Rule 506c due diligence checklist

A printed two-part checklist beside a private placement memorandum and a calculator

Diligence on an advertised private placement is really two jobs, and mixing them is how people end up satisfied by the wrong one. The first job asks whether the offering is being run the way the rule requires. The second asks whether the building, the debt, and the sponsor are worth your capital.

Part A below is the floor. A sponsor that fails any item there should not get to Part B. Part B is the decision, and no amount of clean paperwork in Part A makes it for you.

Part A: Is the Offering Being Run Properly?

Each of these can be confirmed in an hour with the documents and a browser. A “we’ll get that to you” that never arrives is a no.

Form D appears on EDGAR under the issuer’s exact legal name. Why: the notice filing is the only public footprint a 506(c) raise leaves, and its absence after the first sale means either sloppiness or a sponsor who did not intend to be found.
Form D lists the same officers and the same exemption (Rule 506(c)) the sponsor told you. Why: a filing that names 506(b) while the sponsor is running paid ads is a raise with a compliance problem baked in.
The sponsor requires document-based or third-party verification of your accredited status and can name who performs it. Why: a sponsor that will accept a signed box after advertising publicly is treating its own exemption as optional, and your capital will sit inside that exposure.
A full PPM, subscription agreement, and operating (or limited partnership) agreement exist and are provided before you are asked to sign. Why: those three documents are the offering; a deck and a term sheet are advertising.
The PPM contains a risk-factors section written for this deal, not a template. Why: risk factors that never mention the property’s city, the lender, or the specific business plan tell you nobody with legal responsibility read the deal closely.
The sponsor and its principals confirm in writing that no “bad actor” disqualification applies. Why: Rule 506(d) bars issuers whose covered persons have certain securities-law or fraud histories, and the representation is standard in a properly drafted subscription agreement.
You can trace the issuer to a real entity, a real address, and named principals with checkable backgrounds. Why: BrokerCheck, the state bar, and the Secretary of State’s business search are free, and an advertised offering whose people cannot be found is the largest red flag on this list.
The use-of-proceeds table adds up and the offering minimum, maximum, and closing date are stated. Why: an offering with no minimum can close having raised too little to buy the building, leaving your capital in an entity with no asset and a sponsor still collecting fees.

All eight passing tells you the sponsor is competent at the administrative part of raising money. That is a low bar, and clearing it is where many investors stop.

Part B: Is the Investment Any Good?

Nothing here is a regulatory requirement; it is what a careful buyer does with the documents Part A confirmed exist.

The sponsor

The principals have bought, operated, and sold this type of property before, and will say which ones. Why: a manager whose experience is in a different asset class or a different market is learning on your money.
The sponsor is contributing its own capital alongside yours, and the amount is disclosed in the PPM. Why: skin in the game on every project aligns the person choosing the building with the people paying for it in a way no fee structure can.
Reporting frequency and content are specified in the operating agreement, not just promised in the deck. Why: a promise that is not in the governing document is not enforceable once you have wired.

The property

Current rent roll, trailing twelve months of operating statements, and the purchase contract are in the data room. Why: projections are opinions; those three are the closest thing you will get to facts.
Projected rents are within reach of what comparable units in the same submarket are leasing for today. Why: a business plan that needs rents 25% above the neighbourhood is a bet on the neighbourhood changing, not on the building.
The capital-expenditure budget matches the building’s condition and age. Why: a 1968 building with original plumbing and a $2,000-per-unit renovation budget will spend the difference out of your distributions.

The leverage

Loan-to-value (LTV), rate type, term, and maturity date are stated for the actual loan, not a placeholder. Why: a 10-unit building bought for $3,500,000 with a $2,600,000 loan is at 74% LTV, and a 10% fall in value wipes out most of the equity beneath you, whereas the same building at 45% LTV leaves the equity intact through a much deeper decline.
Debt-service coverage ratio (DSCR), meaning net operating income divided by annual debt payments, is above roughly 1.25 on in-place income, not projected income. Why: coverage that only works after the renovation is finished is coverage that does not exist on the day you invest.
The loan does not mature before the projected sale, or the plan explains the refinance. Why: a loan coming due in year three of a five-year plan hands the decision to a lender whose interests are not yours. See loan maturity and refinancing risk in private real estate for how that plays out.

The fees

Every fee is listed in one place with its basis: acquisition, asset management, construction, disposition, and any affiliate property-management charge. Why: fees scattered across the PPM are hard to add up, and the sum is what actually comes off the top of your return.
The preferred return is defined, including whether it accrues and whether it is paid before or after fees. Why: “8% preferred” paid after a 2% asset-management fee on gross capital is a different number from 8% paid first.
The promote (the sponsor’s share above the preferred return) only begins after your capital and preferred return are paid back. Why: a waterfall that pays the sponsor a share of early cash flow before your preference is met inverts who bears the risk.

The exit

The projected sale price rests on an exit cap rate no lower than today’s. Why: assuming buyers will pay more per dollar of income in five years than they do now is where most inflated projections hide.
Transfer rights and the absence of a market for your interest are stated plainly, and your own liquidity plan does not depend on selling early. Why: restricted securities are restricted, and the operating agreement, not the sponsor’s goodwill, governs whether you can get out.
The hold period and the sponsor’s discretion to extend it are spelled out. Why: a “five-year” plan with an unlimited right to extend is an open-ended commitment with a five-year label.

How to Use the Two Halves

Run Part A first and stop if it fails. Run Part B only on offerings that passed, and expect it to take days rather than an hour, because the answers live in the PPM and the rent roll. Our multifamily due-diligence checklist for accredited investors goes deeper on the property questions.

Ask any sponsor, including VisionWise Capital, a private real estate offering for verified accredited investors, to walk you through both halves against its own documents. A sponsor that welcomes Part B has usually already passed Part A; one that wants to talk only about the projections has told you which half it would rather you skip.

Want to run this checklist against a real set of offering documents? Talk to VisionWise Capital →

This content is for informational purposes only and does not constitute investment, legal, or tax advice. Real estate transactions and private placements involve significant risk, including potential loss of principal. Always consult qualified legal, financial, and tax professionals before making investment decisions.

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For independent investor education, see the SEC's investor.gov introduction to investing.

Rule 506(c) Due-Diligence Checklist for Investors