“Mini” Syndications and How to Do Them

[Don Konipol]

Syndications utilizing Reg D for an offering aren’t the ONLY way to a legally complying syndication.  Here are two other legal ways I syndicated real estate deals before I “formalized” my syndication business

1. Intrastate offering.  An offering only open to investors in a single state is itself an exemption from SEC registration.  The offering would have to comply with the requirements for a private offering for the subject state - which depending on the state could be much simpler  and less expensive than a Reg D offering. 

2. General Exemption for Private Placements.  Before the SEC came up with the “safe harbor” Reg D, all multi state private placements were done utilizing this exemption from SEC registration.  And it’s still used today.  As long as the offering is only made only to investors who the sponsor has an “existing relationship” with, and is limited to accredited investors and or no more than 35 “non accredited” investors, the offering will be in compliance. This offering requires only that the sponsor fully disclose all information to the investors; there are no prescribed PPMs, Operating Agreements, or Subscription Agreements required. Typically, the sponsor will engage legal counsel to draw up an Operating Agreement, which for a relatively small offering with less than 9 passive investors should cost less than $1500. 

So, why do sponsors spend $15,000 + in legal fees for Reg D offerings when using the General Exemption cost 90% less?  It’s because 

1. Investors often will only participate in offerings that comply with Reg D; they use it as a “screen” to filter out those offerings that are “professional” from the “one off” wanna be sponsors. 

2. Utilizing Reg D 504 C allows for “general solicitation and advertising” which is disallowed under the General Exemption for Private Placements.

3. Reg D “over rides” states securities laws which have to be complied with in an offering relying on the General Exemption for Private Placements 

4. Reg D is a “safe harbor” meaning that complying with the Reg D requirement guarantees that the SEC won’t come back and contest the exemption from registration.

5. Compliance with Reg D provides the sponsor with a statutory defense against investor lawsuits. So, if an offering complies with reg D, the sponsor should be able to win any lawsuit brought by the passive investors outside of fraud, as compliance with Reg D is a DEFINITIVE defense.  As a result once a plaintiff attorney determines that Reg D has been complied with, they will not take a case representing a disgruntled investor, at least not on a contingency basis. 

I believe that both intrastate and General Exemption offerings have a place in smaller type offerings where the sponsor and other investors know each other and develop “one to one” relationships.  

Have you ever been a sponsor in a syndication?  What type of offering or partnership structure did you utilize?