Finding deals that are open to 'sophisticated' investors'?
Daniel DietzPro Member
Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votesHello,
Currently my partners and I have SFHs, duplexes and fourplexes. We have be researching going to more to maybe 8-16 units properties (the largest in our area for the most part) OR investing in other peoples deals like syndications. The issue with those is that none of us are 'accredited' but I think all three of us would qualify for the sophisticated designation.
I have found a couple of people who do allow for the sophisticated class of investor so far.
What I am wondering is if there is a 'list' or website like Loopnet where a person can find syndicaters or other people who are looking for investors or partners that are do not meet the accredited but DO meet the sophisticated definitions?
Thanks, Dan Dietz
A few comments from my perspective as a Syndication Attorney:
1) Where can you meet Syndicators who are doing deals for unaccredited investors? Go to as many networking and "guru" events where people are learning to buy the same thing you want to buy - for instance if you want to invest in Multi-family, find Multi-family trainers and go to their events. You'll learn how to buy your own, what to look for in a syndication, as well as meet others who are doing Rule 506(b) offerings that allow unaccredited investors. ReMentor's annual Ultimate Partnering events are the biggest networking events I know of (full disclosure, I sponsor this event and do training for them), but there are other trainers as well for multi-family who host live training events. It will pay off to get exposed to as many trainers (and their students) as you can.
Also, even though a syndicator has a 506(c) offering currently, they may do a 506(b) offering later on if they get contacted by enough people who are unaccredited to make it worth their while. Many current 506(c) syndicators have simply exhausted their current database of unaccredited investors in their previous deals and now have to do 506(c) offerings in order to advertise and fill their current deals. Bottom line, reach out to 506(c) syndicators and ask if they ever do 506(b) deals and if so, get to know them.
2) Re your comment: "As far as the 'pre-existing relationship'" would I be correct in thinking for example if I heard a Syndicater on a BP Podcast, then I contacted them, maybe met in person a time or two to talk business and get to know them, conversed on the phone about real estate a dozen times over a year or so, that that would at least be a needed start where I could then ask then about current opportunities?" Sure, that's probably sufficient, but technically - the relationship begins when the syndicator knows enough about you to know whether you are accredited, or unaccredited but sophisticated. That's why a lot of syndicators might ask you to complete a pre-qualification questionnaire early in their relationship with you (or should). Additionally, the syndicator should follow up and take time to get to know you, and for you to get to know them. The SEC says it's more about the quality of the relationship than the quantity of time; but there should be a passage of time between when you first met and when they made you an offer to invest (more than hours or days); and they shouldn't be offering you "current or contemplated deals" that were in play at the time you first met - they should only be offering you future investment opportunities. Think of this like a dating relationship - the first meeting is to exchange contact info; followed up by a phone call or meeting to establish rapport and gauge common interests; followed up by further contact and/or education to ripen the relationship - all before the "marriage"/investment offer is made.
I am not an attorney so you may have to double check me. I think there is a rule that if you are soliciting to the general public, you can only do so to accredited investors. That's why all the websites are only looking for accredited. It would probably be illegal to solicit sophisticated.
If you know a syndicator personally, I think they would be able to take your investment as a sophisticated.
Once again you can double check me with a lawyer but I think that is right.
@Daniel Dietz yes, @Account Closed is correct. You can use "general solicitation" for an offering organized under the rule 506(c) but under that rule you are only allowed to accept accredited investors, and the sponsor has the responsibility to verify that the investors subscribing are actually accredited (not just taking their word for it).
Offerings organized under rule 506(b) can accept non-accredited investors if there is a "pre-existing relationship" with the investor and the sponsor has not used any general solicitation for the offering.
Thus, you will not find any website or list of syndicated offerings accepting non-accredited investors.
That said, evidently there are some crowdfunding sites that are able to take investments from unaccredited investors, but I'm not a subject-matter expert on that aspect of crowdfunding. I'm sure that others on this site can talk about that more accurately that I can.
Hi @Daniel Dietz, @Account Closed types much faster than me and already said it :)
@Brian Burke @Michael Le Thanks guys for confirming. I guess I know just enough to be dangerous. ;)
Thanks for the advice all, it helps me have a lot of clarity.
To summarize what I hear you all saying it sounds like the (c) vs (b) is the key difference.
As far as the 'pre-existing relationship', would I be correct in thinking for example if I heard a Syndicater on a BP Podcast, then I contacted them, maybe met in person a time or two to talk business and get to know them, conversed on the phone about real estate a dozen times over a year or so, that that would at least be a needed start where I could then ask then about current opportunities?
Thanks, Dan Dietz
@Daniel Dietz it is state specific. In Minnesota for instance you can publicly advertise to all types of investors, including non-accredited and non-sophisticated. MNvest laws now allow that to be done, however, there are regulations and limits as well. Land.mn is a site that is in the process of getting offerings that will showcase these offerings. I don't know Wisconsin laws, so I cannot speak to it.
I will second what @Todd Dexheimer is saying when he says it is state specific. MN freed this up with MNvest regulations which opened the door for crowdfunding and other ways for companies to raise capital.
I don't know about the relationship rules under Reg D but @Daniel Dietz let's schedule a meeting and we can meet Todd :)
A few comments from my perspective as a Syndication Attorney:
1) Where can you meet Syndicators who are doing deals for unaccredited investors? Go to as many networking and "guru" events where people are learning to buy the same thing you want to buy - for instance if you want to invest in Multi-family, find Multi-family trainers and go to their events. You'll learn how to buy your own, what to look for in a syndication, as well as meet others who are doing Rule 506(b) offerings that allow unaccredited investors. ReMentor's annual Ultimate Partnering events are the biggest networking events I know of (full disclosure, I sponsor this event and do training for them), but there are other trainers as well for multi-family who host live training events. It will pay off to get exposed to as many trainers (and their students) as you can.
Also, even though a syndicator has a 506(c) offering currently, they may do a 506(b) offering later on if they get contacted by enough people who are unaccredited to make it worth their while. Many current 506(c) syndicators have simply exhausted their current database of unaccredited investors in their previous deals and now have to do 506(c) offerings in order to advertise and fill their current deals. Bottom line, reach out to 506(c) syndicators and ask if they ever do 506(b) deals and if so, get to know them.
2) Re your comment: "As far as the 'pre-existing relationship'" would I be correct in thinking for example if I heard a Syndicater on a BP Podcast, then I contacted them, maybe met in person a time or two to talk business and get to know them, conversed on the phone about real estate a dozen times over a year or so, that that would at least be a needed start where I could then ask then about current opportunities?" Sure, that's probably sufficient, but technically - the relationship begins when the syndicator knows enough about you to know whether you are accredited, or unaccredited but sophisticated. That's why a lot of syndicators might ask you to complete a pre-qualification questionnaire early in their relationship with you (or should). Additionally, the syndicator should follow up and take time to get to know you, and for you to get to know them. The SEC says it's more about the quality of the relationship than the quantity of time; but there should be a passage of time between when you first met and when they made you an offer to invest (more than hours or days); and they shouldn't be offering you "current or contemplated deals" that were in play at the time you first met - they should only be offering you future investment opportunities. Think of this like a dating relationship - the first meeting is to exchange contact info; followed up by a phone call or meeting to establish rapport and gauge common interests; followed up by further contact and/or education to ripen the relationship - all before the "marriage"/investment offer is made.
For those like myself who hadn't heard of a legal definition of "sophisticated investor", here is how the Financial Times summarizes them: "net assets of $2.5 million and annual incomes in excess of $250,000". [Is it the same across the board? Can it / will it change?]...
For those like myself who hadn't heard of a legal definition of "sophisticated investor", here is how the Financial Times summarizes them: "net assets of $2.5 million and annual incomes in excess of $250,000". [Is it the same across the board? Can it / will it change?]...
The person in your definition would likely meet the definition of an accredited investor depending on whether that was single or married income....
Thanks for all the input so far. I did find this article now that I know more what to look for,
https://www.accreditedinvestorleads.com/accredited... and it does a good job explaining the difference.
The meat of it is this:
Sophisticated Investors
If you issue an offering under Rule 506 (b) you can accept investment dollars from non-accredited investors if they are Sophisticated Investors. This is the only exception to the accreditation rule. A sophisticated investor is defined as someone that has superior knowledge of business and financial matters. This definition leaves room for interpretation but it is important to define what that means to you and be able to back up your own personal definition. For example, it could be a CFO, CPA, accountant, business owner, banker etc. If they SEC were to ask why you thought this person was sophisticated you should be able to point to an internal set of standards so you can prove that caution was taken when making these decisions.
Dan Dietz
For those like myself who hadn't heard of a legal definition of "sophisticated investor", here is how the Financial Times summarizes them: "net assets of $2.5 million and annual incomes in excess of $250,000". [Is it the same across the board? Can it / will it change?]...
The person in your definition would likely meet the definition of an accredited investor depending on whether that was single or married income....
Here's a link to the article I referred to: http://www.afr.com/personal-finance/how-to-be-a-so...
So - oops! Sorry that I brought an Australian Corporate Law definition to this forum, so please ignore my earlier post. [Mind you, wouldn't it make sense for the USA to have a similar legal you're-in-or-you're-out definition? Daniel's summary: "A sophisticated investor is defined as someone that has superior knowledge of business and financial matters", which "leaves room for interpretation", seems so wishy-washy by comparison! Is it any wonder that non-accredited, non-regulated portions of the USA finance industry leave so much room for - outright scams?]...
So - oops! Sorry that I brought an Australian Corporate Law definition to this forum, so please ignore my earlier post. [Mind you, wouldn't it make sense for the USA to have a similar legal you're-in-or-you're-out definition? Daniel's summary: "A sophisticated investor is defined as someone that has superior knowledge of business and financial matters", which "leaves room for interpretation", seems so wishy-washy by comparison! Is it any wonder that non-accredited, non-regulated portions of the USA finance industry leave so much room for - outright scams?]...
That is why we have the accredited investor rules.... To protect people who may not be able to take these losses. Anyone who is looking for the sophisticated investor designation is someone who isn't an accredited investor but wants to get in....
@Daniel Dietz, @Kim Lisa Taylor is spot on (duh, shes a synidication attorney) and in my opinion her insight should be held above all else (at least in this thread) as the subject matter expert.
That said, the SEC is not definitively clear on what qualifies a "past relationship" or what it means to be "sophisticated." Sure, they have wording to describe both, but no steadfast "rules" so somewhat open to interpretation.
I would echo what others have said and say to just start networking. This site is a good place to start. Reach out to the syndicators you see who are active in the forums and begin to build a relationship, 9.9 times out of 10 they will reciprocate and get to know you and your experience, goals, investment knowledge, etc., as well as afford you the opportunity to get to know them, before offering you a deal. These relationships are the best way to eventually find yourself with the opportunity to invest as a sophisticated or non-accredited investor in syndicated deals down the road.
KimLisa, feel free to chime in and pick apart what I've said :) more than accepting of constructive criticism.
Full disclosure, I am the EVP of Lifestyles Unlimited. John, it's nice to meet you here on Bigger Pockets. A pre-exsiting relationship is not the only requirement for someone to be a sophisticated investor. If they are not accredited, they must have some education or experience that allows them to make an informed investment decision when deciding to invest in the kind of offering you are sponsoring. Lifestyles Unlimited is a real estate education and mentoring program. Our members do spend a lot of time together and often choose to invest together. Our education program would, I am told by several SEC attorneys, make a member who has completed our education program sophisticated regarding apartment community investments or portfolios of single family property. Anyone who has real estate experience in these areas, has invested in other offerings of this type, or perhaps has business experience with contracts and business operations may qualify as sophisticated. In the offering process there is a form you will have potential investors fill out to provide you with their background that they believe qualifies them as a sophisticated investor, in addition to indicating their prior relationship with one or all of the deal sponsors. I hope that helps! Thanks for participating in the Bigger Pockets community!
Thanks @Lynn Dee Murrow. On the investor end, it seems like part of what’s missing in this thread is that everyone starts somewhere. Aside from joining various eductation groups, is it safe enough to consider your own reading, education, and research a qualifier for being sophisticated?
On the syndicator end, there appears to be more involved in the governance of advertising your deals.
@Daniel Dietz, I believe some mentor/education programs for apartment investing have deals available. I would look into these.
Dan, check out the crowdfunding sites (google crowdfunding for non-accredited investors). There's an extra hand in the pot versus direct investing with the sponsor but it's access to deal flow none-the-less.
@John L. Being a sophisticated investor is about what you know, your experience and ability to throughly understand the investment so your reading and research can absolutely help along with all you can learn here on bigger pockets!
Thanks for the advice all, it helps me have a lot of clarity.
To summarize what I hear you all saying it sounds like the (c) vs (b) is the key difference.
As far as the 'pre-existing relationship', would I be correct in thinking for example if I heard a Syndicater on a BP Podcast, then I contacted them, maybe met in person a time or two to talk business and get to know them, conversed on the phone about real estate a dozen times over a year or so, that that would at least be a needed start where I could then ask then about current opportunities?
Thanks, Dan Dietz
Not an attorney but a 3 touch rule is generally acceptable from my understanding. So an initial email, phone call, and an in person meeting. Something like that is what I've heard other more experienced syndicators say.
Hey @Grant Rothenburger - although the "three touch rule" is a good idea (i.e. get to know your investors before accepting their money) - it is not a legal concept and does not create a pre-existing relationship in the eyes of the law.
A "pre-existing relationship" is defined as "intimate knowledge of one's financial ability to invest." Intimate knowledge means you have an understanding of the net worth and income of the potential investor. This can be accomplished with an Investor Qualification Form.
So what is a sophisticated investor to do if they are having a hard time finding deals in which to invest? My suggestion would be look for the Regulation A filings. There are a bunch out there for real estate that offer some great returns. I have done Regulation A filings for any type of real estate you can think of: funds for a specific type of asset class, funds for multiple asset classes, hard money, note buying, etc. Many of the bigger crowdfunding platforms also use Regulation A so they can take money from unaccredited investors.
What do you do if you are LOOKING for money?
Here are some hard facts for you: since the JOBS ACT passed, more than 77% of the Form D's filed were under Rule 506(b). This means that most successful fundraisers aren't even using Rule 506(c).
So how do they do it?
Well, what a lot of people are doing here right now - building trust, offering information, and educating. Eventually the "crowd" gets the idea and hunts down the syndicator/fundraiser instead of the other way around. It is a pull method of marketing as opposed to a push (and is far more effective in my ever humble opinion.)
I got to run, but I have more to say about this. Maybe I can add later.
Thank you for that @Jillian Sidoti! I was hoping someone of your caliber would help him (and me) out. And then everything else you added is GOLD! Looking forward to what else you have to say.
So - oops! Sorry that I brought an Australian Corporate Law definition to this forum, so please ignore my earlier post. [Mind you, wouldn't it make sense for the USA to have a similar legal you're-in-or-you're-out definition? Daniel's summary: "A sophisticated investor is defined as someone that has superior knowledge of business and financial matters", which "leaves room for interpretation", seems so wishy-washy by comparison! Is it any wonder that non-accredited, non-regulated portions of the USA finance industry leave so much room for - outright scams?]...
That is why we have the accredited investor rules.... To protect people who may not be able to take these losses. Anyone who is looking for the sophisticated investor designation is someone who isn't an accredited investor but wants to get in....
Yeah yeah... But, can you see how lame that is? "Someone who isn't an accredited investor but wants to get in"? Reminds me of another thread, showing that apparently anyone can say they're a "Qualified Intermediary": https://www.biggerpockets.com/forums/104/topics/47...
I believe the rules around accredited investors are there to protect people from being duped by people raising funds that are more financial savy. The non-accredited investors typically are not as able to take losses as an accredited investor so these rules are to protect people from themselves.
I didn't read the thread on QI but it is not hard to meet the criteria, only certain people are excluded.
I believe the rules around accredited investors are there to protect people from being duped by people raising funds that are more financial savy. The non-accredited investors typically are not as able to take losses as an accredited investor so these rules are to protect people from themselves.
I didn't read the thread on QI but it is not hard to meet the criteria, only certain people are excluded.
But, shall a person be found guilty, illegally calling themself a "Sophisticated Investor"?
(Can you imagine the court room filibuster?)...