Rule 506b vs. 506c: Why the Difference Matters in Commercial Real Estate Syndications
Private commercial real estate investments operate under a regulatory framework that can look confusing from the outside. Two terms investors frequently encounter are Rule 506(b) and Rule 506(c).
Both are exemptions under Regulation D of the Securities Act that can allow an issuer to raise an unlimited amount of capital without conducting a registered public offering. The important difference is how prospective investors can be approached and who may ultimately purchase the securities.
Understanding 506b vs 506c is important because the two exemptions differ in how an offering may be marketed and who can ultimately invest. It also explains why JFI Real Estate believes there is value in getting to know prospective investors before there is a specific investment opportunity to discuss.
To be completely clear, JFI is not offering an investment through this article. We do not have a specific property, offering, targeted return, investment amount, subscription opportunity, or securities offering being presented here.
This article is educational and explains how these two commonly used private-offering exemptions differ.
Rule 506(b) | Rule 506(c) | |
General solicitation | Not permitted | Permitted |
Accredited investors | Unlimited | All purchasers must be accredited |
Non-accredited investors | Up to 35 sophisticated purchasers in a 90-day period | Not permitted |
Verification | Reasonable belief standard | Reasonable steps to verify |
What Is Rule 506b?
Rule 506(b) is commonly used for private securities offerings.
An issuer relying on Rule 506(b) can raise an unlimited amount of capital and may sell securities to an unlimited number of accredited investors. It may also include up to 35 non-accredited purchasers, although those investors must satisfy applicable sophistication requirements and additional disclosure requirements can apply.
The major restriction is that general solicitation and public advertising cannot be used to market the securities.
That means a sponsor generally cannot decide to conduct a 506(b) offering and then openly advertise that specific investment across an unrestricted website, social media, mass advertising, or other public channels.
The SEC identifies unrestricted public websites and similar broad communications as examples that can constitute general solicitation when they are used to market an offering.
This is why relationships matter under 506(b).
One established way of avoiding general solicitation is to offer securities to investors with whom the issuer, or in some circumstances its broker-dealer or investment adviser, already has a pre-existing, substantive relationship.
The SEC describes a pre-existing relationship as one formed before the offering begins. A substantive relationship involves obtaining enough information to evaluate, and actually evaluating, the prospective investor's accredited investor status.
That does not mean collecting someone's email address today automatically makes that person eligible for a 506(b) offering tomorrow.
506b vs 506c: The Key Difference
Rule 506(c) works differently.
Under 506(c), an issuer may broadly solicit and generally advertise an offering.
That gives a sponsor considerably more flexibility to publicly discuss a specific investment opportunity.
The tradeoff is significant.
Every purchaser in a 506(c) offering must be an accredited investor, and the issuer must take reasonable steps to verify that accredited status.
Verification is more than asking someone to check a box stating that they are accredited.
Depending on the circumstances, reasonable verification can involve reviewing financial documents or receiving appropriate written confirmation from certain third parties, such as a licensed attorney, CPA, registered broker-dealer, or SEC-registered investment adviser. The SEC specifically states that self-certification alone is not sufficient for the applicable verification requirement.
So the practical distinction is:
506(b): private offering, no general solicitation.
506(c): public solicitation is permitted, but every purchaser must be accredited and that status must be appropriately verified.
Neither exemption is automatically superior. The appropriate structure depends on the particular transaction, investor base, capital requirements, and advice of securities counsel.
What Does "Accredited Investor" Mean?
Accredited investor status is a regulatory classification used throughout the private securities markets.
For individuals, common ways to qualify currently include having net worth exceeding $1 million, individually or jointly with a spouse or partner, excluding the value of the primary residence.
Another route is annual income exceeding $200,000 individually, or $300,000 jointly with a spouse or partner, in each of the prior two years with a reasonable expectation of reaching the same level in the current year.
Certain professional licenses and other categories can also qualify, and separate standards apply to entities.
Being accredited does not mean an investment is safe, guaranteed, or suitable for a particular person.
It simply means the investor meets one of the regulatory standards that permits participation in certain private offerings.
Why JFI Wants to Build Investor Relationships Before There Is a Deal
Commercial real estate transactions can move quickly once a property is under contract.
That is not when we want to meet a prospective investor for the first time.
We would rather establish relationships in advance.
We want to understand what kind of commercial real estate interests you, whether you have invested privately before, your general investment horizon, your approximate investment range, your liquidity expectations, and whether you believe you qualify as an accredited investor.
Just as importantly, you should have time to understand JFI.
You should understand how we think about commercial property, how we operate buildings, how we evaluate acquisitions, how we communicate with owners, and how we approach risk and long-term value creation.
There is no reason that conversation has to begin with someone asking you to write a check.
In fact, we would prefer that it does not.
There is currently no specific JFI investment being offered through this process.
We are building relationships with people who have a genuine interest in commercial real estate and may want to hear from us in the future.
That distinction is important.
What an Investor Profile Does, and What It Does Not Do
JFI may ask prospective investors to complete an investor profile.
The purpose is to help us understand who you are and whether it makes sense for us to begin a broader conversation about commercial real estate investing.
An investor profile might include information such as investment experience, occupation, general investment objectives, approximate investment range, investment horizon, and whether the person believes they qualify as an accredited investor.
That does not mean:
You are investing in anything.
JFI is offering you a security.
You have been accepted into an investment.
You are obligated to invest in the future.
JFI is obligated to offer you a future opportunity.
Or that completing the form automatically establishes the type of pre-existing, substantive relationship that may be relevant to a future 506(b) offering.
The SEC has made clear that simply collecting information or obtaining a self-certification is not necessarily enough. The substance of the relationship and the issuer's actual evaluation of the investor matter.
For us, the form is simply the beginning of getting to know each other.
Why We Believe the Relationship Should Come Before the Investment
Private real estate investing involves a significant amount of trust.
A passive investor may ultimately commit a substantial amount of capital to an investment managed by another person or company. The investor should have an opportunity to understand who that sponsor is before being presented with a closing deadline.
The sponsor should also understand the investor.
Not every investor has the same objectives.
Some prioritize current cash flow. Others are primarily interested in long-term appreciation. Some are comfortable committing capital for many years. Others may have near-term liquidity needs that make an illiquid private real estate investment inappropriate.
Those are conversations worth having regardless of whether a particular offering ever occurs.
That is what JFI is trying to accomplish.
We are not asking someone to invest today.
We are asking whether it makes sense to know each other before tomorrow's opportunity exists.
What Happens If JFI Has a Future Investment Opportunity?
Any future JFI investment opportunity would be separate from this article and from the general investor relationship process.
Before presenting or accepting investments in a particular transaction, the offering would need to be structured under an applicable securities-law exemption with the assistance of appropriate legal counsel.
That may be Rule 506(b), Rule 506(c), or another structure depending on the circumstances.
The specific property, business plan, risks, fees, sponsor compensation, minimum investment, distribution structure, voting rights, investor eligibility requirements, financing, conflicts, and other material terms would be addressed in the documentation applicable to that offering.
An investment decision should be based on those materials and the particular transaction, not on this article.
That distinction is intentional.
Educational content about how commercial real estate investing works is not a substitute for the disclosures associated with an actual securities offering.
Interested in Getting to Know JFI?
JFI Real Estate is building relationships with individuals who have an interest in commercial real estate investing.
There is no investment being offered here.
If you would simply like to introduce yourself, learn more about how JFI approaches commercial real estate, and allow us to understand your general investment interests for the future, you can complete our Investor Profile or contact us directly.
There is no commitment.
There is no investment to purchase today.
There is no guarantee that JFI will present you with a future opportunity.
And completing an Investor Profile does not by itself establish eligibility to participate in any future private offering.
It is simply an introduction.
If you would like to introduce yourself and allow us to better understand your commercial real estate investment interests, you can complete our Investor Profile.
This article is provided solely for general educational purposes. It is not an offer to sell, a solicitation of an offer to purchase, or a recommendation regarding any security. JFI Real Estate is not presenting a specific investment opportunity through this article or through the general Investor Profile process. Any future securities offering would be separately structured and documented in accordance with applicable federal and state securities laws. Private securities involve risk, including possible loss of principal and illiquidity. Prospective investors should review the applicable offering materials and consult their own legal, tax, and financial advisers.
