Raising capital from investors? Here’s the beginner’s guide to Regulation D Rule 506(c), including key requirements, plus the differences between 506(b) vs. 506(c) offerings.
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Learn how to launch your own private fund or real estate syndication with Fund Playbook. In each episode, Jimmy Atkinson shares insights on syndicating deals, raising capital, and entrepreneurship.
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Episode Transcript Summary
Raising capital for private funds and real estate syndications often requires fund managers to navigate securities regulations. In this episode of Fund Playbook, Jimmy Atkinson breaks down Regulation D Rule 506(c)—how it works, why it was created, and how it compares to 506(b). He explains the key legal requirements for fund managers and investors, highlighting the advantages and trade-offs between the two exemptions.
The Origins of Regulation D
To understand Rule 506(c), it’s important to first understand the history of Regulation D.
- Regulation D was created under the Truth in Securities Act of 1933, a law designed to regulate the securities industry after the Stock Market Crash of 1929.
- This law led to the formation of the Securities & Exchange Commission (SEC) to oversee securities offerings and protect investors.
- Reg D allows fund managers and syndicators to raise unlimited capital without registering their offering with the SEC, unlike a public IPO.
For nearly 80 years, these exemptions only applied to private investors, meaning that syndicators and fund managers could not publicly advertise their deals.
The JOBS Act and the Creation of Rule 506(c)
Everything changed in 2012 when President Barack Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. This legislation led to the creation of Rule 506(c), which significantly loosened restrictions on private offerings.
The biggest change? For the first time, fund managers could publicly advertise investment opportunities. Under the new “general solicitation” rules, sponsors could now advertise their deals to the general public in a variety of ways, including through social media, websites, crowdfunding platforms, YouTube, email, and more.
This opened up private investments to a broader audience, but with an important restriction—only accredited investors could participate, and their status had to be verified.
The Four Key Requirements for Reg D 506(c) Offerings
Syndicators and fund managers must comply with four key legal requirements when raising capital under 506(c):
- Only Accredited Investors – Investors must meet the SEC’s accreditation criteria, which includes:
- Earning over $200,000 per year ($300,000 jointly with a spouse), or
- Having a net worth over $1 million (excluding their primary residence).
- Investor Verification – Sponsors must take reasonable steps to verify investor accreditation. This typically requires tax returns, bank statements, or a verification letter from an accountant.
- Form D Filing – Fund managers must file Form D with the SEC within 15 days of receiving the first investment in the offering.
- No Bad Actors – Individuals with past securities fraud convictions or other disqualifying legal issues cannot participate as fund managers or key personnel in a 506(c) offering.
The Differences Between 506(b) and 506(c)
There are two types of Regulation D offerings: 506(b) and 506(c). While they share some similarities, there are four major differences:
- Advertising – The most significant difference is that 506(c) allows general solicitation (public marketing), while 506(b) does not.
- Investor Accreditation – 506(b) allows up to 35 non-accredited investors, while 506(c) is limited to accredited investors only.
- Verification – 506(c) requires mandatory accreditation verification, while 506(b) allows investors to self-certify.
- Fundraising Strategy – 506(b) works best when raising capital from pre-existing relationships, while 506(c) is ideal for expanding reach through marketing.
Which Reg D Exemption Is Right for Your Fund?
Choosing between 506(b) and 506(c) depends on your fundraising strategy.
- 506(b) is a good fit if you:
- Have strong pre-existing relationships with investors.
- Want to avoid the verification process for accredited investors.
- Don’t need to advertise to new prospects.
- 506(c) is the better option if you:
- Want to scale your capital raise beyond your personal network.
- Plan to market your offering online, at conferences, or through email campaigns.
- Are comfortable with the investor verification requirement.
While some sponsors hesitate to verify investor accreditation, Jimmy emphasizes that the process is straightforward and worth the trade-off for wider access to capital.
Final Takeaways
- Regulation D 506(c) revolutionized private capital raising by allowing public marketing of investment offerings.
- Only accredited investors can participate in 506(c) deals, and fund managers must verify accreditation.
- 506(b) is best for private, relationship-driven raises, while 506(c) is ideal for sponsors looking to advertise and scale their fundraising efforts.
- Compliance is critical—fund managers must file Form D, avoid misleading advertising, and adhere to SEC regulations.
Join us for the next Fund Playbook live stream every Thursday at 3 PM ET for real-time Q&A on launching and raising capital for private funds and syndications.