Rule 506(b) vs. Rule 506(c) for Real Estate Syndications
For a real estate sponsor, the choice between Rule 506(b) and Rule 506(c) can determine how an offering is marketed, who can invest and what procedures must be built into the subscription process. It should be made before the sponsor starts publicly promoting a specific deal.
Rule 506(b) and 506(c) at a Glance
| Issue | Rule 506(b) | Rule 506(c) |
|---|---|---|
| General solicitation | Generally prohibited | Permitted |
| Accredited investors | Unlimited | All purchasers must be accredited |
| Non-accredited purchasers | Up to 35 in a 90-day period, subject to sophistication and disclosure requirements | Not permitted as purchasers |
| Accredited status | Rule 506(b) standard applies | Issuer must take reasonable steps to verify |
Why Marketing Strategy Matters
Rule 506(b) generally does not permit unrestricted public solicitation. Public social-media posts, broad email campaigns, public webinars and online advertisements about a specific offering can therefore create problems if the sponsor intends to rely on 506(b).
Rule 506(c), by contrast, permits general solicitation if all purchasers are accredited investors and the issuer satisfies the verification requirement.
The 35-Purchaser Rule Under 506(b)
Current SEC materials state that Rule 506(b) permits sales to no more than 35 non-accredited investors in any 90-calendar-day period. Those purchasers must satisfy the applicable sophistication standard. Including non-accredited purchasers also brings Rule 502(b)'s information-delivery requirements into the analysis, which is one reason many sponsors structure offerings for accredited investors only.
506(c) Requires Verification
For 506(c), an investor's representation that the investor is accredited is not the entire analysis. The issuer must take reasonable steps to verify accredited status. Rule 506(c) provides non-exclusive verification methods, and the SEC also recognizes a facts-and-circumstances approach.
The SEC's March 2025 No-Action Letter
On March 12, 2025, the SEC's Division of Corporation Finance issued a no-action response to Latham & Watkins addressing high minimum investments as a factor in 506(c) verification. The staff agreed, based on the specific representations presented, that specified high minimum investments combined with written investor representations and related conditions could support the reasonable-verification conclusion.
The underlying request used minimum cash investments of at least $200,000 for natural persons and $1 million for legal entities and included representations concerning accredited status and third-party financing. The staff emphasized that verification remains an objective facts-and-circumstances determination and that its response was not an SEC rule.
For many real estate syndications, minimum investments are well below those amounts. Sponsors should therefore not assume the 2025 letter eliminates the need for their existing verification process.
California Adds a Notice Filing
DFPI currently states that issuers relying on Rule 506 must submit a California Form D notice filing no later than 15 days after the first sale in California, together with the applicable filing fee. Federal preemption of substantive state registration does not mean California can simply be ignored.
Broker and Finder Compensation
Real estate sponsors should also examine how people who introduce or solicit investors are paid. Transaction-based compensation for raising capital can create broker-dealer issues regardless of whether the offering uses 506(b) or 506(c). California has a limited finder framework, but its requirements and limitations should be analyzed before commissions or success-based compensation are promised.
Multiple Offerings and Changing Course
A sponsor should not assume it can publicly solicit investors and later relabel the same capital raise as a private 506(b) offering. Sequential and overlapping offerings can raise integration issues under the federal framework, particularly for sponsors raising money for several deals at once.
Documents and Disclosure Still Matter
Neither exemption eliminates the need for accurate disclosure. A syndication package may include a PPM, operating agreement, subscription agreement, investor questionnaire and marketing materials. The documents should consistently describe the property, sponsor, fees, conflicts, risks and investor rights.
A Practical Sequence for Sponsors
- Determine the offering structure.
- Select the exemption.
- Decide who may invest.
- Establish how investors will be approached.
- Build the qualification or verification process.
- Prepare consistent disclosure and governing documents.
- Calendar federal and state filings.
For help structuring the securities side of a syndication, see the firm's private placements practice.
This article is for general informational purposes and is not legal advice.






