robert-anasch-ZFYg5jTvB4A-unsplash.jpg

Simple differences between 506(c) and 506 (b)

If you are new to real estate or want to get started in commercial multifamily syndications, you may have heard there are accredited investor laws that prohibit you from taking part in these deals that always seem to be exclusively available to the wealthy.

There are two types of Reg D exceptions you should be aware of. 506(b) and 506(c). My goal is to help non accredited investors understand the basic difference between these two.

506(b) does not allow for solicitation or advertising of the security, this is due to the fact that 506(b) allows up to 35 non-accredited, and sophisticated investors to take part in the deal. These sophisticated investors are allowed to self certify themselves as sophisticated. In a 506(b) offering there must be a pre-existing and substantial relationship before the investment is made. The SEC defines this as "one that the issuer has formed with an offeree prior to the commencement of the securities offering.."

506(c) on the other hand is allowed to be openly marketed, yet is only available to accredited investors. Often a CPA, attorney or broker dealer reviews your last 2 years of W2 earnings, taxes, or broker statements. (When I have invested, I have always had to have my financials personally reviewed through a lawyer)

You will often see syndicators start by offering 506(b) deals, and after building an email list, or past investor group, they will pivot to 506(c) after becoming established. This makes perfect sense. It helps many syndication groups get the ball rolling by marketing their deals, and once well known, they can stop marketing and just raise capital from people in their network.

Simply put 506(b) is a great way for non-accredited / sophisticated investors to take part in syndications, where 506(c) must be accredited.