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Rule 506(b) of Regulation D represents a very important exemption for real estate syndicators because it allows them the ability to raise capital for their project without the need to register securities with the United States Securities and Exchange Commission.
This exemption is predicated on your actual relationship with the investors to whom you are offering securities and how you are offering them:
Defining who is part of the "general public" and who is not emphasizes the importance of pre-existing, substantive relationships with potential investors. At its core, the rule is based on trust between the investor and the syndicator, which is a fundamental part of unregistered, private market investments.
Therefore, if you are a sponsor, you need to demonstrate that you have a pre-existing substantive relationship. In other words, you need a pre-existing relationship with the investor, whether they are accredited or unaccredited. The relationship cannot be shown anecdotally. It has to be through concreted, documented means.
In the past, the SEC has emphasized the "quality of the relationship" over the length of time when considering a substantive relationship's validity. There should be a significant "passage of time" between the initial meeting between yourself and the potential offer - though there is no fixed rule. Fundamentally, the relationship between the issuer and investor must pre-date the the offer to purchase securities.
Importantly, this cannot be satisfied simply by providing an investor questionnaire to the potential investor.
An an issuer, you need to establish specific policies and procedures that allow you to evaluate the prospective investor’s financial sophistication, suitability, and ability to understand the risks. You also need a record-keeping system document compliance. Finally, you absolutely must engage in candid discussions with any investor about whether they can tolerate the risk of this investment and provide them with transparency about potential risks all before offering the investment to them.
These are also common sense strategies that provide comfort to your clients. You need investors that can sleep at night knowing that they have a full appreciation of where they have invested, and the relative risks and rewards. If you are interested in developing credibility in your industry and confidence in any group of people, clients that appreciate and understand the investment, what it means on a financial level for themselves and for their families is crucial.