How Can I Invest in Syndications if I Am Not Accredited?
In a previous post we discussed who qualifies as an accredited investor and how many passive investment opportunities, including syndications, are limited to this group.
But what if you're not an accredited investor? How can you invest in syndications?
Reg D 506(b) Offerings
Reg D is an SEC regulation that allows syndicators (aka sponsors) to efficiently raise capital by bypassing the expensive and time consuming SEC registration process.
The two most commonly used rules under Reg D are 506(b) and 506(c), but only 506(b) allows non-acreddited investors to invest.
Rule 506(b) & 506(c)
506(b) allows a sponsor to raise capital from an unlimited number of accredited investors, and up to 35 non-accredited investors. Non-accredited investors must also be sophisticated investors, meaning you must have "sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment".
Sponsors using 506(b) to raise capital cannot use "general solicitation or advertising" to find investors. For this reason they must have to a "pre-existing, substantive relationship" with you before you can invest, which makes 506(b) offerings harder to find. (More on this later...)
Whereas, 506(c) allows a sponsor to raise capital from an unlimited number of accredited investors only, but can advertise their offering in anyway they see fit (i.e. the internet, publications, public events, etc.)
Because of the ability to advertise freely, many sponsors, including crowdfunding sites, with larger capital raises will choose to use 506(c) over 506(b).
How to Find 506(b) Offerings
Since you need to be sophiscated and have a pre-existing relationship with a sponsor to invest with them, many sponsors host local groups that can easily be found on BiggerPockets, Meetup, or Eventbrite.
These local groups will often have monthly meetings with an education component (in addition to networking) to educate non-accredited investors on the various aspects of investing in the sponsor’s typical offerings. This allows potential investors like yourself to become sophisticated (if you’re not already), and meet the requirement needed under 506(b).
The networking component allows you to develop a relationship with the sponsor, meeting the pre-existing relationship requirement under 506(b).
At this point you can be added to the sponsor’s list of qualified investors and they can let you know about their investment opportunities as they arise.
Word of Mouth
Of course word of mouth is another way you can find out out about syndications. You may have friends, family, or colleagues that are already invested in a syndication. Ask them for an introduction to the sponsor, I'm sure they would be happy to do so.
If you don't have anybody in your circle that can introduce you to a sponsor, try asking your accountant or lawyer.
You can also look around BiggerPockets or LinkedIn for syndicators and send them a direct message to get the conversation going.
The Bottom Line
Even if you're a non-accredited investor, you can still invest in 506(b) syndications if you develop a relationship with a sponsor and a solid understanding of the asset class you want to invest in.
Look for local groups in your area and attend them regularly to build your knowledge and relationships. If there are none in your area, ask for referrals or search the web.