Requirements to sell investments in other people's syndications?

22 Replies

Let's say, for instance, I have a bunch of connections with groups doing syndication deals and I have a bunch of interested investors.  What are the legal requirements for me to make fees or commissions off of bringing investors into other's syndication deals? 

I've done lots of googling and found mostly info as it relates to stocks, etc.  But, hypothetically speaking, if one wanted to build a business around this idea, how can that be done legally? Obviously, talking to a lawyer will be necessary before actually moving forward, but I'd love to get some high-levels answers first if possible. 

@Graham Lutz  

You need to:

1)have established relationships with deal sponsors and potential investors since this industry is SEC regulated and some of the deals maybe  done via 506 (b) = not publicly advertise and require pre-existing relationship

2) have a full implications of each deal and be well-versed in syndications in general - people won't just jump on a deal cause you offer it. You will get a ton of questions that you will have to answer. Some of these will need to be answered by you personally as it may be something that can be taken directly from the investment offering document, for other questions - you will need to go back to a deal sponsor to get the answers

3) discuss with a deal sponsor(s) as to whether they can add you on the GP side of the deal in order for you to help them with the fund-raising, marketing and potentially some other miscellaneous tasks

Disclaimer: I'm not an attorney so this is just my 2 cents.

I'd advise you speak with a securities attorney who's in industry for a while. Perhaps @KimLisa Taylor can assist you.

Best!

not sure but I think there are some securities issues here like you need one of the series licenses. 

Although my gut tells me that some would do it and some will be sticklers to the law. 

every thing is groovy when its working fine its when you have a melt down that things start to get hairy for all concerned and if your in there making fee's your going to get named as well so you probably need proper license to do it correctly. 

@Alina Trigub - I’ve got plenty of experience with syndications and know the implications of the SEC regulations well. The goal is to not have to be a GP on every deal to which I bring my investors. I’m specifically interested in what’s required to simply sell an investment in another deal. Do I need a series 7/63/65/66 or any other certifications or designations?

@Jay Hinrichs thanks - yeah I would absolutely want to do it right and was thinking some series licenses might be the answer, but I’m not sure which, and the official websites for them don’t quite answer my question. 

Also, getting a 7 without being employed by an investment firm seems to be quite the hurdle. 

Originally posted by @Graham Lutz :

@Jay Hinrichs thanks - yeah I would absolutely want to do it right and was thinking some series licenses might be the answer, but I’m not sure which, and the official websites for them don’t quite answer my question. 

Also, getting a 7 without being employed by an investment firm seems to be quite the hurdle. 

 you may check and see if being a Registered FA  will work.

but I got to think some of the  Syndicators on this site would obviously know right off the top of their heads.

Most these days have waiting list for their projects .. at least the one's that are not beginners.. 

Graham send me a PM I have a few ideas for you I don't want to share on the open forum..

Originally posted by @Graham Lutz :

@Alina Trigub - I’ve got plenty of experience with syndications and know the implications of the SEC regulations well. The goal is to not have to be a GP on every deal to which I bring my investors. I’m specifically interested in what’s required to simply sell an investment in another deal. Do I need a series 7/63/65/66 or any other certifications or designations?

Re-read my response #3. Also, to answer your new question - no you don't necessarily need to have any series exams done. 

Need more details, feel free to PM me or speak with a syndication attorney I recommended.

Originally posted by @Graham Lutz :

@Alina Trigub - I’ve got plenty of experience with syndications and know the implications of the SEC regulations well. The goal is to not have to be a GP on every deal to which I bring my investors. I’m specifically interested in what’s required to simply sell an investment in another deal. Do I need a series 7/63/65/66 or any other certifications or designations?

 Series 7 securities license :)

@Ben Leybovich - that's what I was afraid of...The problem is that I have zero interest in getting a job with an investment firm (which appears to be necessary to get sponsorship for the exam).  Any chance you're aware of any entities that will sponsor someone for the exam without requiring full-time employment?

Originally posted by @Graham Lutz :

@Ben Leybovich - that's what I was afraid of...The problem is that I have zero interest in getting a job with an investment firm (which appears to be necessary to get sponsorship for the exam).  Any chance you're aware of any entities that will sponsor someone for the exam without requiring full-time employment?

 No idea. But there are only 2 choices: become part of the GP team, or get a license.

Originally posted by @Ben Leybovich :
Originally posted by @Graham Lutz:

@Alina Trigub - I’ve got plenty of experience with syndications and know the implications of the SEC regulations well. The goal is to not have to be a GP on every deal to which I bring my investors. I’m specifically interested in what’s required to simply sell an investment in another deal. Do I need a series 7/63/65/66 or any other certifications or designations?

 Series 7 securities license :)

 Series & license is an option BUT not a requirement! Being part of GP side is an alternative. 

Updated almost 3 years ago

Meant to say "Series 7"

@Graham Lutz

This is not advice but I would recommend you talk with a securities lawyer. Anyone doing a syndication I would assume has one so he/she can discuss with you. You probably can't get paid directly for bringing investors as part of just this offering but you might be able to help the Company with their efforts as an IR person etc. 

"Consulting fee" for deal structure services paid by the sponsor.  I don't know how this works or the rules around it but I have seen it in practice.

What is your aversion to getting compensated with a small piece of the GP?

FYI...if your investors are investing directly with the sponsors, they will only need your (introduction) services the first time with each sponsor and you will have investor leakage in future deals, particularly with large dollar investors.  They can get favorable terms from some sponsors at $250-500k+ levels and they will lose those terms if the sponsor is compensating you instead.

@Mike Dymski - I don't have any particular aversion to being a GP, but just exploring options and starting conversations.  And I have that abundance mindset that makes it hard for me to worry too much about investor leakage.  I'm not trying to hide anyone away or protect my little share of the world.  

Originally posted by @Graham Lutz :

@Mike Dymski - I don't have any particular aversion to being a GP, but just exploring options and starting conversations.  And I have that abundance mindset that makes it hard for me to worry too much about investor leakage.  I'm not trying to hide anyone away or protect my little share of the world.  

Got it.  Sounds like the best structure is for you to speak with sponsors and see how much they are interested in compensating you (small piece of the GP) for committing $X in capital to their deal.  This is common and does not required a certification.

Securities exemptions only apply to the issuer of the Securities. One who sells securities in someone else's exempt securities offering is not entitled to the exemption and therefore must have the appropriate securities license to be legally compensated for doing so. This is why most people in this position do so as a member of the GP, sponsor, or manager and earn a slice of their pie - so they can qualify for the exemption. Another option for "people with investors but no properties" is to set up their own "fund of funds" (syndicate) that can invest as a single investor in other people's syndicates. In this case, the manager of the fund of funds would get compensated from their own syndicate.

California does have a couple of exceptions to this for CA real estate brokers or CA registered "finders" but the transaction must be in California to qualify along with some other limitations.

The risks of being compensated for referring investors to a deal without a securities broker-dealer's license are this: 

1) The syndicate that pays an unlicensed broker may put their own exemption at risk, and 

2) The unlicensed broker who accepts an unlawful commission may remain liable for the investment, or be subject to regulatory action by the SEC or a state securities agency.

Most "consulting agreements" are fashioned after those that can be lawfully used receive compensation for referring "institutional investors" - but are not applicable to those who refer individuals to others' syndicates. We are happy to talk to anyone who has further questions about this.

You would need a securities license to do that. Just like with selling real estate you need a license, for selling interests in a syndication, you would need a license as well. If you wanted to get a limited license for a particular syndicator, you could fill out a U-4 and then get qualified in each state that you want to sell. It is a process. 


Originally posted by @Graham Lutz :

Let's say, for instance, I have a bunch of connections with groups doing syndication deals and I have a bunch of interested investors.  What are the legal requirements for me to make fees or commissions off of bringing investors into other's syndication deals? 

I've done lots of googling and found mostly info as it relates to stocks, etc.  But, hypothetically speaking, if one wanted to build a business around this idea, how can that be done legally? Obviously, talking to a lawyer will be necessary before actually moving forward, but I'd love to get some high-levels answers first if possible. 

Just wanted to update my answer on this one. Here is the federal exemption for issuers selling their own securities. This is the exemption that most syndicators/fund managers use in order to NOT register as a broker-dealer: 

§ 240.3a4-1 Associated persons of an issuer deemed not to be brokers.

(a) An associated person of an issuer of securities shall not be deemed to be a broker solely by reason of his participation in the sale of the securities of such issuer if the associated person:

(1) Is not subject to a statutory disqualification, as that term is defined in section 3(a)(39) of the Act, at the time of his participation; and

(2) Is not compensated in connection with his participation by the payment of commissions or other remuneration based either directly or indirectly on transactions in securities; and

(3) Is not at the time of his participation an associated person of a broker or dealer; and

(4) Meets the conditions of any one of paragraph (a)(4) (i), (ii), or (iii) of this section.

(i) The associated person restricts his participation to transactions involving offers and sales of securities:

(A) To a registered broker or dealer; a registered investment company (or registered separate account); an insurance company; a bank; a savings and loan association; a trust company or similar institution supervised by a state or federal banking authority; or a trust for which a bank, a savings and loan association, a trust company, or a registered investment adviser either is the trustee or is authorized in writing to make investment decisions; or

(B) That are exempted by reason of section 3(a)(7), 3(a)(9) or 3(a)(10) of the Securities Act of 1933 from the registration provisions of that Act; or

(C) That are made pursuant to a plan or agreement submitted for the vote or consent of the security holders who will receive securities of the issuer in connection with a reclassification of securities of the issuer, a merger or consolidation or a similar plan of acquisition involving an exchange of securities, or a transfer of assets of any other person to the issuer in exchange for securities of the issuer; or

(D) That are made pursuant to a bonus, profit-sharing, pension, retirement, thrift, savings, incentive, stock purchase, stock ownership, stock appreciation, stock option, dividend reinvestment or similar plan for employees of an issuer or a subsidiary of the issuer;

(ii) The associated person meets all of the following conditions:

(A) The associated person primarily performs, or is intended primarily to perform at the end of the offering, substantial duties for or on behalf of the issuer otherwise than in connection with transactions in securities; and

(B) The associated person was not a broker or dealer, or an associated person of a broker or dealer, within the preceding 12 months; and

(C) The associated person does not participate in selling an offering of securities for any issuer more than once every 12 months other than in reliance on paragraph (a)(4)(i) or (iii) of this section, except that for securities issued pursuant to rule 415 under the Securities Act of 1933, the 12 months shall begin with the last sale of any securityincluded within one rule 415 registration.

(iii) The associated person restricts his participation to any one or more of the following activities:

(A) Preparing any written communication or delivering such communication through the mails or other means that does not involve oral solicitation by the associatedperson of a potential purchaser; Provided, however, that the content of such communication is approved by a partner, officer or director of the issuer;

(B) Responding to inquiries of a potential purchaser in a communication initiated by the potential purchaser; Provided, however, That the content of such responses are limited to information contained in a registration statement filed under the Securities Act of 1933 or other offering document; or

(C) Performing ministerial and clerical work involved in effecting any transaction.