Hello,

Please let me know if this hypothetical idea is legally possible. My friends and I are non-accredited but together we have enough capital to syndicate and finance the down payment and associated costs of an apartment.

I have interest in essentially acting as a general partner (putting together the deal, managing after close, exit/refinance strategies, etc.), and my friends wish to take on a passive role as limited partners.

Since none of us are accredited, is it possible to structure an LLC or LP with all of us general partners and tweaking the conventional contract to make the fees traditionally associated for general partners be directed to me?

Thank you in advance for any input/advice.

Your status as accredited or not shouldn’t matter I think. The reg D filing you make is what matters when going after investors

Yes, this is possible. You need to find a good SEC attorney to work with. They will advise and draft documents for you on the correct company structure, operating agreement, and PPM (private placement memorandum).

Originally posted by @Jung Won Kim :

Hello,

Please let me know if this hypothetical idea is legally possible. My friends and I are non-accredited but together we have enough capital to syndicate and finance the down payment and associated costs of an apartment.

I have interest in essentially acting as a general partner (putting together the deal, managing after close, exit/refinance strategies, etc.), and my friends wish to take on a passive role as limited partners.

Since none of us are accredited, is it possible to structure an LLC or LP with all of us general partners and tweaking the conventional contract to make the fees traditionally associated for general partners be directed to me?

Thank you in advance for any input/advice.

If the investors are going to be passive and you are going to be the sponsor then this would be a security and you need to file an exemption with the SEC and State securities commision. If your investors are not accredited you can do a 506b which allows for up to 35 sophisticated investors (non-accredited) and unlimited accredited investors. Make sure to discuss all this with an SEC attorney. They will do all the filings and documents you need.

@Greg Dickerson

Thanks Greg. Do you know of any legal definitions for what entails a sophisticated investor? Searching on google yields many different definitions, but it looks like it's a very subjective designation.

Jung, it might be simpler, and a lot less expensive, to set up a JV or simple partnership. Check with your lawyer of course.

Originally posted by @Jung Won Kim :

@Greg Dickerson

Thanks Greg. Do you know of any legal definitions for what entails a sophisticated investor? Searching on google yields many different definitions, but it looks like it's a very subjective designation.

The SEC defines non accredited investors here https://www.sec.gov/smallbusin...

You need to discuss this with your attorney to make sure you are in full compliance. 

@Ronan Donnelly

Thank you for saying that. I was reading the responses thinking that they are making a simple partnership into a lot more trouble than it needs to be.

@Jung Won Kim

Yes this sounds like it would be legal. Although it could make more sense to do a JV or partnership.

There is no black and white answer to who a sophisticated investor is. Basically A sophisticated investor is someone who understands the risks that are associated with this type of investment and understand that they could lose all of their money. At the end of the day it is up for the sponsor make a judgement call weather or not the investors are Sophisticated.

Also I see you said you guys have enough capital to syndicate the down payment. You will also need a combined net worth greater than the loan amount.

Hope this helps

@Connor S.

@Connor Swanson

Thank you and thanks to everyone else who replied as well. I hadn't thought of a JV or simple partnership so will look into that (although I assume these wouldn't have the "limited liability" aspect to them).

In regards to the net worth requirement, do you know if the capital we put into the down payment will count, or would our net worths have to equal or be greater than the loan amount net of the down payment?

@Jung Won Kim

I don’t believe it will count but I would call up some local banks and see what they tell you. There may be other options.

If you don’t have the net worth, you could get someone to sponsor the loan in return for a small amount of equity in the deal.

@Jung Won Kim if you decided to go the J/V role with your friends, then every partner would have to take an "active" role. If you are talking about a lot of friends, that would be a headache, and probably not run very smoothly. The less partners the better for a joint venture.

As long as your investor friends have an established relationship with you prior to the offering, and have  "sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment" then the 506(b) should work. Then your partners can be limited partners (not active). If it is something you pursue, then you hire a good SEC attorney.

@Rick Martin

Thanks Rick. I guess the SEC attorney would also help determine whether my friends count as sophisticated investors.

Thank you!

Thatbmeans if they are passive they cant participate. Means everything lies on your shoulders and yours alone  notwise.   And as far as solicitating money from others  my understanding you are walking on egg shells must be sec certified.  Contact SEC attorney and ask.  Even though many are out there doing it. I had to use sec for a different issue. I would not want them looking at me  for any reason 

and normally at least few deals morgage co is going to want guarantor somebody with experience