Partners vs Syndication

6 Replies

At what point does the SEC get involved when it comes to partnering? I hear sydicators mention SEC rules around their deals. But if I were to raise money for a sfr, or small multi family, could I not just form an LLC and have the silent(money) partners own a percentage of the LLC and cut them a cheque quarterly from the cashflow. Is there a certain dollar value, or number of investors where the SEC gets involved? Any help would be great. Thanks in advance

Matt: If you know and have a previous relaionship with the investors then the SEC business isn't relevant. You can just set up the LLC as you said and the investor's percentage is as stated in the LLC and as negotiated between you. A lawyer that has experience in syndications can set this up easily. With the 2 syndications I set up I was the manager of the sydicate and handled the checkbook and made the quarterly distributions.

The SEC “gets involved” when the investment goes to s#!t and an aggrieved investor files a complaint stating that they were sold a security without proper disclosure of the risks and their money vanished. 

They don’t get involved in the process of you raising money.  If you do it wrong but the investment goes great and everyone makes tons of money you’ll most likely never hear from anyone at the SEC.

If you do it wrong and the investment doesn’t go well you could not just get sued, you could go to prison.  So it’s just better to do it right because if you do it right and the investment goes bad you might just get sued. You reduce your chances of prison and you reduce your chances of losing those lawsuits. 

Your question, however, is contradictory. You mention partnering and you mention silent investors. These are two entirely different concepts and the differences are critical.

Partnering means you and some other people that you know get together for a common enterprise and everybody has a role to play. Let’s say you find the deal, your contractor fixes it up, your real estate agent sells it and your friend does the design and staging. Each of you contribute money and each of you have voting rights for all decisions. This is a partnership and even if it goes bad the others would have a tough case to say that SEC rules were violated. 

Now take the scenario where you are handling everything and have decision authority.  You get some passive investors to contribute money and you do the rest. No matter how many investors and no matter how much they contribute, you have sold a security to each of these investors and there are proper ways to do that. Violate those rules at your own peril. 

The common way that many raise money from one investor on their deal is to have that investor make a loan secured by the property.  As long as the terms of the debt are commercially reasonable, you most likely have not sold a security. Pool multiple “lenders” into this loan and that could be a problem with securities laws and/or other state laws governing lending. 

Bottom line: your freedom is at risk so get good legal counsel and follow their advice. I’m not a lawyer so nothing here should be considered anything more than my observations over more than two decades of raising money for my projects. 

Gene Trowbridge has a great book called ”It’s a Whole New Business” which is very educational.  That said, this isn’t a do-it-yourself project so be sure to get good legal counsel and not just rely on this or any other book alone. But it’s great to have some background from the books when you meet with counsel so it’s not all new to you when the conversation gets rolling. 

@Matt Willis I couldn't agree more with @Brian Burke . His experience speaks for itself and his observations are invaluable as always! I noticed that you're from Canada. So in case you're doing business in Canada, you should find a Canadian securities attorney and follow guidelines of Canadian Securities Administration (CSA).

Good luck!

Anytime you take money from investors and the returns are made based primarily on your efforts, then you are selling a security and need to comply with securities laws.  We don't need to register anything with the SEC since we can usually find an exemption to registration, but the SEC rules need to be followed.  Not sure  I would rely on the Good Deal defense since at some point an investment wont go as planned.  And if you don't follow the securities laws, you are essentially guaranteeing the investor's money plus interest since that is their remedy (plus whatever sanctions you get from State regulators and SEC).

This is all I do.  100% of my practice is Syndications.