Top 3 Legal Things Real Estate Syndicators Must Know When Raising Money

Are you thinking about raising money for your next project? There are plenty of great articles about top things to consider when raising capital, so I will leave that to the Ken McElroys of the world.  But what about from the legal side? (I know, the most exciting part, right?). Well, here are the three most important legal things real estate syndicators must know when raising money.  Plus, a quick bonus at the end. 

1. Disclose, Disclose, Disclose. 

One of my favorite things about putting syndications together is working with clients to structure the deal.  The great thing about syndications is you can be as creative as you want to be.  There are very few restrictions.

That is…so long as you Disclose, Disclose, Disclose.

You must disclose anything a potential investor may consider material or relevant in making the decision to invest in your syndication. What does this mean?  If you ask me whether something should be disclosed, the fact that you thought of it, probably makes it material and should be included.  This is where the offering documents, most notably the Private Placement Memorandum, come into play.

2. Know the Difference Between an Accredited Investor and a Non-Accredited Investor. 

So many vital legal decisions are made based on whether you plan to have non-accredited investors in your deal.

To ensure we are all on the same page, in general, accredited investors are those who either have a net worth of over $1M, excluding their primary residence OR make $200,000 a year alone or $300,000 with their spouse.

The distinction has become even more critical with the new rules permitting general advertising of your syndication.  One of the limitations to advertising is that you can only take accredited investors into your syndication.

3. Work With Your Legal Advisor To Find the Right Exemption to Registration. 

What does this mean?  Since syndicators are selling securities, they must comply with the rules of the Securities and Exchange Commission (“SEC”). And the general rules are quite simple…  You either a) need to register your security with the SEC, b) find an exemption to registration or c) your syndication is illegal.

I will assume that you want to stay away from illegal syndication.  Forget about Bernie Madoff…an illegal offering, at a minimum, will make you the guarantor of the investment, so if it goes south, you will have to return all of the investors’ money.

Trust me when I tell you that you want no part in registering your syndication with the SEC.  That process will take over a year, possibly two, and your legal bill will also be in the six-figure range.  Very few instances warrant a registration.

That means you need to find an exemption to registration.  Your individual circumstances and the particular deal will dictate what that exemption is.

Syndication Attorney Bonus Tip: Don’t Pay Referral Fees. 

I know it is tempting to offer someone a fee for helping you raise money or making a referral, but unless that person is a registered Broker-Dealer with the SEC, paying a referral fee is a big no-no. There are obviously many other important legal considerations to take into account, but these are right up there at the top of the list. 

This blog post is intended to provide general information and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship with Premier Law Group.