In this video Kim Lisa Taylor, founder of Syndication Attorneys, explains why switching a Reg D offering from Rule 506(b) to Rule 506(c) (or vice‑versa) during an active raise is not a simple fix. She first clarifies the two exemptions: 506(b) prohibits any general solicitation but permits up to 35 non‑accredited sophisticated investors without independent verification, while 506(c) allows unlimited advertising but requires every investor to be verified as accredited. She then introduces the concept of a “tainted” offering: once any public solicitation occurs under a 506(b) raise, the entire offering becomes a general solicitation, exposing all investors to potential non‑compliance. Switching to 506(c) only fixes future fundraising; it does not retroactively cleanse investors who already wired funds under the tainted 506(b) exemption. Taylor also outlines the SEC’s 30‑day pause rule that must be observed when reverting from 506(c) to 506(b) to accept non‑accredited investors, noting that a 30‑day gap can kill a deal with a tight closing window. She stresses that many syndicators overlook the retrospective exposure and the practical impossibility of pausing a live raise. Finally, she advises concrete steps: stop accepting new capital if a solicitation has occurred, consult a securities attorney immediately, assess each investor’s relationship and documentation individually, and consider offering refunds if necessary. The video ends with a call to schedule a legal consultation and to subscribe for more content.
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You were raising under 506. During the raise, something happened. Maybe you ran a Facebook ad, maybe you sent an email to a list, you bought at a conference, maybe you posted about the deal publicly and it got more traction than you expected. And now someone said, just switch to a 506 and keep going. I want to walk you through what that switch actually involves because the advice is partially correct and what it leaves out is the part that matters most. My name is Kim Lisa Taylor. I'm the founder of Syndication Attorneys. I work exclusively with real estate syndicators and fund managers on Reg D offerings. Let me start with what 506 and actually are, because the distinction matters for everything that follows. 506 is the original securities exemption. No general advertising or solicitation is allowed. You can raise capital from people with whom you already have a documented preexisting substantive relationship, but that restriction comes with a benefit. You can include up to 35 non-accredited but sophisticated investors, and investors can self-certify. No independent verification of investor qualifications is needed. 506 allows general advertising. You can run ads, post publicly, email cold lists. The trade-off, every single investor must be formally verified as accredited with methods such as a letter from a licensed CPA, attorney, or financial advisor. These are 2 separate exemptions. You need to choose one before you start raising capital, and that choice has consequences. Once you're in the middle of a deal, you can't switch very easily. So what does tainted mean? Well, under Rule 506, the no solicitation rule is central to protection of the exemption. Once you've directed any communication about your specific offering to the public, an ad, a public post, an email blast to people you don't have a substantive relationship with, you've made what the SEC calls a general solicitation. One act of general solicitation taints the entire offering, not just the investor who came through that channel, the whole offering. If you're claiming an exemption and you have to defend it to the SEC, to a dissatisfied investor, the burden is on you to show how you followed the rules. If you can't show that you didn't solicit publicly, the exemption is at risk for all investors in the deal, not just some of them. That's where you are when you figure out what happened. Now here's the advice you'll often get. Oh, just switch to a 506 and you're fine. And it's true that going forward, 506 allows the advertising you already did. So for future investors, you're operating under the right exemption. What that advice leaves out is the investors who already wired funds when you had a 506 offering. If you accepted capital from investors while you were operating under a tainted 506 offering before the switch, those investors came in through an exemption that may no longer be defensible. Switching to 506 going forward doesn't retroactively clean up what happened. Those investors are still sitting in a deal that may have a compliance problem. That problem doesn't disappear by changing the label on the offering going forward. This is what most syndicators don't understand when they get the just switch advice. The switch is prospective. It doesn't reach back in time. There's a second piece to this that's equally important, and it's the 30-day rule. So the SEC's guidance says that if you want to go back From 506 to, for example, if you ran ads before now and you want to accept non-accredited investors, you have to pause all capital raising activity for 30 days before restarting under 506. We've actually had this happen where a client went out, thought they were going to be able to do a 506 offering, did their advertising, did not get enough people. But in the meantime, they had people who were their friends, family, and acquaintances who said, Oh, well, we still wanna invest with you. So they had to go back. They wanted to go back to the 506. That's where this 30-day pause comes into play. In an active raise with a 90-day close window, a 30-day gap in raising capital could actually kill your deal, especially if you have investors ready to wire and you have a deal under contract with a specific close date. A 30-day pause simply isn't possible. So the path back to 506, even if it were the right fix, often isn't practically available in the middle of a live deal. What do syndicators often get wrong about this? Many people understand Rules 506 and 506 at a conceptual level. They know that switching to Rule 506 solves the advertising problem. Going forward, and that's true, but what they miss is the fact that they could still have retrospective exposure from the investors who already came in. That's a security-specific nuance. It requires understanding how the exemption works, not just as a filing classification, but as an ongoing legal status that attaches to specific investors for the life of the deal. How and when those investors heard about the investment becomes an issue if there's a problem later on. If they can prove they saw an ad before you made the filing switch, went from a B to a C, your offering could be in serious trouble. This is exactly the kind of thing a securities attorney can help you avoid. Not understanding these nuances that converting to a Rule 506 offering and starting to advertise while your Rule 506 offering is still live is a securities violation, or how it affects all the investors in your deal could mean the difference between being protected by a securities exemption versus being held personally liable for a securities violation. So what do you need to do if you're in this situation? If you've made a solicitation you're concerned about and you haven't accepted capital yet, stop. Talk to a securities attorney before the next investor wires funds. At that point, you still have options. If you've already accepted capital from investors who came in during a potentially tainted offering, The facts need to be assessed investor by investor. There's no universal answer. The specifics matter. When did the solicitation happen? Who came in after it occurred? What can be documented about each investor and their preexisting relationship with you? Do you have to offer some people their money back? The worst thing you can do is assume the switch fixed it and keep going. The second worst thing is panic and stop raising entirely without understanding what you're actually dealing with. What you want is a clear picture of your actual exposure. That's something a securities attorney can help you assess. If you're considering a conversion between 506 and 506, no matter which direction you want to go, book a consultation so we can help you determine a compliant path forward. That's the right time to have this conversation. The link is in the description, syndicationattorneys.com/schedule. Subscribe if you want more content like this.
