Most Sponsors Ask the Wrong Question About Rule 506(b) and Rule 506(c)
One of the most common conversations surrounding Regulation D offerings starts with what appears to be a simple question.
“Should I use Reg D Rule 506(b) or Rule 506(c)?”
At first glance, it seems like the logical place to begin. After all, both exemptions are widely used, both allow companies to raise significant amounts of capital, and both have become staples of the real estate syndication industry. It would seem reasonable to compare the rules, weigh the advantages and disadvantages of each, and then decide which one fits the project.
That’s exactly what many sponsors do. The problem is that they’re often trying to solve a legal question before they’ve answered a much more important business question. By the time the conversation reaches Regulation D Rule 506(b) versus Rule 506(c), the most important decision should have already been made.
The decision isn’t really about securities law. It’s about how the capital is going to be raised.
Too often, sponsors begin by researching accredited investor requirements, general solicitation rules, offering documents, and SEC filing obligations. Those are all important considerations, but they don’t determine whether an offering will be successful. They simply determine the legal framework that supports the offering.
The more important conversation happens much earlier. Before discussing a Private Placement Memorandum, subscription agreements, or investor questionnaires, sponsors should have a clear understanding of how prospective investors are going to find the opportunity in the first place. That single decision influences nearly every aspect of the offering, from the marketing strategy and investor communications to the sales process and, ultimately, the securities exemption itself.
In other words, the legal structure should support the business strategy, not define it. That’s where many sponsors unintentionally get ahead of themselves. They’re asking which exemption they should use before they’ve decided how they’re actually going to raise the money. Once that sequence is reversed, the decision between Rule 506(b) and Rule 506(c) often becomes much more straightforward.
Your Marketing Strategy Is Usually the First Decision
The biggest misconception surrounding Rule 506(b) and Rule 506(c) is that the securities exemption determines how a company raises capital. In reality, the opposite is often true. The way a sponsor intends to raise capital frequently determines which exemption makes the most sense in the first place.
Consider two experienced multifamily sponsors purchasing nearly identical apartment communities. Both have similar purchase prices, comparable business plans, and strong operating experience. From the outside, their offerings might look almost interchangeable. Behind the scenes, however, their investor acquisition strategies could not be more different.
One sponsor has spent the last decade cultivating relationships with existing investors, business owners, CPAs, commercial brokers, and referral partners. Every acquisition is presented to a network that already understands the sponsor’s experience, investment philosophy, and track record. New investors still enter the picture, but they’re often introduced through existing relationships rather than broad public marketing.
The second sponsor has built an entirely different business model. They consistently publish educational content on YouTube, appear on podcasts, host webinars, speak at conferences, invest in paid advertising, and actively grow an online audience. Their objective isn’t simply to communicate with people they already know. It’s to continually introduce their company to new prospective investors and expand their reach beyond their immediate network.
Both sponsors may ultimately raise millions of dollars. Both may build exceptional businesses. Yet asking whether Rule 506(b) or Rule 506(c) is “better” completely overlooks the reason each exemption exists. They’re not competing legal strategies. They’re legal frameworks that support two very different approaches to raising capital.
Why Rule 506(b) Continues to Dominate
Despite the increasing popularity of podcasts, webinars, YouTube channels, and other forms of online investor marketing, the overwhelming majority of Regulation D offerings are still conducted under Rule 506(b). Depending on the year, roughly 85% to 90% of Regulation D offerings continue to rely on Rule 506(b), even though Rule 506(c) has been available for more than a decade.
That surprises many sponsors who assume public marketing has become the standard approach to raising capital. While there are certainly companies that have built exceptional businesses around educational content and national investor outreach, they still represent a relatively small portion of the overall market. Most successful sponsors continue to raise capital the same way they always have, through relationships they’ve spent years developing.
Those relationships take many forms. Previous investors often become repeat investors. Existing investors introduce friends, family members, and business associates. CPAs and other referral sources connect clients with experienced sponsors. Professional relationships developed over years of networking gradually become spheres of influence, introducing prospects. Those individuals may never invest themselves, but they routinely introduce sponsors to business owners, family offices, accredited investors, and other professionals looking for opportunities.
For businesses operating that way, Rule 506(b) frequently becomes the natural choice. The exemption aligns well with a relationship-driven capital raise, while also avoiding the separate accredited investor verification requirements required under Rule 506(c). Rather than collecting tax returns, CPA letters, or third-party verification reports from accredited investors, sponsors can often provide a smoother subscription experience while remaining focused on the relationships that generated the investment opportunity in the first place.
Rule 506(c) Is Not Better; Just Different
One reason this conversation creates so much confusion is that people naturally assume one exemption must be superior to the other. That’s rarely the case. Asking whether Rule 506(b) is better than Rule 506(c) is like asking whether email marketing is better than live networking. The answer depends entirely on what you’re trying to accomplish.
For sponsors intentionally building national outreach, Rule 506(c) can be an extraordinary tool. Public marketing creates opportunities that simply didn’t exist before the exemption was adopted. Educational YouTube channels, podcast interviews, webinar campaigns, social media advertising, and other forms of general solicitation allow companies to introduce themselves to prospective investors far beyond their existing network. For syndicators committed to that growth strategy, Rule 506(c) often provides the legal framework necessary to support it.
The mistake occurs when sponsors choose an exemption because it sounds more flexible rather than because it supports their business model. Public marketing isn’t automatically the right answer for every company. Likewise, limiting an offering to an existing network isn’t automatically the most efficient approach for every sponsor. Each exemption exists because different companies raise capital in different ways.
Experienced sponsors also recognize that this doesn’t have to be an either-or decision forever. As a business grows, its investor acquisition strategy often evolves as well. Some companies begin by raising capital almost exclusively from existing relationships before later incorporating public marketing into future offerings. Others may even use multiple securities exemptions as part of a broader long-term capital-raising strategy when the facts and circumstances support doing so.
Your Capital Raising Strategy Doesn’t Have to Stay the Same
One mistake sponsors make is assuming they have to commit to a single capital-raising strategy for the life of their business. In reality, syndicators can raise capital while regulations change or even run offerings simultaneously under Rule 506(b) and Rule 506(c).
Many sponsors begin by raising capital from the relationships already around them. Friends and family members may participate in the first offering. Business associates, referral partners, and local networking contacts gradually become investors as confidence grows. After successfully closing friends and family, those investors often become repeat participants and spheres of influences introducing investors. Over time, the sponsor’s existing network begins generating new relationships on its own.
As the business continues to mature, many sponsors decide to invest more heavily in public education and brand awareness. They launch a YouTube channel, appear on industry podcasts, host webinars, speak at conferences, publish articles, and consistently create content designed to educate prospective investors. Rather than relying primarily on existing relationships, they’re intentionally expanding their audience and introducing their company to people who may have never heard of them before.
Neither approach is inherently better, and neither needs to be permanent. A sponsor can also switch from Rule 506(b) to Rule 506(c) by updating their private placement memorandum and new blue sky filings. This change can generally be accomplished in a few days.
That’s why choosing between Rule 506(b) and Rule 506(c) should never be viewed as an isolated legal decision. Once that strategy becomes clear, selecting the securities exemption that best supports those objectives often becomes a much more straightforward conversation. That doesn’t stop the syndicator from running multiple offerings simultaneously or switching between offerings.
Four Questions to Answer Before Choosing an Exemption
Instead of beginning with the question, “Should I use Rule 506(b) or Rule 506(c),” it is often more productive to answer a handful of strategic questions first.
Where will most of the investors for this offering come from?
Do I intend to publicly market the opportunity through YouTube, webinars, podcasts, conferences, paid advertising, or social media?
Is this offering primarily being presented to an existing network of investors, or am I trying to introduce your company to people who have never heard of me before?
How does this offering and capitalization strategy fit into my long-term business plan?
By the time those questions have been answered, the conversation surrounding Reg D Rule 506(b) and Rule 506(c) usually becomes much more focused. Instead of debating legal rules in the abstract, sponsors are evaluating which securities exemption best supports the way they actually intend to raise capital.
Start With Strategy, Then Build the Legal Framework
Private placement memorandums, subscription agreements, operating agreements, and securities compliance all play an essential role in a successful Regulation D offering. They protect both the sponsor and the investors while providing the legal framework necessary to conduct a compliant capital raise.
Those documents, however, should support a well-defined business strategy rather than create one. Sponsors who begin by understanding their investor acquisition plan, their marketing strategy, and their long-term growth objectives often find that selecting the appropriate securities exemption becomes a much more straightforward exercise.
Choosing between Rule 506(b) and Rule 506(c) is certainly an important legal decision. By the time that discussion takes place, however, the strategic decisions surrounding investor relationships, marketing, and business growth should already be well underway. Sponsors who start with strategy often discover that selecting the appropriate securities exemption becomes far less complicated because the legal framework is supporting the business plan, not attempting to define it.
The Right Exemption Starts With the Right Conversation
Every successful capital raise begins long before investors receive a Private Placement Memorandum or execute subscription documents. It begins with a business strategy. How will investors discover the opportunity? How will relationships be built? What marketing channels will be used? How does this offering fit into the company’s long-term growth plan?
Those questions deserve answers before the legal documents are ever drafted. Once they are, the decision between Rule 506(b) and Rule 506(c) often becomes much less about comparing securities exemptions and much more about selecting the legal framework that best supports the business.
That’s why the first conversation with your securities attorney shouldn’t simply be about choosing an exemption. It should be about understanding your capital-raising strategy, your investor acquisition plan, and where you want the business to be several years from now. Once those pieces are aligned, the legal structure becomes a tool that supports the strategy instead of a strategy that’s driving the business.
Whether the answer is Rule 506(b), Rule 506(c), or even a combination of exemptions across multiple offerings, experienced sponsors recognize that successful capital raising begins with a plan. The legal documents simply help execute it.