I\u2019ve been writing lately about syndicating your apartment building deals by raising money from private individuals.<\/p>\n
As Ben Leybovich said in his post about this topic<\/a>, syndicating your deals is a great way to add a \u201czero\u201d to your deals.<\/p>\n We\u2019ve skirted around the commonly-asked question and concern, which is \u201cwhat about the SEC? Isn\u2019t it illegal to take investor\u2019s money?\u201d.<\/p>\n Let\u2019s talk about it.<\/em><\/p>\n I will outline some of the securities considerations but I don\u2019t want to overwhelm you with technicalities. This isn\u2019t necessary because your SEC attorney will handle all of the details. But it’s important that you are aware of the main points.<\/p>\n When you accept funds from others to buy an apartment building, you are effectively selling shares, or securities, in the LLC (or other entity) that will own the building. As such, they fall under federal and state securities laws.<\/p>\n These laws differ by state and by how complex the deal is. Typically you have to provide your investors with some kind of disclosure document, and you have to file some forms with the federal SEC and possibly with one or more states.<\/p>\n Most investments will fall under the SEC\u2019s classification of \u201csmall\u201d offerings, i.e., not exceeding $5,000,000. The most important are those under Rules 504 and 505 of Regulation D. Under these rules, you can\u2019t raise more than $5M and have no more than 35 non-accredited investors.<\/p>\n The SEC defines “accredited” investors with a household net worth of at least $1,000,000 and an income of $300,000. There\u2019s no limit with how many of these types of investors you can have.<\/p>\n This impacts your fundraising only in the sense that you shouldn\u2019t have more than 35 non-accredited investors.<\/p>\n Under these rules, you also can\u2019t solicit strangers with your offering. This means you can\u2019t put up billboards, send out mail, or post newspaper ads. Well, you can, but you need to file under another Rule, and then some of the requirements change.<\/p>\n I\u2019m trying to cover the most common case where you\u2019re raising money with word of mouth (more effective anyway in my opinion).<\/p>\n The SEC requires you (or rather, your attorney) to complete a \u201cForm D\u201d (download the form from the sec.gov here<\/a>) and give a disclosure document to each investor.<\/p>\n This disclosure document is usually referred to as a \u201cPrivate Placement Memorandum\u201d or PPM<\/a>. This document is prepared by your SEC attorney and is a long, laborious document that has information about you, the proposed use of the money, possible tax consequences and risks. The document also repeats the terms of your operating agreement.<\/p>\n Your SEC attorney may also have to file some state forms. Some states require you to file, others don\u2019t. The attorney must review the filing requirements for every state your investors live in.<\/p>\nThe Private Placement Memorandum<\/h2>\n
Working with Your Attorney<\/h2>\n