Difference Between 506b and 506c Syndications
In our previous article, we discussed the requirements for being an accredited investor. In short, an individual with a net worth of $1M or more, income of $200k or more or who holds a special financial license is an accredited investor. Today, we will take a look at how this plays out in a 506b syndication versus a 506c syndication as there are specific laws that govern and regulate each of them.
The first and perhaps primary characteristic of a 506c regulation is that it allows for a syndicator to raise money from accredited investors only. The syndicator is given the responsibility for verifying that each investor participating in the deal is indeed an accredited investor which is usually done via a third party. So why would anyone want to do a 506c syndication and limit the number of investors they can take? This is due to the second characteristic of this type of syndication which is that it allows for open advertisement of the investment opportunity. Sponsors who are syndicating using reg 506c can use any type of marketing available to them to attract potential investors. This gives a strong advantage to established sponsors looking to raise large amounts of money for their deal.
For some syndicators, the network of investors they have includes a number of non-accredited investors. For these folks, it is both practical and necessary to instead do a 506b syndication for their deal. A 506b syndication still allows accredited investors to participate but additionally allows up to 35 non-accredited investors to participate too. In a 506b syndication all investors must have a prior existing relationship with one of the sponsors. This difference creates tremendous opportunity for non-accredited investors to grow their wealth that otherwise would not exist for them. In a 506b syndication each accredited investor must self-identify as accredited and the burden of proof lies with them should they be challenged. The key drawback to a 506b syndication is that the sponsor is no longer able to advertise their investment opportunity which makes it essential that they have a solid investor database which includes both accredited and non-accredited investors with whom they have a prior existing relationship. The additional complexity created by the rules in a 506b syndication leads many operators to eventually gravitate towards 506c offerings.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please set up a meeting with us through our Calendly link and subscribe to our weekly blog here.