationship-based outreach. If you want broader reach and can handle thorough investor verification, 506(c) marketing freedom could better serve your goals.

Key factors to evaluate when planning your campaign:

• Target Investor Profile: Who needs to see your offering?
• Investment Opportunity: What makes your offering compelling?
• Resources: What budget and team can you dedicate?

By aligning your marketing strategy with your exemption type and investor targets, you can run an effective campaign while staying compliant. Tools like Homebase provide additional support by helping manage investor communications and fundraising workflows efficiently.

Implementing Robust Compliance Systems

Having solid systems for managing compliance is essential whether you choose a 506(b) or 506(c) offering. A well-structured compliance framework helps protect your offering from legal issues while building trust with potential investors. When investors see your commitment to following regulations properly, they gain confidence in participating in your deals.

Building a Foundation for Compliance

Start by establishing thorough documentation practices for your compliance system. Keep detailed records of all offering materials, investor communications, and verification procedures. For 506(b) offerings, focus on documenting non-accredited investor sophistication assessments. With 506(c) offerings, maintain complete records showing how you verified accredited investor status.

Your compliance framework needs clear steps for meeting regulatory requirements. Stay current on securities laws and make sure all offering activities follow the rules. This is particularly important given how 506(b) and 506(c) have different rules about advertising and solicitation.

Integrating Compliance into Operational Workflows

The most effective approach is weaving compliance into your daily operations rather than treating it as a separate task. For example, include verification checklists as part of how you bring on new investors. Taking preventive steps like this helps you avoid compliance problems before they happen.

Making compliance part of standard procedures can boost efficiency significantly. When you automate key steps, you reduce manual work and mistakes while freeing up time. For instance, Homebase offers automated tools that make verifying accredited investors much simpler and faster.

Maintaining Accurate Records and Automating Key Processes

Keeping precise records throughout your offering is crucial. Track all investor contributions, distributions, and communications. Good record-keeping makes audits easier and provides clear documentation if questions come up.

Using software to handle compliance tasks improves both efficiency and accuracy. Tools that manage investor data, generate reports, and handle document signing reduce manual effort and mistakes. This technology-based approach lets you maintain compliance while growing your operations.

Leveraging Technology for Enhanced Compliance

Modern software plays a key role in building strong compliance systems. Specialized tools can automate investor verification, document management, and reporting tasks. These solutions improve both efficiency and consistency in your compliance efforts. The Homebase platform provides a central system for managing real estate syndication compliance, helping you follow regulations while building investor confidence. This lets you focus on growth while meeting the specific requirements for both 506(b) and 506(c) offerings.

Making The Strategic Choice: Your Path To Success

Selecting between 506(b) and 506(c) is a key decision that shapes how effectively you can raise capital. Making an informed choice requires carefully weighing your current resources, fundraising goals, and existing investor relationships. Let's look at how successful companies evaluate these options to maximize their fundraising efforts.

Evaluating Your Investor Network and Marketing Needs

Your existing investor relationships play a major role in this decision. If you have strong connections with qualified investors who trust you, 506(b) could be your best path forward. This option lets you work with your established network without the extra steps of investor verification that 506(c) requires. For instance, many real estate syndicators who regularly work with the same group of investors find 506(b) more efficient.

But if you want to expand beyond your current network, 506(c) opens up new opportunities through general solicitation. This means you can openly promote your offering and connect with more accredited investors. However, successful 506(c) campaigns need solid marketing plans and resources - more than the relationship-based approach of 506(b).

Assessing Compliance Capabilities and Long-Term Growth

Your ability to handle compliance requirements matters too. 506(c) has strict rules about verifying accredited investor status, which means you need robust systems and processes in place. While 506(b) is less demanding on verification, it still requires careful documentation and compliance tracking, especially when non-accredited investors are involved.

Think about how your choice fits into your long-term plans. Will your current investor network support your future capital needs, or do you need the wider reach that general solicitation provides? Your exemption choice should align with both your immediate goals and your growth strategy.

Decision Matrices and Planning Tools

Create a simple decision matrix to compare these options based on your specific situation. Key factors to consider:

• Existing Investor Network: How many trusted investors do you already work with?
• Marketing Resources: What budget and expertise can you dedicate to promotion?
• Compliance Capabilities: What systems do you have for investor verification and records?
• Fundraising Goals: How much capital do you need to raise and by when?

Using basic planning tools like spreadsheets helps organize these considerations and map out different scenarios. This structured approach makes it easier to see which exemption best matches your needs.

By carefully weighing these elements, you can select the exemption that positions you for fundraising success. Homebase offers tools and support to help streamline your process, regardless of which path you choose.

DOMINGO VALADEZ is the co-founder at Homebase and a former product strategy manager at Google.