Syndicators & Capital Raisers: Avoid SEC Trouble!!

Legal & Legislation
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Syndicators & Capital Raisers: Avoid SEC Trouble!!

Grant ShipmanPro Member
Rental Property Investor · Estes Park, CO · Member since 2017 · 283 posts · 1k+ votes

Hey BiggerPockets Community,

If you’re raising capital for real estate syndications, you need to be aware of SEC regulations—because one wrong move could put you in serious legal trouble.


Many new syndicators think they can just start pooling money from investors without following the proper rules. That’s a massive mistake. The SEC enforces strict guidelines on raising capital, and violating them can lead to hefty fines, investor lawsuits, and even criminal charges.

Let’s break down some key takeaways from SEC Rule 506(b) of Regulation D and why you MUST have a Private Placement Memorandum (PPM) and Subscription Agreement in place.

1. No General Solicitation or Advertising

Under Rule 506(b), you CANNOT publicly advertise your investment deal. That means:
🚫 No posting on social media
🚫 No blasting your deal to an email list of strangers
🚫 No promoting your syndication on a podcast

The SEC is clear: “No general solicitation or advertising to market the securities.”

If you want to publicly advertise, you’d need to use Rule 506(c)—which requires investor verification and limits you to accredited investors only.

🚨 Warning: If you advertise a 506(b) deal publicly, your entire offering could be invalidated, leading to legal consequences.

2. You Can Only Have 35 Non-Accredited Investors

Rule 506(b) allows an unlimited number of accredited investors but restricts you to only 35 non-accredited investors.

However, there’s a catch:

  • Non-accredited investors must be financially sophisticated.
  • They must have enough experience to evaluate the investment risks.

From the SEC:

If you’re planning to include non-accredited investors, make sure they qualify—or you could be violating SEC rules.

3. Full Disclosure is Required for Non-Accredited Investors

If any non-accredited investors participate in your deal, you must provide them with detailed disclosure documents.

The SEC states:

This is where having a Private Placement Memorandum (PPM) and Subscription Agreement becomes absolutely necessary.

A PPM outlines:
✅ The risks of the investment
✅ The structure of the deal
✅ The terms and conditions
✅ The use of funds

A Subscription Agreement ensures:
✅ Investors acknowledge they understand the risks
✅ They meet SEC requirements
✅ They legally commit their capital

🚨 Not providing these documents could leave you vulnerable to investor lawsuits.

4. Investors Receive "Restricted Securities"

Syndication investors receive restricted securities, meaning:

  • They can’t freely sell their shares like a stock.
  • They must hold the investment for a certain period.

Additionally, you must file a Form D with the SEC within 15 days of the first sale of securities.

5. States Can Still Require Additional Filings

Even though 506(b) offerings are exempt from state registration, individual states can still require notice filings and fees.

This means you need to check with each state where your investors reside to ensure compliance.

Final Warning: Don’t Cut Corners – Follow the Law!

Too many new syndicators think they can get away with skipping legal requirements—but the SEC isn’t playing around.

If you’re raising capital, DO IT RIGHT:
✅ Use a PPM & Subscription Agreement to protect yourself and your investors
✅ Avoid general solicitation (unless using a verified 506(c) offering)
✅ Understand accredited vs. non-accredited investor rules
✅ File your Form D and comply with state laws

🚨 Failing to follow these regulations could mean SEC fines, investor lawsuits, or worse. 🚨

***quotes copied directly from SEC.gov ****

Questions for the Community:

1️⃣ Have you seen capital raisers violate these rules? What happened?
2️⃣ Do you always use a PPM & Subscription Agreements for your syndications? Why or why not?
3️⃣ What’s your strategy for educating investors about SEC compliance?

Let’s discuss below! 👇👇👇

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Greg ScottPro Member
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
1y

Good post.

We use a competent SEC attorney that creates all our docs and does the state filings.  We've used Reg D 506(b) for our syndications and ONLY communicate with investors that have a prior relationship with us.

There are two illegal activities that I see all the time.  One didn't make your list.

1) I see people all the time raising money for real estate deals but they call it a partnership either because they are ignorant of the law or they are trying to avoid paying for all the legal work.  I've been on at least a half dozen posts on BP where people try to explain-away the fact that they broke the law.  The truth is if your investors have no involvement in the operations, If they just put in money and expect to get a profit, you have created a de facto syndication.

2) I see a ton of people who just raise money for the syndication.  Some of them post here on BP.  That is illegal unless you have specific licenses.  They will try to cover that up by saying they have some minor role in the general partnership.  From my perspective, they are operating in a dangerous gray area.  If the SEC came sniffing around and your main job was raising money and all you do is attend a weekly meeting, good luck to you!  Frankly, I would never put my money with someone who is just raising money.  I put my money with OPERATORS.  If things to sideways, the money raiser usually has no leverage or even any authority to fix the problem.

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  • Greg ScottPro Member
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    1y

    Good post.

    We use a competent SEC attorney that creates all our docs and does the state filings.  We've used Reg D 506(b) for our syndications and ONLY communicate with investors that have a prior relationship with us.

    There are two illegal activities that I see all the time.  One didn't make your list.

    1) I see people all the time raising money for real estate deals but they call it a partnership either because they are ignorant of the law or they are trying to avoid paying for all the legal work.  I've been on at least a half dozen posts on BP where people try to explain-away the fact that they broke the law.  The truth is if your investors have no involvement in the operations, If they just put in money and expect to get a profit, you have created a de facto syndication.

    2) I see a ton of people who just raise money for the syndication.  Some of them post here on BP.  That is illegal unless you have specific licenses.  They will try to cover that up by saying they have some minor role in the general partnership.  From my perspective, they are operating in a dangerous gray area.  If the SEC came sniffing around and your main job was raising money and all you do is attend a weekly meeting, good luck to you!  Frankly, I would never put my money with someone who is just raising money.  I put my money with OPERATORS.  If things to sideways, the money raiser usually has no leverage or even any authority to fix the problem.

    4Reply
  • Evan Polaski
    Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
    1y

    @Grant Shipman, I will say, I have not explicitly seen anyone violate these rules (that I know of), but more commonly there are a lot of people who have comfort operating at the margins.

    I.e. compliance officers/attorneys that stop at the letter of the law may say: "investment manager X, you can advertise your company all you want.  You can advertise historic performance.  You can run ads directing people to your blogs or white papers, etc. As long as you don't explicitly talk about your current offering, you are in the clear."  A more conservative attorney would say: "investment manager X, you can NOT advertise your company in any meaningful way.  The intent of your advertisements is to build awareness to garner investor interest for your upcoming deal."  

    Or, as Greg noted, the co-GP who raises money to be a part of the deal.  Of course, the smart ones will have agreements stating they are involved in due diligence, marketing, asset management, etc.  But, more commonly, they bring in the capital, maybe do a site visit before closing, and ultimately just forward an investor email to the main operator, then forward the response to the investor.  

    As for question 2: no. But, only because I have seen LLC agreements in lieu of PPMs, with the same general items discussed.

    3. Let's just say compliance officers have a hard enough time educating their employers about compliance, so educating investors who don't already know about it, nearly impossible.  I think this really comes down to many investors not even knowing this is important until they learn the hard way. Many investors in syndications ask such basic questions: what's your track record, when do distributions start, and how frequently do you pay distributions.  If that is the benchmark of an investors diligence, educating them on compliance is a lost cause.

    2Reply
  • Grant ShipmanPro Member
    OP
    Rental Property Investor · Estes Park, CO · Member since 2017 · 283 posts · 1k+ votes
    1y

    Great added points!  I'm just glad someone taught me this when I was started out- Garret Sutton first opened my eyes up to it, and then I started a relationship with a stellar SEC attorney in Denver.  It's always up to investors/etc to decide their risk profile, but those who haven't been exposed to this stuff can't even know this is an exposure. 

    3Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    1y
    Quote from @Grant Shipman:

    Hey BiggerPockets Community,

    If you’re raising capital for real estate syndications, you need to be aware of SEC regulations—because one wrong move could put you in serious legal trouble.


    Many new syndicators think they can just start pooling money from investors without following the proper rules. That’s a massive mistake. The SEC enforces strict guidelines on raising capital, and violating them can lead to hefty fines, investor lawsuits, and even criminal charges.

    Let’s break down some key takeaways from SEC Rule 506(b) of Regulation D and why you MUST have a Private Placement Memorandum (PPM) and Subscription Agreement in place.

    1. No General Solicitation or Advertising

    Under Rule 506(b), you CANNOT publicly advertise your investment deal. That means:
    🚫 No posting on social media
    🚫 No blasting your deal to an email list of strangers
    🚫 No promoting your syndication on a podcast

    The SEC is clear: “No general solicitation or advertising to market the securities.”

    If you want to publicly advertise, you’d need to use Rule 506(c)—which requires investor verification and limits you to accredited investors only.

    🚨 Warning: If you advertise a 506(b) deal publicly, your entire offering could be invalidated, leading to legal consequences.

    2. You Can Only Have 35 Non-Accredited Investors

    Rule 506(b) allows an unlimited number of accredited investors but restricts you to only 35 non-accredited investors.

    However, there’s a catch:

    • Non-accredited investors must be financially sophisticated.
    • They must have enough experience to evaluate the investment risks.

    From the SEC:

    If you’re planning to include non-accredited investors, make sure they qualify—or you could be violating SEC rules.

    3. Full Disclosure is Required for Non-Accredited Investors

    If any non-accredited investors participate in your deal, you must provide them with detailed disclosure documents.

    The SEC states:

    This is where having a Private Placement Memorandum (PPM) and Subscription Agreement becomes absolutely necessary.

    A PPM outlines:
    ✅ The risks of the investment
    ✅ The structure of the deal
    ✅ The terms and conditions
    ✅ The use of funds

    A Subscription Agreement ensures:
    ✅ Investors acknowledge they understand the risks
    ✅ They meet SEC requirements
    ✅ They legally commit their capital

    🚨 Not providing these documents could leave you vulnerable to investor lawsuits.

    4. Investors Receive "Restricted Securities"

    Syndication investors receive restricted securities, meaning:

    • They can’t freely sell their shares like a stock.
    • They must hold the investment for a certain period.

    Additionally, you must file a Form D with the SEC within 15 days of the first sale of securities.

    5. States Can Still Require Additional Filings

    Even though 506(b) offerings are exempt from state registration, individual states can still require notice filings and fees.

    This means you need to check with each state where your investors reside to ensure compliance.

    Final Warning: Don’t Cut Corners – Follow the Law!

    Too many new syndicators think they can get away with skipping legal requirements—but the SEC isn’t playing around.

    If you’re raising capital, DO IT RIGHT:
    ✅ Use a PPM & Subscription Agreement to protect yourself and your investors
    ✅ Avoid general solicitation (unless using a verified 506(c) offering)
    ✅ Understand accredited vs. non-accredited investor rules
    ✅ File your Form D and comply with state laws

    🚨 Failing to follow these regulations could mean SEC fines, investor lawsuits, or worse. 🚨

    ***quotes copied directly from SEC.gov ****

    Questions for the Community:

    1️⃣ Have you seen capital raisers violate these rules? What happened?
    2️⃣ Do you always use a PPM & Subscription Agreements for your syndications? Why or why not?
    3️⃣ What’s your strategy for educating investors about SEC compliance?

    Let’s discuss below! 👇👇👇


     We see people breaking the rules all the time and here on BP as well. People think "friends and family" are exempt - WRONG. Also you cannot raise money for someone else and collect a fee. 

    Doing real estate and managing other peoples money from a fund are two very distinct skillsets. People also need to realize that.

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  • Account Closed
    Specialist · Cape Coral, FL · Member since 2019 · 16 posts · 3 votes
    11mo

    @Greg Scott I certainly agree with you and for your #2, if someone is trying to solely get buy-in for other firms/GP’s funds & syndications and receiving placement fees, they are acting as a security broker for private placements and need to register with FINRA.

    Could turn into a big mess!

    0Reply
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