Real Estate Crowdfunding for Sponsors: How Reg CF and 506(c) Work
Real estate crowdfunding means raising equity for a property or a portfolio from many investors online, instead of from a handful of people you already know. Legally, it’s the sale of securities: investors buy membership units in the LLC that owns the deal and share in its cash flow and upside. Because it’s a securities offering, it has to fit one of the SEC’s exemptions. Which one you use decides who can invest, how much you can raise and how you can market it.
The usual structure
Most sponsors set up a single-purpose LLC for the deal. The sponsor, or an entity it controls, is the manager. Investors buy membership units. The operating agreement sets out how cash flow and sale proceeds are split between the sponsor and the investors, what fees the sponsor earns, and what decisions need investor approval. None of that changes because the capital is raised online. What changes is which exemption you raise under.
The four options sponsors use
| Exemption | Who can invest | Can you advertise? | How much |
|---|---|---|---|
| Rule 506(b) | Accredited investors, plus up to 35 sophisticated non-accredited investors | No general solicitation | No cap |
| Rule 506(c) | Accredited investors only, verified | Yes | No cap |
| Regulation Crowdfunding (Reg CF) | Anyone, subject to per-investor limits for non-accredited investors | Yes, within the SEC’s advertising rules | Up to $5 million in 12 months |
| Regulation A (Tier 2) | Anyone, with limits for non-accredited investors | Yes | Up to $75 million in 12 months, with SEC qualification and ongoing reporting |
Most syndications have traditionally used 506(b): raise from people you already know, no advertising. That works until you run out of people you already know.
Why sponsors look at Reg CF
Reg CF lets you raise from anyone, accredited or not, and market the offering publicly. It has to run through an SEC-registered funding portal or broker-dealer, and you file a Form C with the SEC that discloses the deal, the sponsor, the risks and the financials.
Two changes made it practical for real estate. In 2021 the SEC raised the limit from about $1 million to $5 million in 12 months, which covers the equity on many small and mid-size deals. And the same rules allow testing the waters before filing, so you can see whether investors are interested before you spend on the raise.
There are trade-offs. You file a Form C and, after a successful raise, annual reports (Form C-AR) until your reporting obligation ends. Non-accredited investors have annual investment limits. And outside the funding portal, what you can say about the terms of the offering is limited to what the SEC’s advertising notice allows.
Why sponsors look at 506(c)
506(c) is also public marketing: you can advertise, post and email about the deal. Every investor must be accredited, and you have to take reasonable steps to verify that, usually through documents or a third-party letter. There’s no cap on the amount and no Form C.
You don’t have to pick one
Many sponsors run Reg CF and 506(c) side by side for the same deal: Reg CF for investors of any kind, 506(c) for larger checks from accredited investors. That lets you market the deal to everyone and take the right kind of money from each investor. It needs careful structuring, especially around how the two offerings share the deal’s economics, so plan it with your securities counsel from the start.
What investors should check
If you’re on the investor side, read our guide to real estate crowdfunding due diligence before you commit to any offering.
Raising with Invown
Invown Funding Portal LLC is an SEC-registered funding portal and FINRA member that hosts Reg CF offerings, and the Invown platform supports 506(c) offerings, including accredited-investor verification, the data room and document setup. You can see live and past offerings on the offerings page and our fees on the pricing page. If you’re weighing Reg CF, 506(c) or both for a deal, book a time with me.
This article is general information, not legal advice. Talk to your securities counsel about your specific offering.