I've been looking at some projects and have a couple people that may be interested in putting up some money. I'm a bit confused about the legality/difference between what is considered private funding and what is considered a syndication. I know the rules on syndication is very complicated and very specific but I don't know what constitutes the difference.
Syndication is where you create a pool from different investors and use the funds for real estate projects, from development to rehabs, etc. Since the funds are in a pool, you have to disclose, fill out forms and register what you are doing to avoid complications with SEC and IRS. Partnerships are much easier and you can achieve pretty much the same results: you raise funds for specific projects and create a legal entity for that project, electing yourself as a member of the partnership so you can benefit from any gains without complicated filings.
@Laura Alamery , I guess where I get confused is where it changes from a JV with no SEC concerns to a syndication. Both situations you're reaching out to others to combine resources and fund projects. What causes it to no longer be considered just partnering up with other investors?
It is all about how it is structured. If you create an LLC, for instance, where you are one of the member-managers, and you purchase property under the LLC, then as an owner you are entitled to distribution per your operating agreement (which outlines the split and distribution.) That is the simplest way to be entitled to be an owner, and participate in the gains without reporting. The funds are directly deposited with the title company or attorney for the purchase, rehab and construction. You do not handle the funds directly.
If you pool the money together, all the investors will contribute a certain amount, which is deposited in a general account and used for real estate projects. That would have to be reported and disclosed. The amount is not earmarked for a specific investment and ownership in a particular piece of real estate becomes a little hazy.
I personally have done investments, rehabs and new construction (a 23 homes development) using the first option above.
@Paul Bowers when you create an LLC and sell shares (ownership) of that LLC you have then sold securities and are subject to SEC regulations. However, I believe this depends on whether your investors are passive or active partners with voting rights. If they are not passive and are involved in running the LLC then this is not subject to SEC regs.