Raising Capital the Right Way — 506(b) vs. 506(c), What’s Your Play?

[Jack Pasmore]

I’ve been deep in the trenches of capital raising, structuring deals, and making sure everything stays SEC-compliant. Like many of you, I know the difference between Rule 506(b) and 506(c)—the trade-offs, the nuances, and where each one shines.

• For those that don't know,
• - 506(b) lets you bring in non-accredited investors, but no public solicitation.
• - 506(c) gives you full marketing freedom, but only accredited investors are allowed.

The legal framework is clear. But here’s the real question… How are YOU successfully raising capital while staying 100% compliant?

I’ve seen some investors swear by the old-school, relationship-driven 506(b) approach. Others are running highly optimized 506(c) funnels that print money (raise funds effortlessly). And some? Well, they’re playing chess while the rest of us are playing checkers. I believe that this business is 100% relational and will always nurture a relationship before the pitch.

So, what’s working in this market? Are you leveraging content marketing, strategic partnerships, in-person networking, or something else entirely?

Let’s cut the fluff—feel free to drop some strategies that are moving the needle for you.

Looking forward to hearing what’s working in today’s market.

[Arn Cenedella]

@Jack Pasmore

I’ll share a few thoughts. 

The decision between 506b and 506c is somewhat a function of deal size and capital raise required. 

The larger the deal, the more likely the operator sponsor will go 506c. One - the sponsor needs bigger checks to fund the deal (more likely from wealthy investors) and Two - the sponsor needs more investors and so advertising these deals as allowed in 506c works - Three - there is a limit of 35 sophisticated investors in 506b.

I agree there must be an element of trust built before an investor cuts a check for $50K $100K. That being said, the old adage KNOW LIKE and TRUST applies. The KNOW comes first where advertising helps. 

At Spark Investment Group, we do fairly smaller syndication deals $3M to $6M with capital raises of $2M to $3M. We do 506b deals with a $25,000 minimum.  This structure fits our deal size - our average investment is $50,000 and so we generally have 30 to 50 investors per deal. I’d say half are accredited and the other half sophisticated so we don’t run into issues with the 35 limit. 

The first “sale” is always the hardest. 
How does one acquire their first client or investor?

That always takes the most work. 

I’d say:

One must have:

1. A track record in real estate or business. Some years investing with demonstrated success and expertise. 

2. Local market and or niche knowledge. A sponsor must demonstrate he or she knows the sand box they are playing in. 

3- A professional website and investor presentation. 

4. Work friends and family first - one’s professional and social sphere. 

5. Invest your own capital. 

Once that first “sale” is made then it is time to perform for the investor. If you do, you probably will have an “investor for life”.

At Spark I’d say generally 50% to 60% of our investors in any deal are repeat investors. 

They know us, they like us and they trust us - not because of any “canned” sales pitch but rather we perform for them, and are transparent and available. 

Hope this helps.