Choosing Between 506(b) vs 506(c) for Debt Funds: Real Estate Syndication Compliance

Deciding between Rule 506(b) and Rule 506(c) under Regulation D is a fundamental step for fund managers launching a debt fund. Each exemption shapes how capital can be raised, who can be approached, and what compliance obligations must be met. Rule 506(b) is ideal for those with established relationships and allows inclusion of a limited number of non-accredited but sophisticated investors—making it more flexible in terms of verification, yet restrictive in how you market the offering. On the other hand, Rule 506(c) opens up the ability to publicly advertise, making it well-suited for those looking to scale quickly or reach beyond their current investor base, but it comes with strict accreditation verification requirements.

This content dives into how your business model, fundraising timeline, investor base, and marketing strategy should all influence which exemption to choose. Whether you're building a local fund through personal connections or scaling nationally through online platforms and events, understanding the trade-offs of 506(b) versus 506(c) ensures your offering remains compliant and effective. This strategic insight can help position your fund to raise capital more confidently and securely in today’s regulatory landscape.

Read more about Regulation D: https://www.moschettilaw.com/reg-d-rules/

Read more about real estate syndication: https://www.moschettilaw.com/real-estate-syndication/

Moschetti Syndication Law Group is a boutique syndication law firm, serving small and growth-bound syndicators, as well as private equity firms. Our attorney, Tilden Moschetti, is determined to keep the firm’s ‘boutique’ size so we can tailor the services to each client’s unique needs without turning the firm into a faceless factory churning out private placement memorandums or passing unnecessary overhead expenses onto our clients. (As our client, you’ll only pay a fixed fee, so no surprises.) As for the client experience, we give real-time answers with Tilden Moschetti without making you book an official appointment or get passed along to associates or paralegals. We’ll work with your ambitions and overall vision to help you close the current deal and fill in that ‘missing’ piece – whatever you need – to keep adding more syndications to your portfolio. We keep syndicators syndicating (TM).

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Also, please note, this video and any content from Moschetti Syndication Law Group, Tilden, or anyone affiliated with either or both, does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information from these online sources may not constitute the most up-to-date legal or other information.

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Episode Transcript

(00:00):
Choosing between 506 Band 506 C for your debt fund
sounds simple until you realizethe wrong choice could lock you
out of raising millions or evencost you your legal exemption.
Let's walk through exactly howto pick the right path for your
capital raise. Hi, I'm TildenMoschetti syndication attorney

(00:23):
and founder of Moschettisyndication law. I help fund
managers set up their raises thesmart way so they can scale
without worrying about secheadaches. Today, let's talk
about the critical choice everyfund manager faces 506 B versus
506 C.
You when you're launching a debtfund, one of the first and most

(00:55):
important decisions you'll makeis whether to raise under Rule
506 B or Rule 506 C ofRegulation D. And it's not just
a technical decision. It shapeshow you find investors, how you
communicate and how muchcompliance burden you carry
along the way. Most people firsthear about 506 B, because it's

(01:16):
the classic method. Quietraises, private conversations,
no billboards, no social mediablasts, no advertising under
506, B, you work within yourpersonal network, people you
know, people you have realrelationships with. You can
bring an unlimited number ofaccredited investors, plus up to

(01:36):
35 sophisticated but nonaccredited investors in any 90
day period, as long as theytruly understand the risks, and
that's the big advantage. Youdon't have to verify accredited
investor status through thirdparties. You can simply rely on
signed investor questionnairesand the strength of your pre

(01:57):
existing relationships. But 506B comes with real limitations.
If you slip up and post aboutyour fund publicly, even just
casually mentioning it on apodcast or dropping a hint on
LinkedIn, you could lose yourexemption, and without that
exemption, the SEC could requireyou to offer your investors

(02:20):
their money back. It's a fragilepath that requires discipline.
One wrong move in marketing, andyou're outside the bounds. Now,
compare that to Rule 506 C,which opened the door to public
marketing for private offeringsunder 506 C, you can market your

(02:40):
fund, openly on websites,through ads, on podcasts, even
with live events or webinars,you can cast a much wider net
and attract investors far beyondyour personal network, but that
freedom comes with a cost. Everyinvestor must be accredited, and
you must verify their statuswith real documentation, tax

(03:04):
returns, W twos, brokeragestatements or a professional
third party letter, a simpleinvestor questionnaire just
won't cut it anymore. Choosingbetween the two isn't just about
your preferences, it's alsoabout your business model, if
you already have a strongnetwork of qualified investors,

(03:26):
people you know who trust you,506, B could be the smarter
path. It's simpler, cheaper andrequires less verification work.
Plus you can include a fewsophisticated investors who
aren't technically accreditedbut have the experience to
understand complex deals. But ifyou need to reach beyond your

(03:47):
existing network, if you plan toscale nationally, tap into new
markets or build an onlinebrand, well, 506 C may be the
better choice. Yes, it's aheavier lift up front, but
verification can feel intrusivefor investors, and some people
will balk at providing those taxreturns and financial

(04:10):
statements. But you see, ifyou're prepared to manage that
process professionally, 506 Ccan open up the doors that 506 B
simply can't It's also worthconsidering your marketing plan.
If you plan to create a digitalpresence, blogging, podcasting,
running webinars, building emaillists, you're already walking

(04:33):
into a public space trying tofit all that under 506 B could
be dangerous.
506 C was built for this kind ofoutreach. Though, there's a
third factor your fundraisingtimeline, if you need to close
fast and you already haveinvestors lined up, well, 506 B

(04:54):
can get you to the finish linequicker, verifying accredited
investor status on.
Or 506 C can slow things down,especially if investors delay
sending documents. Speed mattersin competitive markets. Making
the right choice between 506 Band 506 C isn't just about this

(05:15):
deal. It sets the tone for howyou build your investor base
long term. If you get it rightnow, you'll make every future
raise smoother, faster andsafer. When you understand the
real differences between 506 Band 506 C, you can raise money
the smart way, the compliantway, and build a fund that's
ready to scale if you want helppicking the right path and

(05:38):
setting up your raise forsuccess, reach out. I'm Tilden
Moschetti, thanks for watching,and here's to building something
great. You.