Limits on sophisticated / non-accredited investors syndications?

5 Replies

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.

Investment Limits for Non-Accredited Investors
While the updated Title III regulations allow non-accredited investors to participate in crowdfunded investments, it’s not a free-for-all. The SEC has opted to place restrictions on how much non-accredited investors can invest over a 12-month period. Your individual limit is based on your net worth and income. Accredited investors have no such restrictions.
If you make less than $100,000 per year or your net worth is below that amount, you can invest up to either the greater of $2,000 or the lesser of 5% of your income or net worth. If your annual income and your net worth exceed $100,000, you can invest up to 10% of your income or net worth, whichever is less, up to a total limit of $100,000.
The SEC imposes this limit for a reason. The purpose is to curtail the risk to non-accredited investors who may not be as knowledgeable about crowdfunding or investing in general. By limiting how much you can invest, the SEC is also limiting how much you could lose if a particular investment falls flat.


Thank you for reading and commenting. Any input is greatly appreciated!

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.

@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!

Regards,

Charles

Originally posted by @Charles LeMaire :

@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.

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.  

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