New to BP and just getting started with a RE Syndicate. Have a question about legal requirements to market ourselves as an investment opportunity.
We have our eyes on a local 16-unit, and want to start looking at raising capital. We started a FB page for our LLC that essentially advertises the syndication construct, and encourages people to reach out to me to discuss becoming a capital partner. The idea would be to get on the phone, talk them through our business model, then detail any specific property offering we might be raising capital on. After that, we'd work out an OA.
I just got off the phone with a syndication attorney and he suggested I need a securities license to advertise like that. I'm not trying to limit to accredited investors, so I looked at two things from 506(b): 1) Issuer must have a substantive, pre-existing relationship with investors; 2) General solicitation or advertising of the securities is prohibited.
Some questions here: Are Facebook "friends" substantive relationships (from a legal perspective)? If I'm only advertising the model (not a specific property), is that still a security? How have others handled the advertising piece to bring on non-accredited investors?
Thanks for the help!
I would defer to the advice your attorney gives you. (I am not one.) If he says you are doing something wrong, you probably are.
My understanding is that if you are talking in generalities about how a syndication works, that is not a problem. Once you start talking returns, even hypothetical, it starts getting into a danger area. If you are talking about a specific property for which you are going to raise money, you are absolutely "marketing" and you had best had a pre-existing relationship with a 506(b).
Facebook is a pretty open forum so you need to be super careful what you say there.
I practiced securities law for almost 15 years and prior to that syndicated my own deals. I am now back to doing deals and helping people figure out how to raise money for their deals.
To this end, I don't know who you spoke to or if there might be a misinterpretation but you do not need a securities license to market your own deals or your own company. There is an exemption under 3(a)(4)(1) of the securities exchange act of 1934. Also, under 506(b), focus on marketing your COMPANY not your OFFERING. This will make all the difference.
A substantive pre-existing relationship is "intimate knowledge of one's financial ability to invest." This is not FB friends at all. You can achieve this relationship with an investor qualification form.
Thank you for this!
@Jillian Sidoti Just watched your Investor Presentation video. Love the Sinek references! When you say focus on your company vs. offering, are you saying more about WHY your company does what it does, or can we talk about the WHAT and HOW? Is the 'security' portion more about investment structure or a specific asset being offered?
For example (sorry for the length):
We offer investors the opportunity to partner with Equity Shield, LLC as a Networked Capital Partner (NCP). Contact us and we’ll discuss your goals, desired risk level, and expected rate of return. If we determine you’re a good match, we’ll add you to our network! There is no fee or obligation to become an NCP, this simply adds you to our network for future deal offers.
As investment deals meeting our vetting process arise, we offer our NCPs the option to buy into the deal as either a Limited Partner or a General Partner. Limited partners receive preferred payouts, while general partners receive non-preferred payouts and partial ownership of the asset. Most properties will be held for a 5+ year period.
@John Stanczak You will get varying inputs from varying attorneys. Some take a very conservative approach and others have some leeway. The rules can change so it's good to constantly be evaluating if you are in compliance. Perhaps get the opinion of another securities attorney. Intro calls are typically free and perhaps you might learn something or find a new team partner.
I am not an attorney, however the above content looks fine to me. Once you mention a specific deal with specific returns, you are advertising. Talk about the process or the HOW and you should be fine. I would also advise having a call with the investor prior to speaking about a deal. Maybe even set up a timer, 30 days is usually a good safe bet, before a pre-existing relationship gets access to a deal. We track this is ActiveCampaign however, multiple ways to go about it.
@Chris Levarek thanks for this. Do you have a website targeting non-accredited investors?
@John Stanczak - I have met Jillian Soditi a few times, she had a great reputation wrt RE Syndications. Her advice is rock solid.
I was going to suggest (humorously) the phone book, but I don't think those exist anymore.
In my opinion, you need to try IRL (in real life). To my knowledge, there is no "Amazon for Investors". Go to meet-ups (Yes, the virus makes that harder) and network. Find some like-minded person and get coffee.
To do a 506(b), you must have a pre-existing, substantive relationship. You should have been building a database of prospect for quite some time. If you are too far along on the deal you mention to be "rep-existing", you may need to try for an active partner or start over.
I've gotten into 50+ MF deals as a passive (LP), it is the relationship with the lead (GP), along with the business plan, that makes the deal interesting. Personally, I would avoid a GP that does not follow the rules.
Charles ("Grumpy") LeMaire