What is the difference between a 506(b) and a 506(c) offering?

Under Rule 506(b), you may not advertise or publicly promote your offering. You generally offer it to people you already have a substantive relationship with, meaning one that began before the offering and in which you learned about the person's finances and sophistication. You can sell to accredited investors without a numerical limit. The rules also allow a limited number of non-accredited investors, who must meet sophistication requirements and who trigger added disclosure requirements, so many raisers use accredited investors only.

Under Rule 506(c), you may promote your offering publicly, which can reach beyond your network. Every investor must be accredited, and you must take reasonable steps to verify that before accepting their money. People you know who are not accredited cannot invest in a 506(c) offering.

The rest of this article walks through those differences one at a time. It does not tell you which one fits your raise.

In a 506(b) offering, Rule 502(c) bars general solicitation and general advertising by the issuer and by anyone acting for the issuer. Public posts about a specific deal, paid ads aimed at finding investors, open webinars about the offering and pitches from a stage are the usual examples. The relationship you had with each person before the offering began is the main way issuers show they did not solicit generally.

In a 506(c) offering, public promotion is allowed. That does not loosen anything else. The antifraud rules apply to every ad, post and email, and the deal has to be described the same way everywhere, consistent with the offering documents. Checking the 506(c) box on Form D is also not what permits advertising. The offering has to actually meet the 506(c) conditions.

Both exemptions take accredited investors without a numerical limit. The SEC's accredited investor definition covers individuals and certain entities.

A 506(b) offering may also include non-accredited investors, within limits set by Rule 506(b). Each one must be sophisticated, alone or with a purchaser representative, meaning able to evaluate the merits and risks of the investment. If any take part, Rule 502(b) disclosure applies, including financial statements, delivered a reasonable time before the sale. Counting follows Rule 501(e), which leaves some related people out of the count and, for an entity formed to buy the securities, counts each beneficial owner unless the entity is itself accredited. Other offerings can be integrated, meaning counted together with this one. Many sponsors avoid non-accredited purchasers altogether because of these requirements.

A 506(c) offering may not include any non-accredited investor, however well you know them.

In a 506(b) offering, the issuer needs a reasonable belief that an investor is accredited. In practice that is usually a signed questionnaire in which the investor states which specific test they meet. You cannot rely on it if you know, or have reason to know, that it is not true.

In a 506(c) offering, the issuer must take reasonable steps to verify each purchaser's status before accepting money. The standard is principles-based, and the rule lists methods that are examples, not the only options. A checkbox or self-certification on its own is generally not enough. From the investor's side, it reads like this: "If you invest in a 506(c) offering, the issuer must take reasonable steps to verify your status. This can involve documents, a letter from a CPA, attorney, registered broker-dealer or SEC-registered investment adviser, or other methods the issuer's counsel approves."

The two exemptions are not symmetrical. The online route works only if the offering is structured as 506(c) from the start. An offering can switch from 506(b) to 506(c) before any sales, but you cannot go back to 506(b) once you have advertised. A switch after 506(b) sales have been made raises its own questions, and how to handle it is something to settle with your attorney before you act.

The same logic applies across offerings. People you reached through 506(c) advertising can join a later 506(b) offering only if your substantive relationship with them began before the offering in question, that is, before the later 506(b) offering commenced. Keeping a dated record of how and when you met each person makes that question answerable later.

Rule 506(b) and Rule 506(c) are the routes most private real estate raises use, but they are not the only ones. Section 4(a)(2), Rule 504, Regulation A, Regulation Crowdfunding, intrastate exemptions and Regulation S each have their own conditions on who may invest, how much may be raised, what may be said in public and what must be filed.

The exemption is chosen by the issuer, with securities counsel, before anyone talks about the deal. The answer turns on facts this article cannot see: how you plan to find investors, who they are, the size and structure of the offering, and what your documents say.

The issuer decides which exemption applies, with its securities attorney. This article is education, not legal advice. Before you choose an exemption or speak to anyone about a deal, talk to your own securities attorney about your facts. The rules themselves are at 17 CFR 230.506, https://www.law.cornell.edu/cfr/text/17/230.506, and 17 CFR 230.502, https://www.law.cornell.edu/cfr/text/17/230.502. SEC staff interpretations are in the Securities Act Rules Compliance and Disclosure Interpretations, https://www.sec.gov/rules-regulations/staff-guidance/compliance-disclosure-interpretations/securities-act-rules.