difference between crowd funding and sydicating money?

Question

If i wanted to raise about 20k from 20 different people to buy an apartment, what would that be called?

Mark Robertson · Answer

Crowdfunding is pretty much just online syndication. If you raise money "old school" it's a syndication.  If you advertise online and use rule 506c it's called crowdfunding. Using 506b and raise online, it  is somewhere in between. You can't advertise and solicit investors, but its online behind a portals membership wall.

David Thompson · Answer

Robert,

Syndication is pooling investor money to buy an investment where you typically have a GP to manage the investment and investors (LP) that fund it. Most LPs like to have the GP put some money in the deal to align w/them.  With crowdfunding, for a fee, the portal provides a platform to market your deal w/their investor base.  That's one way.  The other is to do it organically and find your own investors and avoid the cost.

Lots of ways to address your question.  First, get legal inputs before you embark and decide on your path for setting up your structure and bringing in investor money.  SEC rules around it so seek legal advice.  But I'll address it at a bit different angle.  I like to talk w/my investors and look to develop a long term relationship w/them.  Understand their objectives, determining if they would qualify if (accredited) is required for your deals, gauge interest, fit and timing.  This is where I think my business model and those of home grown syndicators differ from crowdfunding .  The best syndicators will take time once they have this information to educate their investor base first and develop a direct relationship.  With crowdfunding, it the portal (online site).  Many investors I deal w/have never invested in apartments before so I have a blog for that to get them started, see below.

https://www.biggerpockets.com/blogs/9145/53820-why...

I then can discuss past deals and if I have current deals, take them through the market, deal and team...why this makes a sound investment, also anticipating discussions around risk, how they get paid, the process, etc.

I look at crowdfunding as an option for folks w/little cash that want instant diversification.  I have no problem w/that option per say but I think it lacks the personal and human touch.  Many folks who I deal w/are looking for a long term relationship w/someone that will take the time to educate them and share ideas, develop them on a learning path.  That's where I think you can make the difference between bringing a personal touch to the overall effort and those that just want to play transactionally.  Take time to learn about your investor first, educate them and bring them along w/you.  Play the long game and those investors will build trust w/you over time and keep coming back vs dealing w/a soulless portal.  Here's a top 10 things on vetting a deal sponsor.  Review them and start from the beginning to be the ideal syndicator / partner for your investors.  The blog is currently having IT challenges w/BP and is not available.  Please go to my website and under thought leadership tab, you will find the special report on vetting a deal sponsor.

Robert Reardon · Answer

Syndication is a type of funding and crowdfunding is a method of finding investors.

Kim Lisa Taylor · Answer

Not quite. The whole purpose of crowdfunding is to find investors to fund your deal. Crowdfunding is simply a means of advertising a syndicate to investors.

The person (or management team) putting the deal together (finding the property, organizing the syndicate, getting the loan, finding investors) will usually remain in control of the deal, although you might also have to invite someone to your management team who can help you qualify for institutional financing (i.e., a loan guarantor/sponsor). You probably won't find that person through crowdfunding, however, as a stranger is unlikely to put their credit on the line unless they already know, like and trust you.

Amy Wan · Answer

@Robert Reardon is correct. Syndication is the what; crowdfunding is the how (or the method).

I wrote a length article for Crowdfund Insider a few months ago explaining the difference:

https://www.crowdfundinsider.com/2016/08/88621-syn...

Kim Lisa Taylor · Answer

Good info from Dave.

Syndication is simply the process of putting a group together for a common purpose. In your case, it sounds like you want to put a group of passive investors together to buy (i.e., "syndicate") real estate. Crowdfunding is simply a means of advertising the investment opportunity to prospective investors.

If you are raising money from passive investors, you are selling securities in the form of "investment contracts". Your investment contract could be promissory notes or selling interests in your company. When you are selling securities, you must "register" the offering (i.e. get it pre-approved by a regulatory agency), or qualify for an "exemption" from registration. If you are selling interests in a company, your company will become the  syndicate, and you, as its manager, will be the "syndicator". The documents you and your securities attorney put together for your syndicate, will be your "securities offering".

Each exemption has a specific set of rules you must follow. The rules typically dictate what financial qualifications your investors must have (i.e., net worth, income, or business savvy), whether you need to provide a disclosure document describing the risks (i.e.,  a Private Placement Memorandum), and  and whether you can advertise (i.e., crowdfund), among other things.

Once you have set up your syndicate and have your securities offering documents, you need to find investors. If you have selected the Regulation D, Rule 506(c) exemption for your securities offering, then you can use "crowdfunding" to advertise your investment opportunity to the general public, but you will be restricted to only allowing verified "Accredited Investors" ($1M Net worth or over $200k income if single, or $300k if married) to participate. If you have selected the Regulation D, Rule 506(b) exemption, you can allow "sophisticated" investors who aren't Accredited to invest with you. There are other exemptions that may allow you to advertise, but these are the most common exemptions used for apartment syndications.

Bottom line: Syndication is the process of setting up a group investment so that you can legally fund it through a securities offering; Crowdfunding is the process of advertising your securities offering/syndicate to investors.  They are not mutually exclusive; you have to have a syndicate first, and you must choose an exemption that allows advertising before you can crowdfund.

Leah Bonner · Answer

@KimLisa Taylor Just want to verify what you are saying... So crowdfunding isn't necessarily used to get the funds for the deal it's used to find an investor that will more or less take lead/ownership of the deal?

Leah Bonner · Answer

Wow great info from everyone! Love how many knowledgeable people there are willing to share advice.

I wonder if soon crowdfunding will be the main way since social media and the internet is such a normal part of everyone's routine now.

Brian Adams · Answer

@KimLisa Taylor great info as usual.

difference between crowd funding and sydicating money?

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