506(c) Syndication(s) Secret

13 Replies

Hey BP Community -

I was sitting-in on an investor presentation for a syndication of an attractive 320-unit Class B MF development in a fast-growing market, and then I realized... it was a 506c project for accredited investors only [which I am not.. yet:)]

So then I began thinking...

How can I possibly get involved?

If I have a capital provider whom wants to be 100% passive and is ready to invest $100k with me (cash), and I have all the syndication structure and offering documents for this project... can’t I just find an accredited investor, present them the deal / get them on board, and go through them?

Why wouldn’t an accredited investor want a small portion of the pie at no-risk?

I’m curious to hear if people have done this in the past, how they did it, how they started, etc.

Any thoughts / discussion / enlightenment on this is encouraged!

Thanks!

Originally posted by @Joseph Binkowski :

Hey BP Community -

I was sitting-in on an investor presentation for a syndication of an attractive 320-unit Class B MF development in a fast-growing market, and then I realized... it was a 506c project for accredited investors only [which I am not.. yet:)]

So then I began thinking...

How can I possibly get involved?

If I have a capital provider whom wants to be 100% passive and is ready to invest $100k with me (cash), and I have all the syndication structure and offering documents for this project... can’t I just find an accredited investor, present them the deal / get them on board, and go through them?

Why wouldn’t an accredited investor want a small portion of the pie at no-risk?

I’m curious to hear if people have done this in the past, how they did it, how they started, etc.

Any thoughts / discussion / enlightenment on this is encouraged!

Thanks!

 Do the joint venture deals rather than syndication to get started. The Joint venture is not subject to all these complicated rules. A good attorney on your side would help. 

Hey Joseph, my understanding is that if you wanted to team up with an accredited investor though an LLC in order to invest, both members of the LLC would have to be accredited. And, as I'm sure you know, both investors would require a 3rd party verification of assets to prove their accredited status.

Let me know if this is what are asking or not.

the question is confusing to me.

are you referring to taking funds from an investor and then putting it into a known syndicator's deal? and you split the return?

or becoming a syndicator yourself?

or have an accredited investor invest in the syndicator's deal with your money? and split the difference?

Of course there is nothing magical about a "syndication", it can be as good or bad as an investment in any other real estate activity.

@Joseph Binkowski

Don’t forget that you can now be qualified as an accredited investor by passing the series 65 exam without any income or net worth requirements.

It will cost you around $200 to $300 and will be valid for 2 years (unless you can park your license with a financial advisor firm, then it will last as long as you maintain it).

It is not a difficult exam and you should be able to pass it with around 40 hours of self study with a good prep book or website.

@Daniel Han -  So there are essentially four parties in this situation. 
A) capital provider,
B) deal provider (me),
C) accredited investor,
D) syndicator

I'd want the accredited investor to invest in the syndicator's deal with my money. So I'd need to figure out an agreement/return between A and B, and then I'd need to figure out an agreement/return between (A&B) and C. Or vice versa, depending on who is more negotiable.

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@Mike S. - I had no idea about this. Wow. Thanks for your comment. I will research further.

@Joseph Binkowski There are many syndicators that offer 506B opportunities that you could be a passive investor on.  Then you wouldn't have to give up any return by handing off your money to an accredited investor.  Im not an SEC attorney but I would think you would have to be careful doing this.  If the accredited investor took your money and ran, you probably wouldn't have a leg to stand on in court because you weren't supposed to be In the deal in the first place.  I would be leery of this. With a 506B offering you need a prior relationship with a syndicator before they have a deal. Then when they have a deal in place they are legally able to offer it to you.  Under 506B you can not solicit offerings to the public.  Feel free to contact me if you want to discuss further. 

@Joseph Binkowski - this seems overly complicated and possibly breaking a law... maybe you need a lawyer to vet this.

If I were that accredited investor, I wouldn't touch any of it. There is no such thing as risk-free money.

"small portion" of profit is not worth the possible legal issues.

There are no "secrets" and every scheme has been tried and tried again.  Fortunately the rules have been "modernized," which is kind of a rich NLP technique if you ask me.  In any event you can see what the SEC thinks of modernization here:

https://www.sec.gov/news/press...

I have read of late that small family offices can pool non-accredited investor money to qualify that entity as an accredited investor.  You can also seek projects through licensed Portals that are using Title III and can accept money from non-accredited investors.  Some of those may even be competent and know how to underwrite deals and sponsors.  Our firm is planning on starting a Portal (legal term) next year on our roadmap because with $5M as the new threshold this really can move the needle for certain projects and sponsors.  

Keep in mind that the sponsors with the longer track records and deeper bench of investors are unlikely to use some of the newer exemptions.  From their point of view they're seeking three primary things:

  1. Access to capital
  2. Control of their deal
  3. Cost of capital

They likely have a lot of the first two so the only motivation they'd have to accept your money into their deal is either the third bullet.  The more junior sponsors are seeking more of the first two bullets; but fortunately you're also yield-seeking as a non-accredited investor so there is alignment.  

Wow!!!  Great thread.  I just got back on to BP and boy have I missed these types of threads and insights.

If you are non-accredited and sophisticated, find Sponsors you can talk to that you get to know. You have to have confidence and the Sponsor needs to build a relationship with you if he wants to be sure you have some insights into the risks of the types of deals you would be funding. If you are syndicating or partnering with other investors to fund a Sponsor's deal and you are a company doing this (LLC, partnership) then get a PPM attorney and file with the SEC. 506B is easiest but if it is really risky...then 506C is best. You have to have an "existing relationship" if you are or you are working with non-accredited and sophisticated investors. I would also highly recommend you set some parameters when thinking about working with non-accredited investors or if you are one and want to invest on a large deal. For instance, the SEC doesn't define income or net worth for non-accredited like they do for accredited. Something to consider...and if you are syndicating for your deals or a Sponsor you are partnering with make sure you get verifications for both your accredited and even those non-accredited you work with. Keep records and ask for re-verification as per the guidelines on net worth and income.

Thanks for letting me jump in here.