For passive investors looking to enter a syndication-structured multifamily deal, it’s crucial to understand the different types of offerings available. Two common ways most multifamily deals are structured is through 506(b) and 506(c) offerings, each with its own set of rules and characteristics. In this blog, we’ll break down the key differences between these two offerings.
But, before we get into the types of offerings, let’s talk about what a “security” is. According to TN.gov, “Generally, if an investment of money is made in a business with the expectation of a profit to come through the efforts of someone other than the investor, it is considered a security.”
506(b) Offering:
1. Who can invest?:
– In a 506(b) offering, GP’s can sell securities to an unlimited number of accredited investors and up to 35 non-accredited but “sophisticated” investors.
– Accredited investors meet specific income or net worth criteria, which typically include higher income and wealth thresholds.
2. No General Solicitation:
– Under 506(b), issuers are not allowed to engage in general solicitation or advertising to attract investors.
– Investors usually find out about these offerings through personal connections or existing relationships with the issuer.
3. No Required Investor Verification:
– There is no mandatory requirement for the GP’s to verify the accredited investor status of investors in a 506(b) offering.
– Investors may need to self-certify their accredited status, but this verification is not rigorously enforced by regulators.
4. Flexibility in Information Disclosure:
– GP’s have some flexibility in what information they provide to investors in a 506(b) offering.
– However, they are still subject to anti-fraud rules, meaning they cannot make false or misleading statements.
506(c) Offering:
1. Who can invest?:
– Similar to 506(b), 506(c) offerings are limited to accredited investors.
– However, there is no allowance for non-accredited “sophisticated” investors in a 506(c) offering.
2. General Solicitation Allowed:
– One significant difference is that GP’s conducting a 506(c) offering are allowed to engage in general solicitation and advertising.
– This means they can openly market the offering through various channels, such as websites, social media, and advertisements.
3. Strict Accredited Investor Verification:
– In a 506(c) offering, the GP’s must take reasonable steps to verify that investors are accredited.
– This verification process aims to ensure that only qualified investors participate.
4. Stricter Information Disclosure:
– Due to the increased exposure brought about by general solicitation, GP’s in a 506(c) offering typically provide more detailed information to investors.
– The SEC requires this to prevent fraudulent activities associated with public advertising.
As a passive investor, understanding the differences between 506(b) and 506(c) offerings is crucial. Both options are suitable for accredited investors, but 506(c) offerings allow for greater transparency through general solicitation and more stringent verification requirements.
