Private Placement Memorandum- Do I need one in this scenario?

Question

Hey BP Folks,

So I am going to be starting a syndication to raise $100K, where there would be no more than 10 investors, all of whom I would know personally.  Some would be accredited investors, whereas other might not be.  We would each be putting in $10K, so I will have some skin in the game.

The goal of the fund would be to:

• Buy a distressed multi family property
• Add value
• Rent out
• Appraise, cash out refi, and rinse/repeat

Would this strategy require a private placement memorandum?  I would not plan to add any other investors into the group, and those investing would not be willing to personally guarantee anything.  They would simply be looking to receive a return on their investment, similar to an "angel investor".

My understanding is that I would need set up an LLC, where I would be the only active manager, and thus the only one personally guaranteeing any refinance loan.

Any advice would be greatly appreciated!!

Jay Hinrichs · Answer

@Samuel S.@Chris Soignier  there is a specific PPM dedicated  for 1 mil and under..

I don't think the 1 mil and under exempts you from PPM .. just depends on how you set it up.

100k is pretty small number to pay for a ppm  ... maybe you just have the few buddies give you unsecured prom notes.. that may work.

Zach Mitchell · Answer

I wanted to bring this back up. @Samuel S. Did you ever get an answer to your last question? I'm in the process of raising about $400k for a value-add multifamily deal and plan on a majority of the investors to use their retirement account funds. @Mark Nolan I've been told by an attorney that for a deal this small (Under $1MM all in) that I am fine just using an LLC and shouldn't have issues using retirement funds from investors. Any insight would be much appreciated.

Samuel S. · Answer

@Mark Nolan Honestly I would rather do it through retirement accounts (SDIRA's etc) because in my situation, the individuals I know would be more open to investing through them.  But I feel as though it would get much more complex, and wouldn't I 100% need to get a PPM in that case?

Mark Nolan · Answer

@Samuel S.

Are you also going to look to retirement accounts for funds?

Brian Moore · Answer

@Samuel S.  The short answer is 'yes'. Your plan to pool investor's funds is a "security" per SEC regs.

a. A “security”, for SEC purposes, is an undertaking that pools investor funds with the expectation of profit (and such investors are not all active managers of the undertaking)

b.Securities must be registered with the SEC [This a costly and time-consuming up-front process plus onerous ongoing reporting burden – Ed.] per the Securities Act of 1933 or the security may have an exemption from registration

c.Section 4(a)(2) of the Securities Act contains the “private placement” exemptions. To qualify the purchasers of the securities must:

• i.either have enough knowledge and experience in finance and business matters to be “sophisticated investors” (able to evaluate the risks and merits of the investment), or be able to bear the investment's economic risk;ii.have access to the type of information normally provided in a prospectus for a registered securities offering; andiii.agree not to resell or distribute the securities to the public.

Find out more on applicable exemptions (Reg D, etc) at my blog on syndications at: https://www.biggerpockets.com/blogs/7617-chicago-m...

Chris Soignier · Answer

Re: investment decisions, that's one of the things operating agreements spell out.   Please don't try writing your own, then need to cover death, divorce, disagreements, tax treatment, governance, lead comp, and many other things an experienced lawyer would know to cover.

For financing, my opinion is worthless.    All the matters is what's required by your lender(s).

Samuel S. · Answer

@Chris Soignier Thanks! That's what I assumed.  Since I would be making the sole investment decisions, could that simply be spelt out in the operating agreement?  By stating that the other investors are passive partners, where as I would be the only active partner? Also in terms of doing cash out refinances, in this scenario, could I still be the only personal guarantor?

@Bryan Hancock It wouldn't be more than $5K, which I know is not much at all..

Bryan Hancock · Answer

What is your legal budget?

Chris Soignier · Answer

From my experience, deals under $1M can be done w/o a PPM, but you would still need an operating agreement.   Note that I'm not an attorney nor am I offering legal advice....you get what you pay for.

Samuel S. · Answer

Thanks for your quick response Bryan!

No, the others would not have control in the project.

I guess the main question I am asking is if there's a way to raise a small amount of money (100k or less) without having to file for a PPM, due to the heavy costs..

Private Placement Memorandum- Do I need one in this scenario?

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