Is a 506 Fund the right setup?

Question

A few friends and I were discussing how to “crowdfund” a real estate buy and hold company. The basic premise is our friends and family would invest x dollar amount for x # of years. I saw “crowdfund” because we are looking to get a group of 10 to 25 friends together, so it wouldn’t be public. What is the best entity to establish for this type of ownership structure? Thanks in advance for your knowledge!

Sean Morrison · Answer

Typically your entity would be an LLC. You'll need help putting that together since your standard templates are not ready for multiple silent partners. It will be a securities sale so you need to file with the SEC. Assuming your friends and family are not accredited investors, then 506(b) is a standard SEC exemption to use - in that case you'd just file Form D with the SEC. But remember, you can only have up to 35 non-accredited investors with 506(b), and you need to provide them with the disclosure documents, which can be quite a bit of work and you'll need help with those. If they're all accredited, then you can get them to self-certify, but the disclosure requirements are less burdensome.

As to your questions, the LLC would own the fund, and the investors would own the LLC. Typically, we set up a second LLC to hold the properties. Of course, all LLCs are disregarded by the IRS (unless they're taxed as corporations).

Tom Ott · Answer

506(b) is a good way to do it, but you cannot advertise publically. 506 (c) is accredited only. Also, make sure you file everything with the SEC.

Patrick Sittenauer · Answer

@Sean Morrison I currently own properties in a disregarded LLC. Would I be selling a certain ownership percentage of that LLC to another, which is wholly owned by the passive/silent investors?

Tom Ott · Answer

You can with a 506 (b) but you can't advertise it publically. Look up the SEC regulations.

Patrick Sittenauer · Answer

@Tom Ott

Thanks for the reply. So no issue soliciting from non family non friends with 506(b)? Once I have a fund, do we establish an LLC owned by that fund in order to conduct business? And I assume it would be a disregarded LLC? Thanks again!

Is a 506 Fund the right setup?

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