Under U.S. federal Law, any offer or sale of a security must be registered with the SEC—unless an exemption applies. 

Because promissory notes and fractional interests in trust deeds are commonly treated as securities, private lenders often rely on these exemptions to confidently raise capital or participate in investments without SEC registration, thereby gaining legal clarity. 

Registration is expensive, slow, and designed for extensive public offerings.  Exemptions are the system’s way of allowing private capital formation—friends, family, accredited investors, private placements, syndications, funds, and one-off deals—without going public through an IPO. 

Below are the main categories of exemptions, explained clearly. 

1. Section 4(a)(2) – The Private Offering Exemption 

“Private, non-public, non-advertised offering to sophisticated investors.” 

This exemption allows sponsors or lenders to raise money without registration as long as: 

·        The offering is not public 

·        No general advertising or public solicitation occurs 

·        Investors are sophisticated (financially and experientially) 

·        Investors have access to the information they need to evaluate the deal 

·        The transaction resembles a direct, private negotiation rather than a mass marketing effort 

Used for: 

·        One-on-one note sales 

·        Raising money from a small circle of investors 

·        Private syndications 

·        Partners contributing capital 

Limitations: 

·        No public marketing 

·        It is harder to prove compliance without documentation 

·        Often used together with Regulation D to simplify compliance 

This is one of the oldest exemptions and forms the backbone of all modern private placements. 

2.  Regulation D — The Most Common Exemption for Private Real Estate & Notes 

Regulation D (Reg D) is the workhorse exemption used for: 

·        Real estate syndications 

·        Private lending funds 

·        Fractionalized trust deed investments 

·        Promissory-note offerings 

·        Private debt and equity raises 

Reg D has several rules, but the two most important are Rule 506(b) and Rule 506(c).  For example, 506(b) is ideal for private, non-advertised offerings to friends and family, while 506(c) allows public advertising but requires all investors to be accredited.  Understanding these distinctions helps private lenders select the appropriate exemption for their situation. 

 Reg D Rule 506(b) 

Private offering, no advertising, unlimited accredited investors. 

Under 506(b): 

·        You cannot advertise the investment 

·        You can accept unaccredited but “sophisticated” investors 

·        You may raise unlimited capital 

·        You can have up to 35 non-accredited investors 

·        You do not need to verify accredited status (self-certification is OK) 

Best for: 

·        Friends/family capital raises 

·        Real estate syndications 

·        Passive private lenders 

·        Note funds where advertising is not needed 

Why it’s popular: 

It’s flexible and requires the least intrusive investor qualification procedures. 

Reg D Rule 506(c) 

Advertising is allowed—but only accredited investors may invest. 

Under 506(c): 

·        Advertising IS allowed (websites, social media, email lists, webinars, YouTube) 

·        You may raise unlimited capital 

·        All investors must be accredited 

·        You must verify accreditation (tax returns, CPA letter, etc.) 

Best for: 

·        Sponsors who want to promote offerings publicly 

·        Debt/equity funds seeking national reach 

·        Online capital raising (webinars, newsletters, podcasts) 

Why it’s popular:

It allows public marketing while staying exempt from registration. 

3.  Regulation S — Offers to Foreign Investors Only 

“Non-U.S. investors = outside U.S. securities rules.” 

Regulation S applies when: 

·        The offering is made outside the United States, and 

·        The investors are residents outside the U.S. 

Used for: 

·        Raising capital from foreign investors 

·        Cross-border real estate investments 

·        Offshore funds or non-U.S. entities 

Limitation: 

You cannot use Reg S to “backdoor” U.S. advertising.  The offering must genuinely occur offshore. 

4.  Rule 144A — Sales to Qualified Institutional Buyers (QIBs) 

For institutional investors only. 

Allows unregistered securities to be resold to large institutional investors (insurance companies, pension funds, hedge funds) without SEC registration. 

Useful for: 

·        Mortgage loan pools 

·        Large note portfolios 

·        Institutional-level real estate funds 

Not relevant for most private lenders unless they sell at scale. 

5.  Intrastate Exemption (Rule 147 & 147A) 

“All investors AND the company are in the same state.” 

Allows offerings within a single state without federal registration. 

Requirements: 

·        Issuer is organized and operating in the state 

·        Offers and sales occur only to resident investors 

·        Funds are used within the state 

Good for: 

·        Local real estate projects 

·        Regional lending or fractionalized notes 

·        State-focused mortgage funds 

Limitation: 

Advertising must be confined within the state, which is difficult in the Internet era. 

6.  Regulation A (Tier 1 and Tier 2) 

Mini-public offering—expensive but allows public solicitation. 

Reg A is sometimes called a “mini-IPO.” 

Tier 1 — up to $20M 
Tier 2 — up to $75M 

Pros: 

·        Can advertise publicly 

·        Can accept non-accredited investors 

·        Can build a nationally marketed investment product 

Cons: 

·        Expensive 

·        Requires audited financials 

·        Requires ongoing reporting 

Useful for: 

·        Real estate crowdfunding portals 

·        Large national private mortgage funds 

·        REIT-like structures 

Most private lenders do not use this due to cost. 

7.  Limited Offering Exemption (Rule 504) 

Raise to $10 million per year, under limited circumstances. 

Rule 504 allows small companies to raise up to $10M in 12 months, with fewer restrictions than other rules.  States Play a significant role in governing these offerings. 

Used for small: 

·        Real estate ventures 

·        Local lending funds 

·        Community syndications 

But today, Rule 506(b)/(c) dominates. 

8.  Single-Lender or One-Off Note Exemption (Transaction Exemption) 

One investor + one Borrower = typically exempt. 

When a single lender makes a one-off loan without advertising or cross-investor marketing, the transaction often qualifies for an automatic exemption (thouantifraudaud rules still apply). 

But this does not protect: 

·        Fractionalized notes 

·        Pooled investments 

·        Notes sold through brokers 

·        Notes offered to multiple investors 

These require careful compliance. 

9.  TAntifraudaud Rule — Always Applies (Even When Exempt) 

Every exemption still requires compliance with fraud provisions, meaning: 

You MUST NOT: 

·        Misstate material facts 

·        Omit important risks 

·        Hide conflicts of interest 

·        Promise guaranteed returns 

·        Provide misleading projections 

Even if your offering is fully exempt, failure to provide truthful, complete information can create legal exposure. 

Which Exemptions Do Private Lenders and Trust Deed Investors Use Most? 

For trust deed investing, mortgage funds, fractional note interests, and private-party lending, the most common exemptions are: 

1.       Reg D Rule 506(b) 

2.       Reg D Rule 506(c) 

3.     Section 4(a)(2) private offering exemption 

4.       Intrastate exemptions (Rule 147/147A) 

5.       One-off single-investor transaction exemption 

Reg D dominates because: 

·        No limits on capital 

·        No maximum investor count (except for non-accredited under 506(b)) 

·        Clear, predictable rules 

·        Preemption of many state laws 

Explanation of the difference between Rule 506(b) and Rule 506(c) under Regulation D—explicitly written for private lenders, trust deed investors, and real estate capital raisers—no legal advice—just clear guidance. 

Rule 506(b) vs. Rule 506(c): The Practical, Difference 

Both 506(b) and 506(c) are exemptions under Regulation D of the Securities Act of 1933. 
Both allow companies or sponsors to raise unlimited capital without SEC registration. 
Both preempt most state securities laws. 
Both require compliance with fraud rules. 

But they work very differently—especially regarding advertising, who can invest, and how investors must be verified. 

Below is the most precise comparison you’ll find. 

1.  Advertising and Solicitation 

Rule 506(b): Advertising is NOT allowed 

You cannot: 

·        Advertise publicly 

·        Post offerings on social media 

·        Livestream webinars soliciting investment 

·        Use public websites or email blasts to strangers 

·        Promote yields publicly 

506(b) is a quiet, private, relationship-based exemption. 

Rule 506(c): Advertising IS allowed 

You can: 

·        Market publicly 

·        Post on websites, podcasts, videos, blogs 

·        Use email newsletters 

·        Use seminars, events, or social media 

506(c) allows broad public solicitation, as long as every investor is accredited and verified. 

Quick memory:

1.  Which exemption

506(b) = “Bring your own investors.” 
506(c) = “Broadcast to the world.”

2.  Who Can Invest 

Rule 506(b): Accredited AND (limited) sophisticated investors 

Under 506(b), you may accept: 

·        Unlimited accredited investors, and 

·        Up to 35 non-accredited but “sophisticated” investors 

“Sophisticated” means the investor has enough financial knowledge or experience to evaluate the risks. 

However, once any non-accredited investor participates, disclosure obligations increase. 

Rule 506(c): Accredited ONLY 

Under 506(c): 

·        ALL investors must be accredited 

·        Zero non-accredited investors allowed 

This is the trade-off for being allowed to advertise publicly. 

3.  Verification Requirements 

Rule 506(b): No verification required (self-certification OK) 

Investors self-certify that they are accredited. 

A simple questionnaire or subscription agreement checkbox is usually adequate—no tax returns or financial statements required. 

Rule 506(c): Mandatory verification of accreditation 

You must take reasonable steps to verify accreditation. 
This may include: 

·        Tax returns 

·        W2s or 1099s 

·        Brokerage or bank statements 

·        CPA, attorney, or investment advisor letter 

·        Third-party verification service 

Self-certification alone is NOT allowed. 

This is the single most significant operational difference between 506(b) and 506(c). 

4.  Investor Experience Requirements 

Rule 506(b): Investor sophistication matters 

If you take even one non-accredited investor, you must show: 

·        They are financially sophisticated 

·        They can evaluate the risks 

·        You provided adequate detailed disclosures (often a PPM) 

Rule 506(c): Investor sophistication is irrelevant 

Only accreditation matters. 
Experience or sophistication is not a requirement. 

5.  Documentation and Disclosure Requirements 

Rule 506(b): Lighter documentation if all investors are accredited 

If all investors are accredited: 

·        A full-blown PPM is recommended but not legally required 

·        Documentation burden is lower 

If any investor is non-accredited: 

·        A PPM becomes effectively required 

·        More extensive disclosures similar to registered offerings 

Rule 506(c): PPM is still recommended 

While not mandatory, a PPM is almost always used because: 

·        The offering is publicly marketed 

·        More investors will examine terms 

·        Disclosure helps reduce liability risk 

6.  Practical Use Cases 

506(b) is best when: 

·        You already know your investors 

·        You raise money privately from relationships 

·        You want simplicity 

·        You may include a few non-accredited investors 

·        You do not plan to advertise 

506(c) is best when: 

·        You want to advertise publicly 

·        You want national reach 

·        You require a larger investor pipeline 

·        You are comfortable verifying investor accreditation 

·        Your investor base is primarily accredited anyway 

 7.  Why Private Lenders and Trust Deed Investors Care 

506(b) is ideal for: 

·        Fractional trust deed offerings to people you already know 

·        Small groups of private lenders 

·        Note sales to existing investors 

·        Mortgage funds that grow through relationships 

506(c) is ideal for: 

·        Nationally marketed mortgage funds 

·        Publicly promoted real estate debt offerings 

·        Sponsors who use:  

o   podcasts 

o   social media 

o   webinars 

o   paid advertising 

o   email campaigns 

Quick Summary Table 

The simplest way to remember 

Rule 506(b) 

·        No advertising 

·        Accredited + sophisticated investors 

·        Self-verification 

·        Relationship-based 

Rule 506(c) 

·        Advertising allowed 

·        Accredited only 

·        Mandatory verification 

·        Marketing-based