Did you know that you could transition from a 506B to a 506C mid raise without a mandatory waiting period?
This is not legal advice. Recent guidance provided by the SEC clarified that you are allowed to make this transition immediately as long as you follow specific guidelines.
For instance in order to launch the 506C you must close down the 506B portion of the raise and you can then no longer accept non-accredited investors into your fund. If non-accredited investors reach out to you because of your marketing campaigns you can let them know this particular deal is closed to them but that you can continue the conversation.
This will allow you the opportunity to build a substantive pre-existing relationship with them for future 506Bs and build up your investor database.
The pros of this method are that you can create a smaller window for non-accredited investors to become involved and help develop a sense of urgency early on.
It also creates a backup plan for you to open up the marketing floodgates if you run out of investor capital in your immediate circle. Better to have it and not need it than need it and not have it.
The biggest con is the additional cost. talk to your SEC attorney about this but due to the additional paperwork and disclosures there is roughly 20% increase in legal fees.
Per SEC Attorney Mauricio Rauld, here are some main points you need to consider:
You can now commence your syndication under a 506B and transition to a 506C mid-raise. Need to follow each exemption to the letter of the law. SEC won't integrate those 2 offerings.
Best practice is to create 2 classes of membership units so there is no confusion about which class you advertised and which class you sold only to pre-existing, substantive relationships.
When you terminate the 506B, prepare a Corporate Resolution/Written Consent that terminates your 506B Offering and make no further offers or sales to your 506B prospects.
File 2 Form Ds (one for each exemption within the allotted 15 days of the first sale of each exemption.)
This is a wildly superior (and more compliant) option to scrambling and giving up significant portions of your GP profits to additional partners.