We created this comprehensive guide to help you navigate the complexities of real estate syndication regulations. In this article, we will delve into the intricacies of Rule 506 offerings and explore the key differences between Rule 506(b) syndication and Rule 506(c) syndication. Whether you are an experienced syndicator or new to the world of real estate investments, understanding the nuances of these exemptions is essential for making informed decisions and maximizing the potential of your fundraising endeavors.
This guide provides in-depth insights into the regulatory landscape governing private securities offerings and offers practical advice on choosing the right exemption for your syndication project. By the end of this article, you will have a thorough understanding of the advantages and considerations associated with Rule 506(b) syndication and Rule 506(c) syndication, empowering you to navigate the regulatory maze with confidence and clarity.
Join us as we embark on a journey to demystify Rule 506 offerings and uncover the best option for your real estate syndication goals.
First Things First – What’s a Security?
Let’s start by clarifying what constitutes a securities offering. In essence, if you’re utilizing funds raised from external sources who hope to profit from your real estate endeavors, you’re likely engaged in the sale of securities.
Securities encompass a variety of financial instruments, including promissory notes and “investment contracts,” which involve agreements between a managing entity or general partner and passive investors. Under the Securities Act of 1933, the sale of securities typically requires registration of the securities, akin to pre-approval in a public offering, unless specific exemptions apply. Numerous exemptions exist, at both the federal and state levels, that exempt certain securities offerings from registration requirements.
Among these exemptions, the most commonly utilized is the Rule 506 private offering exemption. Notably, the SEC reported that Rule 506(b) offerings alone raised as much as $2.7 trillion from July 1, 2021 to June 30, 2022.Even 506(c) offerings raised $148 billion, which is more than was raised in IPOs during the same period. Moreover, from the median offering size was approximately $1.2 million.
506(b) & 506(c) Syndication Explained
Real estate syndication offers a pathway for investors to pool their resources and participate in often lucrative real estate ventures. However, syndicators must navigate various regulations to ensure compliance and protect the interests of both issuers and investors. Two common safe harbor exemptions under Regulation D of the Securities Act – Rule 506(b) and Rule 506(c) – provide issuers with avenues to raise capital through private offerings while remaining in compliance with securities laws.
Rule 506(b) – The Traditional Approach
Rule 506(b) has long been a popular choice for issuers conducting private offerings. Under this exemption, issuers can raise an unlimited amount of capital from accredited investors and up to 35 non-accredited but sophisticated investors without the need for SEC registration. The primary advantage of Rule 506(b) is its flexibility, allowing issuers to raise capital without the restrictions imposed by general solicitation.
However, Rule 506(b) prohibits issuers from engaging in general solicitation or advertising of their offerings. Instead, issuers must rely on existing relationships with investors to attract capital. Additionally, issuers must take reasonable steps to ensure that all investors meet accredited or sophisticated status criteria.
An accredited investor is, essentially, one who has high income or net worth, professional knowledge of the securities industry, or is a financial institution such as a bank. A sophisticated investor is an individual or entity that, alone or with a purchaser representative, possesses sufficient knowledge, experience, and understanding of investment markets to be capable of making informed decisions regarding complex investment opportunities.
If non-accredited investors are participating in the offering, the issuer must give the non-accredited investors an offering disclosure document (often called a Private Placement Memorandum or PPM) containing:
- information about the offering and the securities offered,
- the risks of investing in the offering,
- the use of the proceeds to be raised by the offering,
- any sales by selling shareholders, and
- the company’s business, management, performance, plans, and financial statements.
Rule 506(c) – Opening New Opportunities
Rule 506(c), introduced as part of the JOBS Act on July 10, 2013, revolutionized the landscape of private offerings by allowing issuers to engage in general solicitation and advertising of their private offerings.
Under this rule, issuers can reach a broader audience of potential investors, potentially increasing access to capital for real estate projects.
One of the key distinctions of Rule 506(c) syndication is its requirement that all investors be accredited. Issuers must take reasonable steps to verify the accredited status of investors, which may include reviewing financial documents, obtaining written confirmations from third-party professionals, or relying on previous investor status.
How are 506(b) Syndication & 506(c) Syndication Different?
Rule 506(b), often referred to simply as 506(b), has been a longstanding exemption utilized by issuers to conduct private offerings without the need for SEC registration. Under this rule, issuers can raise an unlimited amount of capital from an unlimited number of accredited investors and up to 35 non-accredited but sophisticated investors. However, advertising or soliciting investments from the general public is prohibited under Rule 506(b), and issuers must have a pre-existing relationship with investors before making an offer.
On the other hand, Rule 506(c) syndication, established as part of the JOBS), introduced a significant change by allowing issuers to engage in general solicitation and advertising of their offerings, provided that all investors are accredited. This rule offers greater flexibility in reaching potential investors but requires issuers to take reasonable steps to verify the accredited status of investors.
Choosing Between Rule 506(b) and Rule 506(c)
The decision between Rule 506(b) syndication and Rule 506(c) syndication depends on various factors, including the issuer’s fundraising objectives, investor base, and compliance considerations. Issuers must weigh the benefits and requirements of each exemption to determine which option best aligns with their fund-raising goals.
For issuers seeking to raise capital from a select group of investors and maintain control over the offering process, Rule 506(b) may be the preferred choice. Conversely, issuers looking to cast a wider net and leverage the power of general solicitation may opt for Rule 506(c) offerings.
Considerations for Issuers
When deciding between a Rule 506(b) real estate offering and a Rule 506(c) real estate offering, issuers must carefully weigh the benefits and requirements of each option.
Under Rule 506(b), issuers benefit from the ability to raise capital from both accredited and non-accredited but sophisticated investors without the need for extensive investor verification. However, the prohibition on general solicitation limits the pool of potential investors and may require issuers to rely on (and document!) existing relationships to attract capital.
In contrast, Rule 506(c) syndication offers issuers the opportunity to cast a wider net by advertising their offerings to the general public. This increased visibility can lead to greater access to capital and a broader investor base. However, issuers must comply with stringent verification requirements to ensure that all investors meet accredited status criteria, which can entail additional time and resources. This means that issuers must document all client statuses to be able to demonstrate compliance if an issue arises in the future.
Navigating Compliance
Regardless of whether an issuer chooses Rule 506(b) syndication or Rule 506(c) syndication, compliance with securities regulations is paramount. Working with experienced securities counsel can help issuers understand the nuances of each rule and develop strategies to remain compliant throughout the fundraising process. If you are at this step in the process, Syndication Attorneys can help you navigate the road ahead. Contact us today to answer your questions in a free 30-minute consultation. To schedule a teleconference, click here.
Syndication Attorneys: Your Trusted Legal Partner
At Syndication Attorneys, we concentrate our practice on providing legal guidance and support to real estate syndicators navigating the complexities of securities law. Our team of experienced attorneys has extensive knowledge of Rule 506 and can assist you in choosing the right exemption for your syndication project.
Whether you opt for Rule 506(b) syndication or Rule 506(c) syndication, Syndication Attorneys is here to help you navigate the regulatory landscape and achieve your fundraising goals.
In conclusion, the decision between Rule 506(b) and Rule 506(c) depends on various factors, including the issuer’s fundraising objectives, investor base, and compliance considerations. By understanding the differences between these two exemptions and seeking expert legal guidance, syndicators can effectively navigate the regulatory landscape and successfully raise capital for their real estate projects.
Understand your options and get all your questions answered. Contact Syndication Attorneys today and schedule your free 30-minute consultation. To schedule a consultation, click here.
