Reg D
506(b) vs 506(c)

Regulation D overview

Safe harbor from §5 Securities Act registration. Three active rules in Reg D:

• Rule 504. Offerings up to $10M/year. State blue-sky rules apply. Rarely used for real estate.
• Rule 506(b). No solicitation permitted. Up to 35 non-accredited sophisticated investors + unlimited accredited. Self-certification of accredited status.
• Rule 506(c). General solicitation permitted (website, podcast, mailing list). ALL investors must be accredited AND sponsor must "take reasonable steps to verify."

Accredited investor (post-2020)

• Individual income ≥ $200k last 2 years (or $300k joint with spouse)
• Net worth ≥ $1M excluding primary residence
• Series 7, 65, or 82 license holder (added Dec 2020)
• "Knowledgeable employees" of private funds
• Entities with $5M+ in assets
• Family offices
• SEC/state-registered investment advisors

506(b) — the quiet offering

• No general solicitation. Cannot advertise publicly. No website, no podcast mention, no mass email.
• Pre-existing relationship. Investor must have substantive prior relationship with sponsor before investment invitation. 30-day "substance" rule sometimes cited but not a bright line.
• Up to 35 non-accredited. But non-accredited must be sophisticated (knowledge and experience) and receive additional disclosure package.
• Self-certification. Investor self-certifies accredited status on questionnaire. Sponsor doesn’t verify.

506(c) — the open market

• Full marketing permitted. Public website, podcast, social media, email list, billboard. JOBS Act 2012 liberalized.
• 100% accredited. No non-accredited allowed. Ever.
• Verification required. Reasonable steps per SEC Rule 506(c)(2)(ii):
  • Review tax returns (income method)
  • Review bank/brokerage statements (net worth method)
  • Written letter from CPA, attorney, licensed broker-dealer, or RIA confirming accredited status
  • Third-party verification services (VerifyInvestor.com, AccreditedLink)
• Verification renewed periodically. For repeat investors, 5-year re-verification typical.

Form D and blue sky

• Federal Form D. Filed with SEC EDGAR within 15 days of first sale. Notice filing only — not approval. Covers offering details, sponsor info, compensation.
• State blue-sky notice filings. File in each state where investor resides. Filing fee $100–500/state. 15-day window typical.
• Missed filing. Late Form D doesn’t disqualify Reg D exemption. Late state filing can trigger state investigation.

Bad actor disqualification (Rule 506(d))

Anyone with certain prior disqualifying events in last 10 years cannot use Reg D 506:

• Felony securities or fraud conviction
• SEC enforcement action (cease-and-desist, disgorgement, suspension)
• State securities regulatory order
• Postal Service false representation order
• Final order of state securities/insurance/bank regulator (specific enumerated conduct)

Disqualification extends to: sponsor, directors/officers, 20%+ beneficial owners, general partner, promoter. Background checks essential before offering.

PPM structure

Private Placement Memorandum — the master offering document. Standard sections:

• Executive summary
• Offering terms (amount, minimum investment, use of proceeds)
• Property description
• Market analysis and business plan
• Sponsor background and track record
• Financial projections (pro forma, IRR, equity multiple)
• Capital structure and waterfall
• Risk factors (required extensive)
• Management and fee structure
• Regulatory and tax considerations
• Subscription agreement
• LLC operating agreement
• Investor suitability questionnaire

Typical PPM: 60–150 pages. Drafted by securities attorney ($15k–50k typical).

Crowdfunding alternatives

• Reg CF. $5M cap/year. Non-accredited permitted with limits. SEC-registered funding portal required (StartEngine, Wefunder, Republic).
• Reg A+. $75M cap/year Tier 2. Mini-IPO style. More disclosure than Reg D. Fundrise, RealtyMogul use this.
• Intrastate exemption (Rule 147). State-only investors. State-specific crowdfunding rules.

Common pitfalls

• Inadvertent general solicitation on 506(b). Public podcast mention, Facebook post, BiggerPockets forum pitch. Blows 506(b) exemption. Can’t convert to 506(c) without re-opening and verifying all prior investors. Rescission + SEC enforcement.
• Failure to verify 506(c). Taking self-certification on 506(c) offering. SEC enforcement; offering rescission.
• Pre-existing relationship challenge. 506(b) offering to someone sponsor met 2 weeks ago at event. May not qualify as substantive prior relationship.
• Form D late or missing. Doesn’t disqualify federal, but state regulators impose fines or bar future offerings.
• Bad actor disqualification missed. Co-sponsor has prior state securities order. Entire offering disqualified from Reg D.
• PPM misrepresentation. Projection based on unreasonable assumptions. Fraud exposure. Rescission + damages.
• Promoter compensation. Sponsor pays finder fees without broker-dealer license. Broker-dealer registration violation.
• Accredited lapses post-investment. Investor no longer accredited at next capital call. No obligation to redeem, but restrict new subscriptions.