For private lenders, fund managers, and real estate sponsors, raising capital is a foundational business activity. But before a single dollar can be solicited from investors, the sponsor must select the appropriate federal securities exemption framework. The wrong choice can mean unnecessary costs, regulatory complications, or restrictions that limit the fund’s growth potential.
This guide covers the three most widely used federal securities exemptions for capital raises in the real estate and private lending space, helping sponsors understand which framework aligns with their business model, investor base, and marketing strategy.
Why Exemptions Matter
The Securities Act of 1933 requires that any offer or sale of securities be registered with the SEC unless an exemption applies. Full registration is expensive, time-consuming, and imposes ongoing reporting obligations that most emerging sponsors cannot justify. Federal securities exemptions provide a practical alternative, allowing sponsors to raise capital without the burden of a full public registration.
State-level exemptions exist as well but are rarely the primary framework for sponsors who plan to raise capital across multiple states. This article focuses exclusively on federal exemptions that preempt state securities registration requirements, giving sponsors a single compliance framework regardless of where their investors are located.
The Three Primary Federal Exemptions
Three exemptions account for the vast majority of private capital raises in real estate and lending. Each serves a different strategic purpose.
Regulation D Rule 506(b): The Private Placement Standard
Rule 506(b) is the traditional private placement exemption and remains the foundation of capital raising for sponsors who rely on existing relationships with investors.
- No dollar limit on the total amount raised
- Up to 35 non-accredited investors may participate, provided they meet the “sophisticated investor” standard (sufficient knowledge and experience to evaluate the investment)
- Accredited investors may participate in unlimited numbers
- No general solicitation or advertising is permitted — the sponsor cannot publicly market the offering through websites, social media, email blasts, or other mass communication channels
- Accredited investor verification is not required under the formal safe harbor rules, though sponsors must have a reasonable belief that each investor qualifies
- Form D filing with the SEC is required within 15 days of the first sale
Rule 506(b) is best suited for sponsors conducting a “friends and family” raise or building on an established network of investor relationships. Sponsors who prefer to avoid the formal accredited investor verification process or who need to include a small number of non-accredited investors often gravitate toward this exemption.
Regulation D Rule 506(c): The Modern Capital Raise
Rule 506(c), adopted by the SEC in 2013, has become the dominant choice for real estate and private lending sponsors. The exemption permits what 506(b) does not: public marketing and general solicitation of the offering.
- No dollar limit on the total amount raised
- All investors must be accredited — no non-accredited investors are permitted
- General solicitation is allowed — sponsors can advertise the offering through websites, social media, conferences, email campaigns, and any other marketing channel
- Formal accredited investor verification is mandatory — sponsors must take “reasonable steps” to verify each investor’s accredited status, typically through third-party verification services, review of tax returns, brokerage statements, or written confirmation from a CPA, attorney, broker-dealer, or registered investment adviser
- Form D filing with the SEC is required
The appeal of 506(c) is straightforward. In a competitive fundraising environment, the ability to publicly promote an offering is a significant advantage. The accredited investor verification requirement, which initially concerned some sponsors, has become far less burdensome as verification services have matured and the safe harbor practices have become standardized.
For sponsors in the private lending and real estate sectors, where minimum investment thresholds tend to be substantial, the accredited-only limitation is rarely a practical constraint. The vast majority of capital raises structured by Geraci LLP use Rule 506(c).
Regulation A Tier 2: The Mini-IPO
Regulation A Tier 2 functions as a scaled-down public offering, sometimes called a “mini-IPO.” It provides the broadest access to investors but carries significantly higher costs and regulatory requirements.
- Up to $75 million may be raised in any 12-month period
- Both accredited and non-accredited investors may participate, with individual investment limits for non-accredited investors (generally the greater of 10% of annual income or 10% of net worth)
- General solicitation is permitted — the offering can be widely marketed
- SEC qualification is required — the offering circular must be filed with and reviewed by the SEC before any sales can be made, a process that typically takes six to eight months
- Ongoing reporting obligations apply, including audited financial statements and annual, semi-annual, and current event reporting
Regulation A Tier 2 is best suited for experienced sponsors with established track records and the resources to absorb the higher upfront costs of qualification. It is commonly used by crowdfunding platforms, fintech companies, and larger sponsors seeking broad investor participation. For emerging sponsors, the cost and timeline of SEC qualification make it impractical relative to the Regulation D alternatives.
Choosing the Right Framework
The decision depends on three primary factors:
Investor base composition. If the raise will include non-accredited investors, the sponsor must choose either Rule 506(b) (limited to 35 non-accredited investors, no advertising) or Regulation A Tier 2 (unlimited non-accredited investors, higher cost). If all investors are accredited, Rule 506(c) provides the most flexibility.
Marketing strategy. Sponsors who want to advertise their offering publicly must use either Rule 506(c) or Regulation A Tier 2. Rule 506(b) prohibits all forms of general solicitation.
Cost and timeline tolerance. Rule 506(b) and 506(c) offerings can be launched relatively quickly and at moderate cost. Regulation A Tier 2 requires SEC review, audited financials, and ongoing reporting, making it a significantly larger investment of time and money.
For most private lending and real estate sponsors, the practical choice comes down to 506(b) versus 506(c), with 506(c) being the preferred option for sponsors who want the ability to market their fund broadly.
Work with Geraci LLP on Your Capital Raise
Structuring a fund, selecting the right exemption, and preparing compliant offering documents requires experienced securities counsel. The corporate and securities team at Geraci LLP works with private lenders and fund managers across the country to structure capital raises, navigate federal exemption requirements, and ensure compliance throughout the fundraising process.
Contact Geraci LLP at (949) 403-3488 or visit us at 90 Discovery, Irvine, CA 92618 to discuss your capital raising strategy.
