Syndications - how many passive investors required?

Question

Hello - is there a minimum number of passive investors required for a syndication? For example, if I'm the deal sponsor and only have one other passive investor (LP) investing in the deal, am I still required to form a syndication for that one investor or are syndications only required for two or more investors? Thank you!

Greg Dickerson · Answer

Just so you have more conformation it's not the amount of investors it's the structure of the deal and investment. If it's one passive investor it's a security and requires an expedition.

Roni E. · Answer

Not giving you legal advise but I would speak with your attorney if you think only 2 or 3 folks you are working with then see if you could then just do as hard money loan or even a possible Joint Venture. You just need to make sure it is true JV. Also a PPM and so forth will run at a minimum $10k and up so you need to make sure it makes sense.

Michael Le · Answer

If they're a passive investor then it is considered a security and you will have to to treat it as such. The number of investors does not matter.

Account Closed · Answer

I'm open to a partnership or doing the deal on my own with a down payment coupled with bank or seller financing...think it will just depend on the the deal. Right now I'm actively sourcing self-storage opportunities in the $300k-$600k range...not sure a syndication would make economic sense at that price point. This will be my first deal, and I have some great folks helping me. Plus I'd like to cut my teeth on a deal or two before asking for the trust of other investors.

Account Closed · Answer

Thanks everyone for your input! I attended a great syndication seminar put on by The Real Estate Guys about a month ago and have several friends doing well in the private equity world, both in and out of real estate.

Ronald Rohde · Answer

Are you going to do a partnership then?

Bryan Hancock · Answer

If "forming a syndication" means that you develop offering disclosures then the sponsor SHOULD do so.  The offering documents are for the sponsor's protection if the deal goes sideways or south.  They masquerade as protection for investors, but since the sponsor puts the documents together and is in all likelihood who will get sued if things don't go as expected those are who the documents are for.

This issue is separate and distinct from whether or not the financial arrangement is one where a security is being offered.  Generally if anyone is "passive" in the project you likely have a securities arrangement whether or not you have one investor or hundreds of investors.  There is a four-part Howey test for securities that you're welcome to Google and find all the nitty-gritty details about, but here are the salient elements:

• It is an investment of money
• There is an expectation of profits from the investment
• The investment of money is in a common enterprise
• Any profit comes from the efforts of a promoter or third party

The details of this can get quite technical if you're dealing with operating companies or exotic SPV-live constructs.  I've seen discussion claiming that borrower dependent notes are not securities because they fail the common enterprise element.  A lot depends on how your offering is structured, but in general if you are accepting money from one or many investors and they lack adequate control of what happens in the project you're likely to be issuing a security.   All securities are required to be registered unless they're exempt.  Common exemptions are Reg. D, Rule 506 (b) or (c), but there are several others including some intrastate exemptions if all of your investors reside in one state.

Whole books have been written about this subject.  Consult a competent securities attorney in your area for better advice, but in general raising and organizing money is an ask for permission business and not an ask for forgiveness business.  If you do it wrong you can go to jail.  Do it correctly and save yourself the mess later on.

Syndications - how many passive investors required?

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