Reg D 506(c) vs 506(b): Which Fund Structure Is Right for Your Investment?

Understanding Regulation D: The Foundation of Private Fund Offerings

When a real estate fund raises capital from private investors in the United States, it almost always does so under Regulation D of the Securities Act of 1933. Regulation D provides exemptions from the full SEC registration process — allowing fund managers to raise capital without the cost, complexity, and public disclosure requirements of a registered offering.

Within Regulation D, two exemptions dominate the private fund landscape: Rule 506(b) and Rule 506(c). While both allow issuers to raise an unlimited amount of capital, they differ significantly in who can invest, how investors are verified, and how the fund can be marketed. For accredited investors evaluating private real estate opportunities, understanding these differences is not merely academic — it directly impacts the quality of the investor base, the transparency of the fund, and the legal protections available.

This analysis provides a detailed, side-by-side comparison of 506(c) and 506(b), examines the implications for international investors, and explains why Grow Fund US has structured its offerings under Rule 506(c).

The Core Difference: General Solicitation

The most fundamental distinction between 506(b) and 506(c) lies in how the fund can communicate with potential investors.

Rule 506(b) prohibits general solicitation and general advertising. This means the fund manager cannot publicly market the offering — no advertisements, no social media campaigns, no public presentations about the investment opportunity. The fund must rely on pre-existing, substantive relationships with potential investors. Every investor approached must have a prior relationship with the issuer or its placement agent before any offering materials are shared.

Rule 506(c), introduced by the JOBS Act of 2012, permits general solicitation and advertising. A fund operating under 506(c) can publicly discuss its investment opportunity, present at conferences, advertise on its website, and reach investors through any legitimate marketing channel. However, this freedom comes with a critical trade-off: every investor must be a verified accredited investor, and the burden of verification falls squarely on the fund manager.

Investor Eligibility and Limits

Rule 506(b)

Under 506(b), a fund may accept up to 35 non-accredited investors in addition to an unlimited number of accredited investors. Non-accredited investors must be "sophisticated" — meaning they possess sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the investment.

When non-accredited investors participate, the fund must provide them with disclosure documents comparable to what would be required in a registered offering. This increases legal costs, compliance complexity, and the fund's exposure to liability.

In practice, most institutional-quality 506(b) offerings restrict participation to accredited investors only, but the legal option to include non-accredited investors remains.

Rule 506(c)

Under 506(c), only accredited investors may participate. There is no allowance for non-accredited or sophisticated investors. Every single investor in the fund must meet the SEC's accredited investor definition and must be verified through reasonable steps taken by the issuer.

This creates a higher-quality, more uniform investor base. Every participant has been independently verified to meet minimum financial thresholds, reducing the risk of disputes, regulatory challenges, and investor-suitability concerns.

Accredited Investor Verification: Self-Certification vs. Independent Verification

This is where the rubber meets the road for investor protection and fund integrity.

506(b): Self-Certification

Under 506(b), the fund can rely on investor self-certification. The investor checks a box on a subscription agreement or questionnaire stating that they meet the accredited investor criteria. The fund manager has no affirmative obligation to independently verify this claim.

While convenient, self-certification introduces risk. If it is later discovered that a non-accredited investor was included in the offering — even through self-certification — the entire exemption could be jeopardized. The SEC has brought enforcement actions against issuers who failed to take reasonable steps to ensure investor eligibility.

506(c): Reasonable Steps to Verify

Under 506(c), the issuer must take "reasonable steps" to verify that each investor is accredited. The SEC has outlined several non-exclusive safe harbors for verification:

Income Verification

• Review of IRS forms (W-2, 1099, K-1, tax returns) for the two most recent years, plus a written representation that the investor reasonably expects to meet the income threshold in the current year
• The threshold: individual income exceeding $200,000 (or $300,000 joint with spouse) in each of the two most recent years

Net Worth Verification

• Review of bank statements, brokerage statements, and other documentation of assets, combined with a credit report to assess liabilities
• The threshold: net worth exceeding $1,000,000, excluding the value of the primary residence

Third-Party Verification

• A written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed CPA, or attorney that the firm has taken reasonable steps to verify accredited status within the prior three months

Existing Investor Re-Verification

• For investors who previously invested as verified accredited investors, the fund may obtain a new written representation at the time of new investment

These verification methods create a documented audit trail that protects both the fund and its investors.

Reporting and Compliance Obligations

Both 506(b) and 506(c) offerings must file a Form D with the SEC within 15 days of the first sale of securities. Form D is a brief notice that includes basic information about the offering, the exemption claimed, and the issuer's identity.

Beyond Form D, the compliance burdens diverge:

Requirement	506(b)	506(c)
Form D Filing	Required	Required
State Blue Sky Filings	Required in states where investors reside	Required in states where investors reside
Anti-Fraud Provisions	Full application	Full application
Disclosure Documents for Non-Accredited Investors	Required if non-accredited investors participate	Not applicable (no non-accredited investors)
Ongoing Verification Records	Not required	Required — must maintain verification documentation
Bad Actor Disqualification	Applies	Applies

The bad actor disqualification rules (Rule 506(d)) apply equally to both exemptions. Any covered person with a disqualifying event — such as certain criminal convictions, regulatory orders, or SEC disciplinary actions — is barred from participating in the offering.

Implications for International Investors

For investors based outside the United States — particularly in Brazil, Latin America, and other jurisdictions where Grow Fund US has a significant investor base — the choice of exemption has practical consequences.

Pre-Existing Relationship Requirement Under 506(b)

International investors often discover U.S. investment opportunities through conferences, referrals, or online research. Under 506(b), the fund cannot discuss the offering with a prospective investor unless a pre-existing, substantive relationship has been established. This creates a barrier for international investors who may have limited prior contact with U.S.-based fund managers.

In practice, this means a Brazilian investor who learns about a compelling opportunity at a real estate conference cannot receive offering materials at that event. The fund manager would need to first establish a relationship — which could take weeks or months — before sharing investment details.

Open Access Under 506(c)

Under 506(c), there is no pre-existing relationship requirement. An international investor can learn about the opportunity through any channel — a website, a conference presentation, a published article — and immediately request and receive offering materials. The only gate is accredited investor verification.

For international investors, verification typically involves:

• Providing financial documentation from their home jurisdiction, translated into English where necessary
• Obtaining a third-party verification letter from a qualified professional (CPA, attorney, or financial adviser) who has reviewed their financial position
• In some cases, providing documentation of equivalent accredited status under their home jurisdiction's securities regulations

This streamlined access is one of the primary reasons why 506(c) is favored by funds with an international investor base.

Regulation S Considerations

It is worth noting that offers and sales to investors outside the United States may also be conducted under Regulation S, which provides an exemption from registration for offshore transactions. Many funds use a dual structure — Regulation D 506(c) for U.S. investors and Regulation S for non-U.S. investors — to maximize reach while maintaining compliance.

Why Grow Fund US Chose 506(c)

Grow Fund US structures its offerings under Rule 506(c) for several strategic and philosophical reasons:

1. Transparency and Trust

The ability to publicly discuss our investment thesis, track record, and fund structure allows us to build trust with prospective investors before they commit capital. We believe that transparency is the foundation of a strong investor-manager relationship. Hiding behind the veil of "no general solicitation" is inconsistent with our commitment to open communication.

2. Verified Investor Base

By requiring independent verification of every investor's accredited status, we ensure that every participant in our fund meets the financial thresholds established by the SEC. This protects existing investors by ensuring that all co-investors have the financial capacity to bear the risks inherent in private real estate investment.

3. Wider Reach for Qualified Investors

Our investor base includes accredited individuals and family offices in the United States, Brazil, and across Latin America. The 506(c) structure allows us to reach these investors without the artificial constraints of the pre-existing relationship requirement. A qualified investor in Sao Paulo or Mexico City has the same access to our offering materials as an investor in Miami or New York.

4. Regulatory Confidence

The verification requirements under 506(c) create a documented audit trail that provides confidence in regulatory compliance. In the event of a future SEC inquiry, we can demonstrate that every investor was verified through a recognized safe harbor method. This proactive approach to compliance reduces regulatory risk for the fund and its investors.

5. Alignment with Modern Capital Formation

The JOBS Act created 506(c) to modernize the capital formation process. Grow Fund US embraces this modernization. We believe that qualified investors should be able to learn about compelling investment opportunities through the same channels they use for every other financial decision — publications, conferences, digital media, and direct outreach.

Practical Comparison: Decision Framework for Investors

When evaluating a fund, investors should consider which exemption it operates under as a signal of the fund manager's approach to transparency and compliance:

Choose 506(b) if:

• You have an established relationship with the fund manager
• You value privacy and prefer minimal public disclosure about the fund
• You are comfortable with self-certification of accredited status
• The fund's track record and strategy are well-known to you through existing channels

Choose 506(c) if:

• You want assurance that every co-investor has been independently verified
• You prefer fund managers who communicate openly about their strategy and performance
• You are an international investor without a pre-existing relationship with the fund manager
• You value the regulatory confidence that comes with a documented verification process
• You want access to a broader set of opportunities that may not be available through personal networks alone

The Verification Process: What to Expect

For investors considering a 506(c) fund like Grow Fund US, the verification process is straightforward but requires documentation. Here is what to expect:

Step 1: Initial Interest Express interest in the fund by contacting the fund manager or submitting an inquiry through the fund's website. Under 506(c), the fund can share offering materials immediately.

Step 2: Review Offering Documents Receive and review the Private Placement Memorandum (PPM), subscription agreement, and operating agreement. Conduct your own due diligence.

Step 3: Accredited Investor Verification Provide one of the following:

• Two years of tax returns showing income above the threshold, plus a written representation regarding current-year income expectations
• Bank, brokerage, or other asset statements plus a credit report
• A verification letter from a licensed CPA, attorney, broker-dealer, or registered investment adviser

Step 4: Subscription Complete the subscription agreement, wire funds, and receive confirmation of your investment.

The verification step typically takes 3-7 business days, depending on the documentation method chosen and the responsiveness of third-party verifiers.

Legal Considerations and Recent Developments

The SEC has continued to refine the accredited investor definition and the verification process under 506(c). Recent developments include:

Expanded Accredited Investor Definition (2020) The SEC expanded the definition to include individuals with certain professional certifications (Series 7, Series 65, Series 82) and knowledgeable employees of private funds, regardless of income or net worth.

Inflation Adjustment Discussions The SEC has signaled that it may adjust the income and net worth thresholds for accredited investor status. The current thresholds ($200,000 income / $1,000,000 net worth) have not been adjusted for inflation since their adoption in 1982. Any increase would reduce the pool of eligible investors — making current 506(c) funds potentially more exclusive over time.

Technology-Enabled Verification Several fintech platforms now offer automated accredited investor verification, reducing the administrative burden for both investors and fund managers. These platforms connect to financial data sources, apply the SEC's safe harbor criteria, and issue verification letters in as little as 24 hours.

Frequently Asked Questions

What is the difference between Reg D 506(b) and 506(c) for an investor?

The key practical difference is access and verification. Under 506(b), the fund can only share offering materials with investors who have a pre-existing relationship with the manager, and investors can self-certify their accredited status. Under 506(c), anyone can learn about and receive materials on the fund through any channel — but every investor must be independently verified as accredited through a documented process before investing.

Does 506(c) require more paperwork than 506(b)?

Yes, 506(c) requires more documentation for investors at the time of subscription. You will need to provide either two years of tax returns showing qualifying income, financial statements showing net worth above $1 million excluding primary residence, or a verification letter from a licensed CPA, attorney, broker-dealer, or registered investment adviser. This process typically takes 3–7 business days. The extra step is the tradeoff for having access without a pre-existing relationship.

Can a Brazilian or Latin American investor invest in a Reg D 506(c) fund?

Yes — 506(c) is specifically advantageous for international investors. There is no pre-existing relationship requirement, so an investor in Brazil, Mexico, or anywhere else can learn about the opportunity through a website, article, or event and immediately receive offering materials. The only gate is demonstrating accredited investor status through documentation from their home jurisdiction, translated into English where necessary.

What is a Form D and how do I check if a fund has filed one?

A Form D is a brief notice filed with the SEC within 15 days of the first sale of securities under a Regulation D exemption. It includes basic information about the fund, the exemption claimed (506(b) or 506(c)), and the issuer. All Form D filings are publicly searchable in the SEC's EDGAR database at edgar.sec.gov. If a fund cannot produce an EDGAR filing, that is a significant red flag.

What does "accredited investor" mean under current SEC rules?

An accredited investor is an individual with annual income exceeding $200,000 (or $300,000 joint with spouse) in each of the two most recent years, a net worth exceeding $1,000,000 excluding primary residence, or — since the SEC's 2020 expansion — a holder of certain professional certifications (Series 7, 65, or 82) or a knowledgeable employee of the fund. Institutions with assets over $5 million also qualify. These thresholds may be adjusted upward by the SEC in future rulemaking.

Conclusion: Structure Matters

The choice between 506(c) and 506(b) is not a technicality — it reflects the fund manager's philosophy about transparency, investor protection, and modern capital formation.

At Grow Fund US, we chose 506(c) because we believe that the best investment relationships are built on openness, verification, and mutual confidence. We want our investors to know that every participant in our fund has been verified, that our strategy is communicated publicly and honestly, and that our compliance practices meet the highest standards.

For accredited investors — whether based in the United States, Brazil, or anywhere else in the world — understanding these structural differences is an essential part of evaluating any private real estate opportunity. The exemption under which a fund operates tells you as much about the manager's values as it does about the legal framework.

When you invest with Grow Fund US, you invest in a fund built on transparency, verification, and a commitment to doing things the right way.

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This article is for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any securities. All investments involve risk, including the potential loss of principal. Past performance is not indicative of future results. Please consult with your financial, legal, and tax advisors before making any investment decision.