Los Angeles · Member since 2016 · 3 posts · 2 votes
Hi BP community,
I recently invested in a real estate syndication as a passive non-accredited investor. Syndicators that I have spoken with say there are no limits to investing but I wanted to see what others had to say on this topic.
Here is a paragraph describing investment limits for CROWDSOURCING deals found on investopedia. Please note that my question is not for crowdsourcing; it's whether or not any similar limits apply to private deals.
Thank you for reading and commenting. Any input is greatly appreciated!
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
6y
There are a number of different regulations allowing a company to raise capital from individual investors without the requirement that the securities being offered become publicly registered. It sounds like this issuer is using one of the Reg A exemptions. This framework allows them to advertise their offering and raise money from non-accredited investors, but it places limits on how much a non-accredited investor can invest.
Most real estate syndicates use the Reg D exemptions, either rule 506(b) or 506(c).
506(c) allows the issuer to advertise, but does not allow them to raise money from non-accredited investors under any circumstances.
506(b) allows the issuer to raise money from up to 35 non-accredited investors, and there are no limits on how much the non-accredited investors can invest. BUT, the issuer is prohibited from advertising the offering.
So the answer to your question is “it depends.” The majority of syndicates use the 506(b) exemption so there wouldn’t be limits for you here, except that you might not even know these offerings exist. The only way to find out is to get to know some sponsors and wait for their next offering to come out.
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
6y
There are a number of different regulations allowing a company to raise capital from individual investors without the requirement that the securities being offered become publicly registered. It sounds like this issuer is using one of the Reg A exemptions. This framework allows them to advertise their offering and raise money from non-accredited investors, but it places limits on how much a non-accredited investor can invest.
Most real estate syndicates use the Reg D exemptions, either rule 506(b) or 506(c).
506(c) allows the issuer to advertise, but does not allow them to raise money from non-accredited investors under any circumstances.
506(b) allows the issuer to raise money from up to 35 non-accredited investors, and there are no limits on how much the non-accredited investors can invest. BUT, the issuer is prohibited from advertising the offering.
So the answer to your question is “it depends.” The majority of syndicates use the 506(b) exemption so there wouldn’t be limits for you here, except that you might not even know these offerings exist. The only way to find out is to get to know some sponsors and wait for their next offering to come out.
Rental Property Investor · DFW TX · Member since 2018 · 179 posts · 260 votes
6y
@Jordan Lamarre-Wan & @Brian Burke One comment. Most of the deals I have seen give an upper limit on the amount an LP may invest, so as not to crest 20% (I think it's 20%). This may not actually relate to the Reg D 506(b), but may instead be a lender limit on some loans. I gather that any investor over 20% has to submit financials.
I defer to Brian on any specifics that he might add, as he is always terribly knowledgeable and accurate!
@Jordan Lamarre-Wan & @Brian Burke One comment. Most of the deals I have seen give an upper limit on the amount an LP may invest, so as not to crest 20% (I think it's 20%). This may not actually relate to the Reg D 506(b), but may instead be a lender limit on some loans. I gather that any investor over 20% has to submit financials.
This is likely the reason. With many lenders, any owner over 20% has to be treated differently than smaller minority owners.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
6y
Lender regulations certainly come into play, but even for non-levered syndicates it is desirable to have a max in your mini-max to reduce concentration risk. Investors generally have many rights with how things are set up and having one investor have too much clout in a deal abdicates the authority of the sponsor, which arguably is not in alignment with the interests of the other investors who are entrusting this individual with their hard-earned investment dollars.
Ooltewah, TN · Member since 2017 · 75 posts · 38 votes
5y
@Brian Burke Just curious has anything changed on this front in the last post on this from your understanding? I.e. has any limit been imposed for non-accredited investors participating in a 506(b) type offering under Reg D? As you stated above there are limits for offerings under Reg A...is there any similar limit to under Reg D? Seems rather difficult to find a a clear and conscious answer on this from online searches...
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
5y
@Amit P. I'm not aware of any changes in this regard. There are no limits that I'm aware of that constrain the amount that a non-accredited investor can invest into a 506(b) offering. Reg A, yes, but not Reg D rule 506(b). I'd imagine that this is intentional, and not an oversight. Reg A allows the issuer to advertise, meaning that they could recruit investors from the general public via marketing, and the regulators want to protect unsuspecting investors from unscrupulous operators--so a limit on how much those investors can invest might protect some folks.
But the Reg D 506(b) exemption prohibits advertising--meaning that it is generally thought that investors aren't cold leads from a billboard, instead they are people who might have a pre-existing relationship with the sponsor, or is friends with other investors and so on. A limit here could have unintended consequences--such as a family who wanted to pool their money to invest in a deal run by another family member--they might be prohibited from accomplishing their collective objective if the regulation limited each family member's investment.