506(b) versus 506(c) offerings compared

One rule, two doors

Rule 506 of Regulation D is the exemption almost every private multifamily offering in the United States is sold under. It has two subsections that function as separate doors into the same building, and a sponsor picks one before speaking to a single investor. The choice is not cosmetic. It determines whether the deal can be advertised, who may buy it, what the sponsor has to do to check you, and what documents you will be asked for.

The trade is symmetrical and easy to state. Rule 506(b) allows a limited number of investors who do not meet the accredited threshold, but forbids advertising. Rule 506(c) allows advertising, but requires that every purchaser is accredited and that the sponsor actively verify it rather than take your word.

Both are exemptions from registration, so neither offering is reviewed by the Securities and Exchange Commission and neither carries the disclosure a registered public offering would. Investor.gov describes what the two have in common in its material on private placements. What follows is the difference, and why it changes what happens to you in practice.

Rule 506(b), the quiet door

The defining condition of 506(b) is the one the SEC states first: there may be "no general solicitation or advertising to market the securities." No public webinar pitching the deal, no paid advertising, no open post naming the offering, no cold outreach to a purchased list. The sponsor is expected to be selling into a pre-existing, substantive relationship.

That phrase is the part investors most often miss. The relationship has to exist before the offering does, and it has to be substantive enough that the sponsor knows something about your financial circumstances. This is why established sponsors run a private investor list and why they will often ask you to complete a questionnaire and then wait before showing you anything. That waiting period is not sales technique. It is the sponsor building the relationship the exemption requires.

Within that constraint 506(b) is permissive. There is no cap on the amount raised and no cap on the number of accredited investors. And because the offering is not advertised, the sponsor is generally entitled to rely on your written representation that you are accredited, which in practice is a subscription questionnaire you complete and sign under penalty of misstatement.

The thirty-five, and why you rarely see it used

Rule 506(b) permits something 506(c) does not. Per the SEC, "securities may not be sold to more than 35 non-accredited investors." So a 506(b) offering can include a limited number of purchasers who fail the income, net worth, credential and insider tests, provided each is sophisticated, meaning capable of evaluating the merits and risks of the investment.

The price of using that allowance is steep, which is why most sponsors do not. Once even one non-accredited investor is admitted, the company must provide disclosure documents containing information similar to what a Regulation A offering requires, together with the financial statement information specified in the rule. The sponsor must also, in the SEC's words, "be available to answer questions from prospective purchasers who are non-accredited investors."

That converts a private placement into something closer to a small registered offering, with the cost and audit burden that implies. The practical consequence for you is worth naming plainly: when a sponsor tells you an offering is open to accredited investors only, that is usually an economic decision about disclosure cost rather than a judgment about you. And the corollary is more useful still. If a 506(b) offering does admit non-accredited investors, there is a richer disclosure package in existence, and you are entitled to see it.

Rule 506(c), the public door

Rule 506(c) was created by the JOBS Act and lifted the advertising ban. A sponsor operating under it can market an offering publicly, name it on a website, run paid advertising and speak about it at an open event. Almost every private real estate offering you have seen advertised is a 506(c).

Two conditions come with that freedom. First, in the SEC's words, "all purchasers in the offering are accredited investors." There is no equivalent of the thirty-five. Second, "the issuer takes reasonable steps to verify purchasers' accredited investor status." A signed representation is not enough on its own, and that is the single most consequential difference between the two doors for anyone actually subscribing.

The verification obligation sits on the sponsor, not on you, and it is not satisfied by good faith. An issuer that advertises publicly and then accepts a checkbox has failed a condition of its own exemption, which puts the entire offering at risk rather than that one subscription. Understanding that is what turns an intrusive document request into a reasonable one.

The four ways a sponsor can verify you

The rule itself, at 17 CFR 230.506(c)(2)(ii), gives a non-exclusive list of methods that are deemed to satisfy the requirement for a natural person. Knowing them tells you in advance what you will be asked for, and lets you choose the route that exposes the least.

The income route. The sponsor reviews "any Internal Revenue Service form that reports the purchaser's income for the two most recent years (including, but not limited to, Form W-2, Form 1099, Schedule K-1 to Form 1065, and Form 1040)" and obtains a written representation from you that you have a reasonable expectation of reaching the qualifying income level in the current year. Note that the forms are for both years, and note the forward-looking representation, which is the same current-year expectation the definition itself requires.

The net worth route. The sponsor reviews documentation "dated within the prior three months," which for assets means bank statements, brokerage statements, certificates of deposit, tax assessments or third-party appraisals, and for liabilities means "a consumer report from at least one of the nationwide consumer reporting agencies," together with your written representation that all liabilities have been disclosed. The three-month currency requirement is the reason a sponsor may decline a statement you consider recent, and the consumer report requirement is the reason a net worth verification is more invasive than an income one.

The third-party confirmation route. The sponsor obtains "a written confirmation from one of the following persons or entities that such person or entity has taken reasonable steps to verify that the purchaser is an accredited investor within the prior three months," being a registered broker-dealer, an investment adviser registered with the Commission, a licensed attorney in good standing, or a certified public accountant in good standing.

That fourth category is the one most investors should know about and few do. A letter from your own CPA or attorney satisfies the rule, which means you can be verified without sending your tax returns and credit report to a sponsor at all. If you would rather your financial detail stayed with your own professionals, ask for this route by name.

The existing investor route. Where a person was previously verified as accredited, a written representation that they remain so can suffice, subject to a five year limit and to the issuer having no knowledge to the contrary. This is why a repeat subscription with the same sponsor is usually lighter than the first one.

The disqualification nobody asks about

Both doors are closed to some sponsors entirely, and this is worth a question rather than an assumption. Paragraph (d) of the rule, the bad actor provision, denies the exemption where the issuer or a covered person has a disqualifying event in their history.

Covered persons reach further than the entity itself. They include directors, executive officers, general partners, promoters, and beneficial owners of twenty percent or more of the voting equity. Disqualifying events include criminal convictions in connection with the purchase or sale of a security, court injunctions and restraining orders, regulatory orders barring association with a regulated entity, Commission cease and desist orders relating to fraud, and United States Postal Service false representation orders.

There are limits. The provision generally applies to events occurring after its September 2013 effective date, earlier events carry a disclosure obligation instead, a waiver may be granted for good cause, and there is an exception where the issuer establishes it did not know and, exercising reasonable care, could not have known of the disqualification. That reasonable care standard is why sponsors circulate bad actor questionnaires to their own principals.

You can simply ask whether any covered person has a disqualifying event or has been the subject of a waiver. A sponsor who has done this properly will answer immediately, because they have already collected the answer in writing.

Form D, and what a filing does not mean

Under both subsections a company must "file a notice with the Commission on Form D within 15 days after the first sale of securities in the offering." The filing is public and searchable on the SEC filing search, and looking a sponsor up before you subscribe is a five minute exercise that most investors never perform.

It is worth being precise about what you learn from it. Form D is a notice, not an application. Nobody at the Commission reviews the offering, approves the terms, or forms a view on the projections. The SEC explains the filing on its own Form D page. A sponsor saying they are "filed with the SEC" has told you they complied with a notice requirement, which is a floor rather than an endorsement.

What the filing does give you is a factual record: the entity name, the date of first sale, the exemption claimed, the size of the offering, the amount sold to date and the number of investors. It also gives you history. A sponsor with a long trail of Form D filings has a track record you can at least count, and a sponsor whose filings stop abruptly is a question worth asking about.

One further point on jurisdiction. The Securities Act preempts state registration for Rule 506 offerings, but the states retain "authority to require notice filings and collect state fees." So a sponsor still has state obligations, and a competent one will know exactly what they are in your state.

Working out which one is in front of you

The fastest test is how you found the deal. If you learned about a specific offering from an advertisement, a public post, a sponsored search result or a webinar open to the public, it is a 506(c), because a 506(b) could not lawfully have reached you that way.

The second test is what they ask of you. A request for two years of tax forms, a recent consumer report, or a letter from your CPA is a verification obligation being discharged, which means 506(c). A questionnaire you complete and sign with no supporting documents means the sponsor is relying on your representation, which means 506(b).

The third is simply to ask, and to ask which exemption the offering is being made under before you spend time on the materials. It is a question with a one word answer that a sponsor should not have to look up.

What none of this tells you is anything about quality. Neither door is safer than the other. The verification in 506(c) protects the exemption, not the investor. Plenty of poor deals are sold under both, and the sponsor's conduct, terms and track record remain the things worth examining. Our own list for that is nine questions before wiring, and the underlying status test is set out in accredited investor requirements.

What to ask about the offering

1. Which exemption is this offering made under, 506(b) or 506(c)?
2. If 506(c), will you accept a written confirmation from my own CPA or attorney rather than my tax returns and consumer report?
3. If 506(b), when was the relationship with me established, and are any non-accredited investors being admitted?
4. If non-accredited investors are being admitted, may I see the additional disclosure package they receive?
5. Has any covered person been subject to a disqualifying event under Rule 506(d), or obtained a waiver?
6. What is the entity name I should search for your prior Form D filings?

What this is built on

1. U.S. Securities and Exchange Commission, Rule 506(b) of Regulation D
2. U.S. Securities and Exchange Commission, Rule 506(c) of Regulation D
3. Legal Information Institute, Cornell Law School, 17 CFR 230.506, exemption for limited offers and sales without regard to dollar amount
4. U.S. Securities and Exchange Commission, Form D, notice of exempt offering of securities
5. U.S. Securities and Exchange Commission, EDGAR full text filing search
6. Investor.gov, Private placements under Rule 506(b) and 506(c)