Can a syndicator do both a 506(b) offering in order to get non-accredited investors and a 506(c) offering in order to advertise at the same time?

My name is Tilden Moschetti. I’m an attorney for the Moschetti Syndication Law Group. Our practice focuses exclusively on Regulation D Rule 506(b) and 506(c) offerings. It’s only natural that we oftentimes hear this question: Can the syndicator do a Rule 506(b) offering to get non-accredited investors and a Rule 506(c) offering to advertise and get investors they don’t know into the same syndication?

Well, the answer is, there’s one way that sort of works, and there are two ways that don’t work. Let’s talk about the rules in general, and then we’ll go through the specifics of the different strategies we get asked about.

In general, Rule 506(b) is an exemption to your registration with the SEC. It allows up to 35 non-accredited investors into your syndication over a 90-day period. You can stack these, so it can be 35, then 35 more, and then 35 more, as long as there’s no more than 35 in that 90-day period. The big problem with Rule 506(b) is its prohibition of general solicitation, which means you can’t put a billboard on Main Street advertising your offer during that time.

Rule 506(c), on the other hand, allows you to make a general solicitation. You could put skywriting across the sky all about your syndication and look for investors; it doesn’t matter if you know them or not.

The problem syndicators sometimes have is raising money and getting enough capital. The idea is if they can pull from the general public and get as much as they can from there, but also raise money from people they already know who trust them, they would have no problem raising funds. The challenge, of course, is that you can’t really do this in the way most people think.

The first strategy we get asked about, and probably the way I’m asked most often, is: Can I do a Rule 506(b) and Rule 506(c) at the exact same time to get the investors in? The answer is clearly no. If you were to do that, it would basically be akin to having an end run around this prohibition of general solicitation. It just negates the whole point of the rule.

The other strategy that we get asked about that does not work either is doing a Rule 506(c) offering, closing it, and then doing a Rule 506(b) offering. An unscrupulous syndicator may come up with the idea of doing it this way, simply because they could advertise to the world saying they’re doing a 506(c) offering. When non-accredited investors call, they would just say, “Let’s build that relationship.” Because they’re going to close that Rule 506(c) offering and then already have that relationship where you can come in under Rule 506(b). This way is simply not going to work because it’s clearly an end run around the rules.

The third way to do it, which probably would work but would look a little funny, is to do a Rule 506(b) offering first. Talk to all of your friends and family, don’t do any advertisement whatsoever, and bring them into your syndication. Make it clear that in this 506(b) offering, it’s closed, you have to know me, and we’re going to talk about how you know me and what that relationship looks like. Make sure that’s very well documented.

Let those investors know that once this closes, you’re going to have another round that’s going to be 506(c). It’s a completely different round in the same syndication, but it might even be a different class of membership units altogether. Once that’s closed, you would then do a 506(c) offering a little while later. At that point, you could advertise.

Do not make the mistake of your friend Joe calling you during the 506(c) period saying he wants in but didn’t make it into the 506(b) offering, and you letting him in anyway because he’s a non-accredited investor you know well. Do not make that mistake. Once you’ve done that, the whole house of cards falls apart completely because you’ve brought in a non-accredited investor into your 506(c) offering.

I hope that helps. My name is Tilden Moschetti. I am the syndication attorney for the Moschetti Syndication Law Group. If you need anything as it relates to Regulation D offerings under Rule 506(b) or Rule 506(c), please don’t hesitate to give us a call or visit our webpage.