We remember fondly when we first got involved in real estate investing… and EVERYTHING seemed like a foreign language. For 2 people who hadn’t really done much investing in the past, apartment syndication and real estate seemed complicated and tricky. 🤭
Like, hello — vocab was hard enough IN high school, ya know?! Add in terms like “accredited investor” and “equity split” and… yeah.
Now, we got a handle on all of it relatively quickly (even though it still seemed confusing for quiiiite a while), but then a new term would pop up and we would find ourselves trying to remember what meant what, and what was different from what.
Oof. 😬
Especially two terms that we saw all the time (and seemed interchangeable) 〰️ 506(b) offerings vs 506(c) of Regulation D.
Like, how on earth were we supposed to learn the difference (and remember it)?
Luckily, we learned it — and we’re here to give you the rundown on all things 506(b) vs 506(c) offerings. As an apartment investor, you’ll need to be well-versed on 506(b) vs 506(c) offerings, and we have you covered.
Inside this blog post, you’ll find info on:
- 506(b) vs 506(c) offerings
- The Tax Cut and JOBS Act of 2012
- Sophisticated investors vs. accredited investors and how they relate to 506(b) and (c) offerings
- Advertising and prior relationships
- The importance of knowing, liking, and trusting your sponsor team
Are you ready? Let’s dive in. 🧐
506(b) vs 506(c) offerings
In real estate and apartment investing, there are typically two main types of offerings and deals you’ll find 〰️ 506(b) offerings and 506(c) offerings. To give you the most accurate definition, we’ll give you the ~official~ definition from the Securities and Exchange Commission, or SEC.
506(b) offerings are: “considered a “safe harbor” under Section 4(a)(2). It provides objective standards that a company can rely on to meet the requirements of the Section 4(a)(2) exemption. Companies conducting an offering under Rule 506(b) can raise an unlimited amount of money and can sell securities to an unlimited number of accredited investors.”
You can find out more on the details and exceptions to this rule here.
Essentially, 506(b) offerings allow investors to raise an unlimited amount of accredited investors (and even up to 35 non-accredited investors) without needing to file with the SEC. However, 506(b) offerings do not allow investors to solicit other investors. Instead, they have to have established relationships with the investors they reach out to.
A 506(c) offering “permits issuers to broadly solicit and generally advertise an offering, provided that:
- All purchasers in the offering are accredited investors
- The issuer takes reasonable steps to verify purchasers’ accredited investor status and
- Certain other conditions in Regulation D are satisfied”
You can find out more on the details and exceptions to this rule here.
Essentially, 506(c) offerings *can* solicit investors and advertise their offerings — with a few exceptions and verifications.
At The Kitti Sisters, we’re a 506(b) offering — meaning that we establish relationships with investors like you before you can invest with us. As a 506(b) offering, we’re able to take on both accredited and sophisticated investors — unlike with 506(c) offerings, where all investors must be accredited.
The Tax Cut and Jobs Act of 2012
A lot of what we know as real estate investing today (including these types of investments as a whole) comes from the Tax Cut and Jobs Act of 2012. See, prior to this act, the only way to ever hear about private real estate deals was through a boys’ club type of situation — i.e., a country club deal. Really, to get involved in private real estate deals, you had to be in a closed network and get lucky.
However, the Tax Cuts and Jobs Act of 2012 lowered this barrier of entry in a huge way. The Securities and Exchange Commission (SEC), which has always required deals to register pre-issuance, decided to break Regulation D into two sub-sections 〰️ the 506(b) and 506(c) deals we’ve been talking about.
Now, thanks to this Act, it’s a lot easier to invest in real estate without being a bazillionaire or belonging to a country club. In fact, this Act actually made it possible to do things like start real estate crowdfunding websites…
Sophisticated Investors vs Accredited Investors and How They Relate to 506(b) vs 506(c) Offerings
We’ve talked a lot lately about the difference between sophisticated and accredited investors — and it’s important to understand the difference when talking about 506(b) and 506(c) offerings.
See, sophisticated investors have a lower barrier to entry. They have a high understanding of investments and are great at what they do, but they don’t have to go through dozens of steps to prove it.
Accredited investors, however, have to verify things like their income and their knowledge levels. In fact, rule 506(c), which deals with accredited investors, has a very strict verification process.
Plus, the definition of a sophisticated investor is, in itself, not as well-established as the definition of an accredited investor.
With 506(b) offerings and sophisticated investors? the issuers can essentially take an investor’s word that they meet those so-called “sophisticated” requirements — and many high-level entrepreneurs *do* meet those requirements. And, when the investors know, like, and trust their sponsors, it typically means that they already meet those requirements in another way completely.
To simplify it even more, accredited investors have strict rules and requirements. Sophisticated investors have looser rules and requirements, allowing people who are highly interested and educated in investments to get involved… without the strict verification. 506(b) offerings reward both types of investors. Rule 506(c), however, requires that all investors be accredited.
Currently, our offerings at The Kitti Sisters are all 506(b) offerings — as our deals are quickly filled by people who know, like, and trust us. In the future, we may transition into 506(c) offerings with bigger deals. Stay tuned in by joining the waitlist for The Kitti Freedom Club.
Advertising and prior relationships
A big difference between both 506(b) offerings and 506(c) offerings is the ability to advertise or not. In Rule 506(b) offerings, like ours, the issuer has to be able to prove an existing relationship pre-investment, meaning that they can’t advertise specific deals. Instead, they can advertise things that grow their brand and their know, like, trust factor (like the blog you’re reading now)! This is incredibly important in meeting SEC requirements — and it’s why you’ll often have several meetings with your 506(b) sponsors before they ever ask you to invest.
Rule 506(c), however, does not have this restriction — and the issuers of a Rule 506(c) deal can advertise to and accept any accredited investor.
The importance of knowing, liking, and trusting your sponsor team
Here’s the thing — there are far more important things than the type of investment offer you choose to invest in. The most important one? Knowing, liking, and trusting your sponsor team. See, the team you choose to invest in needs to be a team that you feel confident in entrusting a big piece of your financial future to 🤓— and it’s important to consider that know, like, and trust factor right alongside considering the type of investment itself.
If you’re looking for an investment team you can know, like, and trust, look no further than us — our biggest goal is YOU, always, regardless of the deal classification itself. And, if you’re ready to increase your investment knowledge (helllllooooo, investor sophistication! 😎), keep an eye out for the exciting news coming soon‼️
Inside, we’ll be diving deep into everything from investment classifications and Regulation D to accreditation and IRR… and if you didn’t know what any of that meant, we promise you that you WILL. We hope to see you there!
GET ME ON THE KITTI FREEDOM CLUB
………..
Rate, Review & Follow!
“I love Cashflow Multipliers.” ◀️ If that sounds like you, please consider >> rating and reviewing our show! This helps us support more people — just like you — move toward the financial futures that they desire. Click here to let us know what you loved most about the episode!
Also, if you haven’t done so already, follow the podcast. We’re sharing the best tips, tricks, and secrets in owning your own time so achieving financial freedom early and permanently becomes easier. Follow now!
Comments +