Syndication to nonaccredited or sophisticated investors

Rental Property Investor · Manama, Bahrain · Member since 2015 · 96 posts · 68 votes

Hello. I want to start to syndicate and I have several family and friends who are interested in investing in me. I also hear many times on the podcasts that people go to friends and family to raise money on their early investments. But it seems like those friends and family would have to be accredited or "sophisticated" investors to not violate SEC laws. Is there something that I'm missing? I know I could do an LLC with them being limited partners, but was specifically looking at syndication because I think I'd need a larger number of investors than what's generally accepted as LPs in an LLC.

Thanks for any help!

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Amy Wan

Attorney · Los Angeles, CA · Member since 2016 · 284 posts · 314 votes

They only have to be all accredited investors if you're doing a 506(c), which you wont want to do at this early stage anyway. You would more likely be using a 506b, under which you can take up to 35 non-accredited investors, so long as 1) you already know them (i.e. family, friends, people in your network), and 2) they are "sophisticated" in that they understand the risks of the investment and that they could lose all their money.

Happy to answer any other questions you have. Syndication (or at least the legal process) is all I do ;)

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Scott Meitus
Contractor · Minocqua, WI · Member since 2016 · 44 posts · 12 votes
9y
Steven,
My understanding is that the SEC will not be involved unless it is a "public offering". That said, you may still want to limit investment to only accredited investors, as this gives you a much higher level of protection should things go south.
Good luck!
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Michael Le
Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
9y
No, you're not missing anything. If you want to do a 506(b) or 506(c) syndication then there will be those requirements. It does not matter if it is a public offering. The 506(b) exemptions, as a matter of fact, can not be publicly offered. They can only be offered to people you have substantive relationship with.
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Amy Wan
Attorney · Los Angeles, CA · Member since 2016 · 284 posts · 314 votes
9y
They only have to be all accredited investors if you're doing a 506(c), which you wont want to do at this early stage anyway. You would more likely be using a 506b, under which you can take up to 35 non-accredited investors, so long as 1) you already know them (i.e. family, friends, people in your network), and 2) they are "sophisticated" in that they understand the risks of the investment and that they could lose all their money.
Happy to answer any other questions you have. Syndication (or at least the legal process) is all I do ;)
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Joel OwensBusiness Member
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
9y
Some syndicators do not take investors unless accredited. They also do not take IRA money or 1031 money etc.
Anything that makes the structure more complex to some syndicators is a no go. Not being accredited there is more red tape to follow as a sponsor of a deal.
I like the plain ole vanilla type of investors that have money sitting around in the bank or in the stock market and want to put it to work.
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Kim Lisa TaylorPro Member
Attorney · Saint Augustine, FL · Member since 2016 · 246 posts · 234 votes
9y
In response to the comment: "I know I could do an LLC with them being limited partners,"; yes, you could do that, but your Limited Partnership would still be a syndicate. Unless all investors are actively involved (which means they can't be limited partners), you have to follow securities laws. Limited partnership interests, where the limited partners provide the cash and the general partner provides the services, are, by definition, securities. If you are selling securities, you have to register your offering (get it pre-approved by regulators so you can go public), or qualify for an exemption. However, if you can contain all of your investments and investors in one state, you may be able to qualify for a state securities exemption that will allow unaccredited, unsophisticated investors.
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Account Closed
Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes
9y
Originally posted by @Steven Kleppin:
Hello. I want to start to syndicate and I have several family and friends who are interested in investing in me. I also hear many times on the podcasts that people go to friends and family to raise money on their early investments. But it seems like those friends and family would have to be accredited or "sophisticated" investors to not violate SEC laws. Is there something that I'm missing? I know I could do an LLC with them being limited partners, but was specifically looking at syndication because I think I'd need a larger number of investors than what's generally accepted as LPs in an LLC.
Thanks for any help!
Usually if the only investors in your project is family members, that may not necessarily be a good thing. Should things go south, relationship with family can be irreparable especially if they loose money. Whenever you start 'raising' money from investors, family or not, you always risk raising compliance concerns with securities law.
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Jillian Sidoti
Professional · Murrieta, CA · Member since 2013 · 405 posts · 458 votes
9y
Hi @Steven Kleppin - as many previous posters said, you need to always comply with securities laws when dealing with investors. So you are obligation is something I call the "three D's":
1. DISCLOSE - all the material facts. What do your investors need to know to be fully informed.
2. DISCLAIM - any liabilities. What are the risks associated with investing? What rules are you operating under.
3. DETAILS - tell your investors what you are up and what their expectations can be going forward.
Another poster mentioned "substantive pre-existing relationship" - this is true. But what does this mean? There is a lot of misinformation about this phrase and test.
A substantive pre-existing is one where you are "intimately aware of one's financial ability to invest." This is normally done through a investor qualification form. Honestly, if you google search "investor qualification form" you should be able to find one. Provide it to all of your potential investors. It will help you a lot in the event of a problem. Best of luck!
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