We can accept up to 35 non-accredited investors in each offering, because we use the 506(b) exemption. This exemption allows non-accredited investors but prohibits advertising. If we were to use the 506(c) exemption we would be allowed to advertise but we would be prohibited from accepting non-accredited investors. I've done one 506(c) out of like 30+ syndications. I really don't need to advertise because investors come to me from word-of-mouth and referrals, so if I don't need it there's no reason to restrict who I can accept just so I can advertise.
We can accept up to 35 non-accredited investors in each offering, because we use the 506(b) exemption. This exemption allows non-accredited investors but prohibits advertising. If we were to use the 506(c) exemption we would be allowed to advertise but we would be prohibited from accepting non-accredited investors. I've done one 506(c) out of like 30+ syndications. I really don't need to advertise because investors come to me from word-of-mouth and referrals, so if I don't need it there's no reason to restrict who I can accept just so I can advertise.
We can accept up to 35 non-accredited investors in each offering, because we use the 506(b) exemption. This exemption allows non-accredited investors but prohibits advertising. If we were to use the 506(c) exemption we would be allowed to advertise but we would be prohibited from accepting non-accredited investors. I've done one 506(c) out of like 30+ syndications. I really don't need to advertise because investors come to me from word-of-mouth and referrals, so if I don't need it there's no reason to restrict who I can accept just so I can advertise.
Interesting. Was not aware of the 506(b) exemption. Another nugget to add to my collection. Thanks.
@Steve Veen it really all depends on your network. When most syndicators start out they usually are dealing with more sophisticated investors than accredited investors. Syndicators tend to attract more accredited investors once they have a track record they can build on. Now if you're network consist of you having all accredited investors then so be it. If not you gotta start somewhere. Majority of syndications that are filed with the SEC are 506(B) which allows for 35 non-accredited investors and unlimited accredited investors. Hope this helps
@Steve Veen - established operators will often opt-out of allowing any Sophisticated investors on 506(b) offerings, simply because they don't need to. To @Brian Burke's point above, if they have an established base of repeat investors and consistently find strong deals, they can look to 100% Accredited LPs for all their projects.
In my experience, Sophisticated investors are often smart, hungry and eager to learn.. but also come with some inherent risks to the deal:
* drop-out of deal at a higher rate, for a variety of reasons
* expect more hands-on support (phone, text, email)
* are investing a larger % of their total net worth, so are typically more nervous about deploying the capital
Disclaimer: I am not an attorney, and strongly recommend you connect with a qualified SEC attorney for advisory on this topic, and certainly for creating/structuring a 506(b) offering.
To the point that @Tj Hines made above, it's worth noting that up-and-coming operators will allow for Sophisticated investors, out of necessity, since they are still building their network (e.g. mentees in coaching programs, who are syndicating "student deals" with the co-sponsorship of an established operator).
Keep in mind, SEC definition of non-accredited investors is very vague. So I suggest you discuss it with your security attorney, as it sounds like some of them are using their own flavors of it. Here's the SEC reference:
@Steve Veen I agree with everything that has been said. We mainly use a 506(b) offering which allows us to offer the opportunity to 35 non-accredited investors.
@Alina Trigub makes an important point here. Make sure to get on the same page as your securities attorney, so there is a clear understanding related to non-accredited investors allowed to subscribe. This will be important to your attorney because they will be counsel as long as the investment is active. Should anything occur along the way requiring the attorney's involvement it will be good to have had that clarity in advance.
Personally, I think it is equally important that a non-accredited investor is a good fit for the investment and will be a good "partner" to have along on the journey. I have met plenty of highly qualified investors who were simply not a good fit, or one I wouldn't want as a partner:)
@Steve Veen almost all our deals at 506b like @Brian Burke said and for the same reasons. Just wanted to chime in and back up his statement just as another point of reference.
I’ve been thinking about raising money for syndications. I was trying to determine how those funds could be directed depending on the mix of acc and non acc.
The deal will probably be smoothest for you (long term) with accredited only, but you may have to use whatever available fish there are in your pond at the moment, so to speak.
@Steve Veen I think you mean you're thinking about sponsoring syndications--correct? Because many of the capital raising activities that are going on are not compliant with securities laws :) In my experience, much of this comes down to the main sponsor and what type of investors they're willing to take.
0% of our deals require accredited investors only as we use 506(b) exemption or similar. Every deal that we have done has involved at least a handful of non-accredited investors.
I know there are a lot of companies that don't like to use non-accredited investors, because of one reason or another. For me, I like the fact that we can offer a tremendous investment to our sophisticated non-accredited investor friends/family that they otherwise wouldn't have access to. Most middle class invest in Stock, bonds and mutual funds because that is what they know and are exposed to. I think it's fantastic that I can help expose them to real estate.
Hi Amy, thank you (and everyone else) for the response.
Well, I’m not interested in going up against the SEC, :) but I’ve got a network of sophisticated investors that I’d like to bring to a deal in exchange for a small slice of the GP. Where’s the line between “raising” and “sponsoring”?
As @Amy Wan said, you need to be very very careful when proposing to bring equity to a deal in exchange for part of the GP equity. This alone is illegal because you aren't playing an active role in managing the deal; you are essentially acting as a broker without a securities license. What you can do, however, is bring skills/duties/responsibilities to the table in exchange for that 'slice of the pie'. Keep in mind, the role you play should be commensurate with the portion of the GP equity you are entitled to since legally that should be the only determining factor in your cut. The LP equity you bring to the deal should technically be just the icing on the cake.
In response to your original question, 95% of our returning syndication clients and all beginning syndicators do 506(b) offerings (that allow up to 35 sophisticated, non-accredited investors and an unlimited number of accredited investors). Friends, family and acquaintances will invest with you because they know, like and trust you. Strangers you meet via advertising want to know about your track record syndicating similar properties. Note that there are also some state securities exemptions that might allow non-accredited investors if everything is contained in one state (I.e., the syndicator, investors and the property).
Our clients that graduate to 506(c) offerings (advertising allowed but only verified, accredited investors can invest) do so because: 1) all of the non-accredited investors they know have already invested with them, or 2) they have a sufficient track record to start buying bigger deals (requiring them to raise more money) and they want to use a crowdfunding platform like Crowdstreet to promote their offerings and/or start their own advertising campaign.
Right, but no securities regulations preclude syndicators from getting out there in front of investors and establishing relationships with them online - something my company does on a daily basis for syndicators.
In fact, if the first time you 'meet' a prospect online you are soliciting investment then you've probably failed already - "Hi, nice to meet you. Please send me a check!"
Key to a successful capital raise is in carefully establishing a relationship with investors first, nurturing and educating, and only once you've done that, to actively solicit an investment.
@Adam Gower we do need to be careful about what we say publicly online (and in person). There are rules about conditioning the market which restrict what sponsors can say.
@Adam Gower well worth talking with a securities attorney for an actual opinion, but Lexis Nexis has a short description here. One legal opinion I've read is that going around talking about "We made %X returns for our investors on this recent deal!" would constitute conditioning the market. One sees examples of that out there all the time, so many newer sponsors seem unaware of this rule.