Is a PPM Needed to Raise Capital From Passive Investors?

[Stephen Pearse]

I'm closing on my first syndication next month and I've run into contradicting beliefs. It is a smaller deal- 15 units, $1,025,000 price, raising $50,000 from 5 passive investors. The questions is, do we need a PPM?

Up until now I have always been told that a PPM is needed for any sort of syndication. My partner and I were referred to an attorney who claims that the term "syndication" would only apply to deals bigger than ours and that we don't need that much documentation. He says that we can have a 3-7 page disclosure and file an M11 with New York State and be ok. I'm worried that our operating statement would list the passive investors as members of a JV, meaning that they can't be passive and that we wouldn't pass the Howey Test without a PPM.

If anyone has any insight on whether a PPM is absolutely necessary or not would be extremely helpful. 

[Taylor L.]

I am not a securities attorney. You need to talk with a securities attorney. The following is not securities advice but is rather my understanding as a participant in the syndication space for the last number of years.

Securities are either exempt from registration or non-exempt from registration with the SEC. Most of the syndications you see in real estate these days are done under an exemption through Regulation D Rules 506(b) or 506(c). While the 506(b) rule does limit the maximum number of non-accredited, sophisticated investors you can raise from (35), there is no minimum number of investors or dollar amount that it applies to. I know folks who have done a full syndication to bring in just one investor. So the logic that the deal is too small does not pass the sniff test. 

Do you know which of those you intend to use? Did you talk with an attorney who does not specialize in securities law?