In the realm of investment opportunities,

there are several ways to raise capital, each having their own rules and criteria. In the United States, two well-known choices for private investments are the 506(c) offering and the 506(b) offering. In this blog, we will explore the qualities, distinctions, and advantages of these two investment options. Therefore, whether you are an investor or a sponsor syndicator seeking funding, continue reading to obtain a thorough discussion of these alternatives.

These are some of the most common questions we get asked:

Chris & Maricela, do I have to be an accredited investor to invest with you? Do I need to send my financials to your team to determine if I qualify to invest in your deals? Why do you only post about some of your deals on social media and some I only hear about it by email or webinars?

Well this blog has information to help you answer these questions. The short answer is, it depends on the type of investing offering (506B or 506C) dictates how the investing opportunity is advertised. Let’s dive in.

Understanding the 506(c) Offering: The 506(c) offering is a type of private placement exemption provided by the Securities and Exchange Commission (SEC) under Regulation D. It allows companies to raise funds from accredited investors through public advertising and general solicitation. However, it comes with strict eligibility criteria, primarily focusing on investor verification.

• Accredited Investors: To participate in a 506(c) offering, investors must meet the definition of an accredited investor, which typically includes individuals with a high net worth or income, institutional investors, and certain entities.

• Public Advertising: One key advantage of the 506(c) offering is the ability to engage in public advertising. This means companies can openly promote their investment opportunities through various channels such as websites, social media, and traditional advertising methods.

• Investor Verification: Unlike the 506(b) offering (which we’ll discuss next), the 506(c) offering requires companies to take reasonable steps to verify that all investors are accredited. This verification process involves assessing an investor’s income, net worth, professional certifications, and other relevant documentation.

Exploring the 506(b) Offering: The 506(b) offering, also falling under Regulation D, is another common private placement exemption. Unlike the 506(c) offering, the 506(b) offering allows for a limited degree of pre-existing relationships between the issuer and the investors, but it prohibits public advertising or general solicitation.

• Limited Pre-Existing Relationships: Under the 506(b) offering, companies can accept investments from up to 35 non-accredited investors, in addition to an unlimited number of accredited investors. However, the issuer must have a substantive relationship with these non-accredited investors before offering them the investment opportunity.

• No Public Advertising: One notable difference between the 506(b) offering and the 506(c) offering is the absence of public advertising. Issuers must rely on their existing network of contacts, personal connections, and other private means to find potential investors.

Key Differences and Considerations:

The 506(c) offering allows access to a broader pool of investors due to the ability to publicly advertise, whereas the 506(b) offering restricts advertising and relies on pre-existing relationships.

• Verification Requirements: The 506(c) offering requires rigorous investor verification, while the 506(b) offering relies on the issuer’s reasonable belief that the investors are accredited.

• Legal Compliance: Both offerings require compliance with various securities laws and regulations. However, the 506(c) offering, with its stricter verification process, offers a higher level of legal certainty.

• Investor Sophistication: The 506(b) offering is often considered more suitable for investors with pre-existing relationships and a deeper understanding of the investment opportunity. The 506(c) offering, on the other hand, may attract a wider range of investors, including those new to private placements.

Conclusion: When it comes to private placements, the choice between a 506(c) offering and a 506(b) offering depends on factors such as fundraising goals, investor base, and preferences. The 506(c) offering allows for general solicitation, while the 506(b) offering is more suitable for targeted approaches and limited non-accredited investor participation. Issuers should carefully consider their specific circumstances and seek professional advice to determine the best option.