Syndications: 506(b) vs 506(c) - Make the Switch?

[Spencer Gray]

I would appreciate the opinions from both other experienced syndicators as well as LP's, accredited and sophisticated on the pros and cons on the two main securities exemptions for syndications, 506(b) and 506(c).

Gray Capital is considering whether to make the switch to using the 506(c) securities exemptions after using the 506(b) exemptions for the vast majority of our syndicated multifamily deals, although we have co-sponsored several 506(c) offerings. 

For those of you unfamiliar with the terms, real estate syndications are securities that qualify to be exempt from registering with the SEC, although you must file an exemption to do so, typically 506(b) or 506(c).

506(b) - Unlimited number of accredited investors and up to 35 unaccredited "sophisticated" investors. No public solicitation (advertising), no requirement to verify accredited investor status. Usually less expensive legal. 

506(c) - Unlimited number of accredited investors, no unaccredited/sophisticated investors. Public solicitation is allowed (you can advertise your deals), all investors must verify accredited status. More expensive legal.
 

We have been doing well using 506(b), and have quite a few loyal sophisticated but unaccredited investors who want to continue to invest with us, and we hate the idea of excluding them if we switch to 506(c). Also, we've been hesitant about adding another step for investors by having them verify their accredited investor status (although a letter from a CPA will do so it's not that burdensome, but another step non-the-less). 

That being said, we are interested in switching to 506(c) for 3 main reasons. 

1. To accelerate our accredited investor pool/raise more capital by being able to advertise more freely. 

2. We are already advertising publicly, not for our deals, but about our company, educational resources, our newsletter, etc. In discussion with our lawyers, we aren't violating the SEC guidelines but are in a grey area with some of our content. By going the 506(c) route we would be totally in the clear of getting on the wrong side of the SEC in terms of putting out content/advertising and "seasoning the market". 

3. The majority of our investors are accredited. While we have some awesome/loyal/very sophisticated LP's, they make up a very small % of the overall capital raised in a given deal. 

Benchmarking some of the bigger syndication firms out there, most have gone the 506(c) route, which really makes me consider pulling the 506(c) trigger on an upcoming project.

For those of you who have made the switch, or who haven't, what was your thought process? Was it worth it?

@Brian Burke @Joe Fairless @Brandon Turner @Grant Cardone @Matt Faircloth @Ivan Barratt