Raising money - Are non-accredited investors an option?

20 Replies

When raising money within a syndication structure I have my short-list of accredited investors, but my issue is I have a long-list of non-accredited investors. How can I get the non-accredited investors involved in deals, and can it still be done through a syndication?

Originally posted by @Troy Marschall :

When raising money within a syndication structure I have my short-list of accredited investors, but my issue is I have a long-list of non-accredited investors. How can I get the non-accredited investors involved in deals, and can it still be done through a syndication?

 First you have to have a "casual acquaintance " with them. Invite them out to lunch and find out what their hobbies are. Don't discuss syndication on the first get together. Certainly don't mail to them if you don't already have a relationship built up. Friends, family, school chums, church, etc all are okay to approach for a Join Venture or a syndication. The key difference is people you "know" vs people you "don't know". Get to know them, they will be more likely to participate anyway once they know who you are and what you do.

You wouldn't do this as a JV. Too many cooks in the kitchen and chances are they wouldn't all add value as active participants in the business nor would they all want to. Bring them in as passive investors.

You can have up to 35 non-accredited investors in your syndication as long as you have a pre-existing personal or business relationship with each of them.  This is how most investor funded businesses of all types get started—friends and family money.

Ask your securities counsel to guide you and keep you out of trouble—this isn’t a do-it-yourself project unless you don’t mind wearing orange or stripes. 

Originally posted by @Troy Marschall :
@Mike M. Thanks! In a JV structure does each member need to have an appointed role or can they simply provide cash and be a passive investor expecting returns on their money?

This would Not be the way to go with a Syndication, but Yes. In my JV Agreements, written by an attorney, there is a Contributing Investor, a "CI" (the passive money investor) and a Managing Investor, an "MI". The CI provides the money, the MI does all of the work. Keep in mind, in my JV Agreement, this is a not a Partnership. There are totally different Tax and Legal relationships in a Partnership. Many people confuse these and you have to read the JV Agreement to make sure you aren't inadvertently winding up in a Partnership. A JV that is simply an Agreement that informs the LLC of your relative amount of interest gives you the most protection and best tax advantages. Anybody who says or thinks otherwise is advised to talk to both their CPA & Lawyer for clarification. It is a commonly misunderstood financial relationship.

My understanding is that to properly do a Syndication, plan on spending between $10,000 and $15,000 to cover the costs of setting one up before you can solicit money.

Originally posted by @Troy Marschall :

When raising money within a syndication structure I have my short-list of accredited investors, but my issue is I have a long-list of non-accredited investors. How can I get the non-accredited investors involved in deals, and can it still be done through a syndication?

 Troy,

Yes you can get bring in up to 35 non-accredited investor if you structure it under rule 506(b) of Reg D.

You are required to have a pre-existing relationship with all of the investors and you can’t publicly advertise the investment opportunity.

Consult with an SEC attorney to confirm the best structure for you but generally speaking, the answer to your question is Yes.

One thing I haven't seen mentioned is that not only do you need a pre-existing substantive relationship with the 35 non-accredited investors, but that those investors need to be sophisticated. In the SECs own words 'all non-accredited investors, either alone or with a purchaser representative, must meet the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment'. So you shouldn't just be going to Aunt Bessie or Joe from Church if they don't know a thing about real estate or investments. 

Also, you can call it a JV and assign them some title that means they are passive investors... but if they are truly passive investors relying on your effort to make a profit then this is a security and thus is governed by SEC.

@Troy Marschall I'd do a JV agreement if I was only dealing with one other entity or one investor. If it's two or more investors that don't know each other, go the 506(b) route. Your structure will become an issue if one of your investors complains because they're unhappy with the investment. If everything goes well and your investors make their expected returns, you might never have to worry about it. Howver, setting your private placement offering as a 506(b) with the proper filings goes a long way in limiting your liability and, personally, it lets me sleep at night knowing I did things the right way and that I'm covered.

For your first one, I'd suggest going the $10k-$15k route and having an experienced attorney draft your PPM and operating agreement. With subsequent funds that are nearly identical, you might consider less expensive options once you have the experience.

Yes, the 35 non-accredited investors need to be "sophisticated" but your investors can self identify for a 506(b). That means that the investor is the one claiming to be accredited or non-accredited and signs their name affirming their status. There is no further duty by you, as the Sponsor, to verify this. As a practical matter, you should take steps to accept investments from people who know what they're doing and can afford to do so. Not only is it the right thing to do but you mitigate the risk of a mom and pop investor complaining against you for whatever reason.

For a 506(c), which allows general solicitation, it's a different story. The accredited investors must provide documentation to prove their status and non-accredited investors are not allowed. 

@Troy Marschall As @Brian Burke and many others said in this thread, you should consult with your securities attorney on the best structure for your deal in particular. As for your original question about raising funds from sophisticated investors, there're exemptions permitting it to do via crowdfunding. Also there's a rule 147 that allows to raise up to $1mil from sophisticated investors as long as it is offered to in state residents. There're other conditions surrounding this rule of course. You can read more about it here https://www.sec.gov/smallbusiness/exemptofferings/intrastateofferings, or better yet... consult with your attorney :) 

Best of luck! 

@Troy Marschall it all depends how you structure your deal and if you get an exemption under Rule506 (b) you can have 35 non accredited investors but you should know them personally and also they should have some business experience or real estate experience. Here is a link for your info Rama Timon. https://www.crowdfundinglawyers.net/faqs-crowdfunding-cheat-sheet/

" First you have to have a "casual acquaintance " with them. Invite them out to lunch and find out what their hobbies are. Don't discuss syndication on the first get together. Certainly don't mail to them if you don't already have a relationship built up. Friends, family, school chums, church, etc all are okay to approach for a Join Venture or a syndication. The key difference is people you "know" vs people you "don't know". Get to know them, they will be more likely to participate anyway once they know who you are and what you do."

@mike 

Account Closed I did want to voice my differing opinion on your comments.  You need to have a significant relationship with everyone you allow into your 506b offering.  The relationship needs to be such that you as a sponsor, can make a judgement that the deal is appropriate for this investor. Even with friends and family you should be comfortable with that judgement.  We also keep our investors below 10%of their networth on any one deal.  This is for everyones protection.

In many states you can now advertise for non-accredited investors and not have a pre-existing relationship with them and they don't need to be sophisticated. In MN we have a few types of offerings that allow this. The key is to talk with the right securities attorney that knows the laws inside and out. 

Originally posted by @Jeff Greenberg :

" First you have to have a "casual acquaintance " with them. Invite them out to lunch and find out what their hobbies are. Don't discuss syndication on the first get together. Certainly don't mail to them if you don't already have a relationship built up. Friends, family, school chums, church, etc all are okay to approach for a Join Venture or a syndication. The key difference is people you "know" vs people you "don't know". Get to know them, they will be more likely to participate anyway once they know who you are and what you do."

@mike 

@Mike M. I did want to voice my differing opinion on your comments.  You need to have a significant relationship with everyone you allow into your 506b offering.  The relationship needs to be such that you as a sponsor, can make a judgement that the deal is appropriate for this investor. Even with friends and family you should be comfortable with that judgement.  We also keep our investors below 10%of their networth on any one deal.  This is for everyones protection.

 Hi Jeff, I guess that is where we differ: 

"The relationship needs to be such that you as a sponsor, can make a judgement that the deal is appropriate for this investor."

I treat people as adults and I expect them to act like adults and make their own decisions. I am not their "dad" nor am I their god. I have no idea what their "best interest" is nor do I know what is "appropriate" for them. I suspect you have the same limitation. However, my opinion is not meant to dismiss what appears to be your honest, and sincere, but misguided, attempt to save everyone from making mistakes. We learn and thrive by making our own decisions in life.

Account Closed

Please show me where the words; casual, friends, or family, show up in the Reg D 506b offering.  Here is the definition of a substantive relationship.

The SEC defines a substantive relationship as “[a relationship] in which the issuer (or person acting on its behalf) has sufficient information to evaluate, and does, in fact, evaluate, a prospective offeree’s financial circumstances and sophistication, in determining his or her status as an accredited or sophisticated investor.” This means the issuer, broker, or advisor needs to actually have knowledge of an investors sophistication or accreditation. As the SEC says in that same CD&I, “[s]elf-certification alone (by checking a box) without any other knowledge of a person’s financial circumstances or sophistication is not sufficient to form a ‘substantive’ relationship.” Industry participants should take particular note of this point, as having a subscriber “check the box” is part of most, if not every, 506(b) subscription document. In addition to this attestation, issuers, brokers, or advisors should take extra steps to actually learn about the individuals with whom they engage, such as discussing finances, annual income, net worth, investment goals, and larger investment strategy.

Originally posted by @Troy Marschall :

When raising money within a syndication structure I have my short-list of accredited investors, but my issue is I have a long-list of non-accredited investors. How can I get the non-accredited investors involved in deals, and can it still be done through a syndication?

 @Matt Faircloth talks about this in his book. DISCLAIMER! I am not a securities attorney and I recommend you talk to one before proceeding.

With that said, Matt talks about the concept of making the non-accredited investor no longer a passive investor in your deal, a Joint Venture as mentioned above. Give them a job. Have them help underwrite the deal, have them help screen contractors, etc. This strategies has its limits. If you get beyond having 2 or 3 investors involved I don't think that strategy is viable but I think it's a place to start. 

I would also caution against faking this. Make sure the investor can truly do the job and has a sophisticated enough knowledge of the asset class to genuinely add value to the project beyond just their capital. 

Originally posted by @Jeff Greenberg :

@Mike M. While I appreciate you treat your investors as adults to make their own decisions and not be coddled,  the SEC has another viewpoint.  If it wasn't for this viewpoint, we would not have these regulations.  You certainly can have your opinion and do as you see fit.  Your and my opinion are not what matters in this issue.  It is that of the SEC that is of great concern here.  A mistake in the SEC arena can be very costly and even end up in a jail term.  I highly suggest that anyone looking to syndicate deals, speak to an SEC attorney.  @Jillian Sidoti

Please show me where the words; casual, friends, or family, show up in the Reg D 506b offering.  Here is the definition of a substantive relationship.

The SEC defines a substantive relationship as “[a relationship] in which the issuer (or person acting on its behalf) has sufficient information to evaluate, and does, in fact, evaluate, a prospective offeree’s financial circumstances and sophistication, in determining his or her status as an accredited or sophisticated investor.” This means the issuer, broker, or advisor needs to actually have knowledge of an investors sophistication or accreditation. As the SEC says in that same CD&I, “[s]elf-certification alone (by checking a box) without any other knowledge of a person’s financial circumstances or sophistication is not sufficient to form a ‘substantive’ relationship.” Industry participants should take particular note of this point, as having a subscriber “check the box” is part of most, if not every, 506(b) subscription document. In addition to this attestation, issuers, brokers, or advisors should take extra steps to actually learn about the individuals with whom they engage, such as discussing finances, annual income, net worth, investment goals, and larger investment strategy.

 I admit this will be "boring" to most people so I'll keep it short. As I said in my comments, "people you know". You are adding that I said or inferred to solicit "people you don't know & checking a Box on a form" which I didn't and I wouldn't.

and your followup comment "

"The relationship needs to be such that you as a sponsor, can make a judgement that the deal is appropriate for this investor. Even with friends and family you should be comfortable with that judgement."

Goes beyond knowing their circumstances. You're intruding in their decisions. You are making the decision for them. Perhaps you are a financial planner and are licensed, I hadn't considered that possibility. However, for non FPs, it is beyond their expertise to make those decisions for people. Have you read the book "The Millionaire Next Door?" It points out that A LOT of people have more money and more smarts than they ever let on. 


Account Closed I have read the "millionaire next door".  May I suggest that you read Reg D rule 506b.  Very boring, but the author carries a big stick. 

Non-accredited or "sophisticated" investors can invest in 506b syndication offerings. You can have up to 35 sophisticated investors. However, you must have a pre-existing relationship with them.

But, find a securities attorney to help you structure the partnership so you are doing it by the book.