Have you ever wondered how you as a passive investor can participate in those lucrative multifamily developments you see being built around your city? The secret lies in Regulation D offerings, specifically 506(b) and 506(c). These are not just random numbers and letters – they’re your ticket to participating in lucrative real estate deals.
The SEC imposes these regulations to protect investors with companies that sell securities. Let’s dive into the world of 506(b) and 506(c) syndications and discover which one might be right for you.
Before we jump into the specifics of 506(b) and 506(c), let’s understand the bigger picture. Regulation D is a set of rules created by the Securities and Exchange Commission (SEC) that allows real estate investment companies to legally raise capital for their projects.
Under the federal securities laws, any offer or sale of a security must either be registered with the SEC or meet an exemption. Regulation D under the Securities Act provides a number of exemptions from the registration requirements, allowing some companies to offer and sell securities without having to register the offering with the SEC.
Companies that comply with the requirements of Regulation D do not have to register their offering of securities with the SEC, but they must file what’s known as a “Form D” electronically with the SEC after they first sell their securities.
A 506(b) offering is the traditional way of raising capital for real estate projects. Think of it as the “quiet” option in the world of real estate syndications.
Key features of 506(b) syndications:
In a 506(b) real estate syndication, the sponsor (that’s us, the real estate developers) can’t shout from the rooftops about our investment opportunity. We can only offer it to people we know or have a pre-existing relationship with. It’s like an exclusive club where membership is by invitation only.
The 506(b) SEC rules allow for up to 35 non-accredited investors to participate. However, these investors need to be “sophisticated” – meaning they have enough knowledge and experience in financial matters to evaluate the risks and merits of the investment.
Now, let’s talk about the new kid on the block – 506(c) offerings. Introduced in 2013, 506(c) syndications are the “loud” option in real estate investing.
Key features of 506(c) syndications:
With a 506(c) syndication, we can advertise our investment opportunity far and wide. We can talk about it on social media, our website, or even put up a billboard if we want to. It’s like throwing a big party and inviting everyone – as long as they meet the accredited investor criteria.
The trade-off is that in a 506(c) offering, we can only accept accredited investors. These are individuals who meet certain income or net worth thresholds set by the SEC. And we have to take steps to verify this status – a simple declaration isn’t enough.
Now that we’ve covered the basics, let’s break down the main differences between 506(b) and 506(c) offerings:
An accredited investor, as defined by the U.S. Securities and Exchange Commission (SEC), is an individual or entity that meets certain financial criteria, allowing them to invest in private securities offerings not registered with the SEC. The following information outlines the accredited investor qualification for individuals and entities, as defined by the SEC.
For Individuals to obtain accreditation status:
Income-based qualification:
Net worth-based qualification:
For an individual to obtain accreditation status, you must meet the income or net-worth qualification.
For Entities to obtain accreditation status:
Financial Institutions (such as banks, insurance companies, and investment companies) can qualify based on their regulatory status.
The SEC imposes these criteria to ensure that accredited investors have the financial sophistication and ability to bear the risks associated with investing in private offerings.
To prove your accreditation status, your CPA or tax professional can provide you with written confirmation, which can be given directly to the sponsor.
One offering type is not better than the other. Both 506(b) and 506(c) have their pros and cons, and the choice often depends on the specific needs of the real estate syndication.
The decision to offer an investment through 506(b) or 506(c) regulations is the sole decision of the developer or sponsor in charge of the project. The quality of the prospective investment is not impacted by whether it is a 506(b) or 506(c) offering.
Advantages of 506(b) offerings:
Advantages of 506(c) offerings:
For passive investors like you, the choice between a 506(b) and 506(c) syndication might come down to your accredited investor status and how you prefer to learn about investment opportunities.
If you’re looking to invest in real estate syndications, understanding the difference between 506(b) and 506(c) offerings is crucial. Here’s why:
Whether you’re considering a 506(b) or 506(c) real estate syndication, the key is to understand what you’re getting into. Both options offer exciting opportunities for passive real estate investing, each with its own set of rules and requirements.
Remember, the world of real estate syndications is vast and full of potential. Whether you’re drawn to the exclusive nature of 506(b) offerings or the openly advertised opportunities of 506(c) syndications, there’s a place for you in this exciting investment landscape.
As you explore these opportunities, keep in mind that the most important factor is not whether it’s a 506(b) or 506(c) offering, but the quality of the investment itself and the track record of the sponsor. Do your due diligence, ask questions, and don’t hesitate to seek professional advice.
At Goodin Development, we work with accredited investors and non accredited investors. Start by applying to join our Investor Club. After that, you can schedule a call with our team and see if we are a great fit to work together.
