506B vs 506C? Which one is best for you?

Navigating the regulatory maze of investment fund compliance doesn't have to be overwhelming. In this eye-opening breakdown, I tackle one of the most confusing aspects of raising capital: understanding the critical differences between 506B and 506C offerings.

Think of 506B as a private dinner party – you're limited to raising from people you know, with no public advertising allowed. While you can include up to 35 non-accredited investors alongside unlimited accredited ones, you're relying solely on pre-existing relationships. The benefit? A simpler process with less verification hassle. The downside? Severely restricted marketing reach.

On the flip side, 506C is your public concert – advertise freely across social media, run ads, and market openly to the estimated 10 million accredited investors in the US. The catch? You can only accept accredited investors who must verify their status through tax returns, financial statements, or third-party letters. Modern platforms like Funflow make this verification process smoother, but it's still an additional step that can sometimes slow down capital inflow.

I reveal a powerful strategy many successful fund managers use: starting with 506B to bring in family and close investors (including non-accredited ones), then temporarily closing subscriptions before reopening as a 506C to scale publicly. Just remember – compliance isn't optional. File your Form D, stick to the rules of your chosen exemption, and build your fundraising approach on a legally sound foundation. Whether you're leveraging existing relationships or building a marketing machine to attract new investors, choosing the right regulatory path can make all the difference between frustration and fundraising success.

Want more guidance on structuring compliant, scalable funds? Subscribe to this channel where we keep it real, keep it legal, and help you build a fund like a pro. To great success and greater impact!

Get the Free Capital Raising Course
Get Fund Flow Os
Join the Free Capital Raising Community
Apply to the Founder's Circle

Follow me on instagram
Connect with me on Linkedin

Transcript

Introduction to Fund Compliance

Speaker 1 0:00

What's up? Y'all? It's Devin, and on this channel, I help you guys to launch and scale investment funds, raise smart capital and navigate the whole crypto and finance world without getting finessed by complexity or compliance. So I'm here to help. Today, we're going to be talking about one of the biggest sources of confusion in the fund and syndication world. Just period 506B or 506C, and if you've ever been stuck wondering wait, can I publicly advertise my fund? Do I need to verify if my investors are accredited? Is this the part where the SEC kicks my door and I go to prison? Then this video is for you, so I'm going to go ahead and break it down Now.

What Makes an Accredited Investor

Speaker 1 0:35

506b and 506C are both reg defilings under the Security Act, and so really all this means is they're the legal lanes that let you raise money without doing a full blown SEC registration like a public company would if it's going to IPO or something. But here's the catch they have very different rules. So, for example, 506b, this is like the private dinner party you know them, you have invited people, you have a relationship with no Instagram ads, no public TikToks, no mass emails to strangers. You're allowed to raise from unlimited amount of accredited investors, which we'll talk about what that is in just a minute. And then up to 35 non-accredited investors, as long as they're sophisticated or whatever that means. But and this is the key you cannot publicly solicit to them. You can't post your deal on Twitter with the buy this like, get jump into this deal hashtag. You can't DM random people, you can't run Facebook ads. You're relying on pre-existing relationships.

Speaker 1 1:31

And a lot of people will say, well, what the heck is a pre-existing relationship? And the IRS, or sorry, and the SEC will kind of say something a little bit different. Who knows? This is a little bit of a gray area. Some people will say pre-existing the offering or pre-existing the fund, and some people will say, as long as you track their relationship right, you track when you met them, you got it like literally in a calendar when you met them, the conversations you had when you got coffee with them, the next thing you did. If you can track that and there's like two to three or four weeks between you meeting them and you offering them deal, sec will kind of be like okay, that's good. It just really depends the benefit of like a 506B. You don't have to go through the hassle of verifying if someone's accredited, if they say they are, you can take them on their word and you don't really have to have that many checks Maybe like a reasonable amount of checks which is like are you accredited? Yep, sweet.

Speaker 1 2:19

Now the downside you're limited in reach. Your marketing is basically word of mouth or just one-on-one conversations. The SEC did this a long time ago because they wanted to protect little old grandma from getting scammed by the Instagram influencer that's running ads saying that she's going to make 30% if she invests her life savings into it, and then she loses it all. So the SEC wants to make sure that if people are going to be marketed to about offerings, they are in a position to be able to lose their money. Now, the way that we know that is because 506Cs allow you to market. This is where you can be loud. You want to run Facebook ads? Cool, do it. You want to post and raise on your IG or LinkedIn? Be my guest, all good. You can publicly solicit or publicly market your fund all day long.

How to Choose Between 506B and 506C

Speaker 1 3:05

But and it's a big but you can only accept accredited investors. So what's an accredited investor? Accredited investors what I like to call one, two, three they have a million dollar net worth outside of their primary residence. Two, they make $200,000 a year for the past two years and for the foreseeable future. Or three, they make $300,000 a year jointly with their spouse for the past two years or for the foreseeable future. So that is what accredited investors are so definitely different from little old grandma unless little old grandma's got it like that.

Speaker 1 3:36

And it's not just people that are saying they're accredited. They have to verify it. That means they have to have tax returns, w-2s, brokerage statements or a third-party verification letter from an attorney, cpa or financial advisor. The great thing is Funflow, the operating system that we manage. If you put your investors in there, they can go through the accreditation process right in the app and it takes care of all of that for them and it helps them to streamline that process, because I can't tell you how many times people lose out on deals because the accreditation process takes so long. It's frustrating, it can be cumbersome. We like to make that as easy as possible.

Common Compliance Mistakes to Avoid

Speaker 1 4:10

So, yeah, the bar is a little bit higher, but the upside is real. You can cast a much wider net and raise capital from people you don't already know. I think this is massive. I would always go with this because I'm telling you. There's way more accredited investors than you think out there. I think there's like 10 million in the United States. This is where capital raising systems come into play Funnels, emails, automations, landing page all of that works best with 506Cs, which is why Funflow is really cool and works really well for you.

Key Takeaways and Resources

Speaker 1 4:39

Now let me break it down to you. How do you choose? It's pretty simple. You go 506B if you already have a tight network of investors. This is actually really interesting. If you have investors, even if they're accredited, you know that you don't need to go out and market it to get more capital. 506b is actually a pretty good way to go because you don't need to market the fund and it makes the process a lot smoother of getting that capital in, which is great. And this is why you see some really, really big institutions that you know they have a lot of money in them, but you don't see them marketing it at all or marketing their fund. It's because they already have those institutions and they want to make the process of getting their money in simpler. Or you want to allow a few non-accredited people in, like family or longtime business friends. You don't want to deal with the accreditation verification process. Now that's kind of the friends and family route where there are people you know no Instagram, no TikToks, no mass emails.

Speaker 1 5:31

Now you go 506C if you're planning to grow your investor base beyond, like your circle. You want to market it publicly. You're building a brand and lead gen strategies to capital raise long term, which is a lot of what we teach at Fund Founders. A lot of times I see people that come in and they have a really big social media following. You want to leverage that. So you could do that For me and my funds.

Speaker 1 5:51

I've used both. Sometimes I start with a 506B and then switch over to a 506C whenever I'm ready to scale, because you can do that. But here's the golden rule you don't want to switch them. You can't say that you're doing a 506B and then go promote it online. That's how you end up with the SEC really on your butt. You can though this is very interesting you can start as a 506B, bring in those non-accredited investors and then actually, when you fill that space up, close subscription Some people will say for 30 days, some people will say for seven days, some people will say for one day and then open back up as a 506C and then you can market your fund again, but you cannot let any more non-accredited investors in, which is wild. So you can do both. Actually, I mean, it depends on what type of fund you have.

Speaker 1 6:34

Now here's the mistakes I see. All the time People start raising capital under a 506B, then get really excited and start posting it online. Don't do that. I mean like, don't do that, don't hype it up. If you don't, you just can't talk about your fund if that's what you decide that you're going to do Now. The second mistake I see is and then the other thing I see is people forget to file a Form D. Yes, they forget to actually register with the SEC. Like, don't forget to do that.

Speaker 1 7:10

Compliance is not optional. This is the foundation to keep your fundraising efforts legal and sustainable. It has to be done, otherwise you will find yourself in a world of trouble. So you got to make sure that you are not advertising it. Now you can talk about like, I'm doing this, I'm doing that, but it has nothing to do with the fund. So for me, we are flipping houses, we're doing things like that, we're helping people, and people wanted to be a part of that, and so then I would introduce them to what we are doing. But honestly, you can't be reaching out to people and you make sure that you file with compliance and we help you build the fund like a.

Speaker 1 7:47

So key takeaways here both the 506B and 506 are legal lanes to raise money without SEC regulation. 506b let's be friends right. Private solicitation pre-existing relationships. This can include non-accredited investors and accredited investors. 506c public advertising is allowed. Accreditation investors only. Verification is required. Don't mix them. Pick one strategy. Stick to it. Unless your closing subscription is switching to a C, compliance is an option.

Speaker 1 8:17

This is foundation that keeps your fundraising efforts legal and sustainable. File your forms or we will do them for you so we can make that happen for you Now. Hopefully this clears things up. If you want more help structuring your fund the right way or need help with legal docs, capital raising systems or back-end automation, hit the links below. We help people launch compliant, scalable funds every single week and if you're serious about raising capital, make sure you subscribe to this channel. We keep it real, we keep it legal and we help you build a fund like a pro.

Call to Action and Closing

Speaker 1 8:46

So, as I always like to say, to great success and greater impact. I'll see you on the other side. Peace. Wow, I hope you enjoyed that. I have a quick favor. If you've been enjoying the show. There's one simple way you can support us and it's by hitting that follow button or that subscribe button on the app you're listening to. I want to level this podcast up in every single way possible. I want to level this podcast up in every single way possible, bringing you more value, incredible content and guests and new strategies. Following the show and leaving a quick review goes a really long way in helping us to grow and continue to deliver top-tier content. It's the only free thing I'll ever ask you to do and it makes a bigger impact than I can possibly put into words. So thank you for being a part of this journey and I'll definitely catch you on the next episode To.