For U.S.-based real estate syndicators raising capital from private investors, ensuring that their offering qualifies for an exemption from securities registration is essential.

This involves adhering to a precise set of guidelines. Otherwise, you risk encountering serious issues with securities regulatory agencies. These include the sale of unregistered securities or selling securities without a license.

Let’s explore securities laws and make sure your syndication is compliant.

The Necessity of Securities Compliance

Understanding and adhering to securities laws is critical for anyone in real estate syndication. When raising funds from private investors, the legal landscape demands strict compliance to avoid severe repercussions.

Securities laws are in place to protect investors and ensure transparent, fair dealings. They stipulate that any fundraising from private investors—excluding hard money lenders—must qualify for an exemption from securities registration. That, or face potentially significant penalties, including fines and legal actions.

Compliance isn’t just a legal obligation but maintains trust and credibility with investors.

Securities Exemption Types and Requirements

Navigating the landscape of securities exemptions is key to ensuring compliance. At the federal level, there are several notable exemptions under Regulation D:

Rule 506(b) allows for private placements but prohibits advertising and general solicitation. It also limits sales to no more than 35 non-accredited investors within any 90-day period.

Rule 506(c) permits the use of advertising and general solicitation, provided all purchasers are accredited investors. The issuer should also take reasonable steps to verify their accreditation.

Rule 504 authorizes the issuer to offer and sell up to $10 million of securities within a 12-month period. This makes it a common choice for regional offerings.

How to Ensure Compliance with an Exemption

Real estate syndicators must adopt a systematic approach to comply with a securities exemption.

Select the Appropriate Exemption

Your offering must fit the exemption’s criteria. Typically, you need to develop a securities offering with a comprehensive Private Placement Memorandum (PPM) prepared before presenting investment opportunities to private investors. This document serves as a communication tool between you and your investors, detailing the terms, risks, and financial outlook of the investment.

The offering documents should be meticulously structured and drafted by a seasoned securities attorney who will assist you in determining the suitable entities, securities exemptions, tax provisions, voting rights, investor buyouts, and other crucial details.

Verify Investor Accreditation Status

If your offering is under Rule 506(c), the exemption limits you to present your offering to Accredited Investors. Establish a robust process for verifying them and maintain meticulous records of all communications, transactions, and interactions. Proper documentation not only aids in regulatory audits but also protects you against potential disputes.

Follow the Exemption’s Rules

Numerous exemptions exist at both the federal and state levels, each governed by a unique set of regulations that dictate various aspects, such as:

  • Advertising and general solicitation, which may either be banned or restricted.
  • Mandatory disclosure documents like a PPM or offering circular that outline the risks involved in the investment.
  • Filing requirements for securities notices with the Securities and Exchange Commission (SEC) and state securities agencies — usually required within 15 days of accepting an investment.
  • The maximum amount you can raise within a designated time frame.
  • A cap on the percentage of an investor’s net worth or annual income that can be invested in your offering.
  • Minimum financial qualifications for investors, including net worth, income, or investment experience requirements.

Continuously Educate Yourself

Securities laws are periodically updated, so if you intend to stay compliant, you should keep abreast with evolving regulations. Numerous free resources are available online to aid in this endeavor. The Securities and Exchange Commission (SEC) website offers comprehensive guides, regulatory updates, and educational materials tailored for different types of offerings.

Legal experts and industry organizations host webinars and online courses that provide information and practical insights on recent changes in securities regulations. Industry forums and professional networks can also be valuable, offering real-world experiences and advice from peers who have navigated similar challenges.

Additionally, many law firms specializing in securities laws publish articles and whitepapers that break down complex legal concepts into understandable terms. Exploring these resources can significantly enhance your understanding and help you stay compliant.

Consequences of Non-Compliance

Syndicators who fail to adhere to securities laws may face heavy fines, legal sanctions, and a tarnished reputation, all of which will jeopardize their future in real estate. On the other hand, investors may see their investments invalidated or suffer financial losses.

Beyond the financial implications, legal issues arising from not conforming to regulations can consume significant time and resources. Legal defense costs in securities cases can reach up to six figures.

Furthermore, if you mismanage the process, you could receive a Cease And Desist order or a similar directive from a state or federal securities regulator. In such a scenario, you may be permanently disallowed to raise money from private investors.

Alternative Funding Sources

Should you prefer not to engage in a securities offering, these are viable options that broaden your financing options while minimizing legal risks:

Regulation Crowdfunding

This allows companies to offer and sell securities on a cloud platform, executed through a registered broker-dealer or funding portal. Offerings are limited to a maximum of $5 million.

Regulation A

With this option, you can get an exemption for public offerings of up to $75 million. It shares several characteristics with registered offerings but offers a middle ground for those seeking a larger pool of capital.

Traditional Financial Institutions

These include money lenders, which charge significantly higher interest rates compared to private funds, and institutional lenders, such as banks and insurance companies.

Exploring these options can provide flexibility and open up new avenues for financing your real estate ventures without the need to comply with stringent securities regulations.

Moving Forward with Legal Guidance on Securities Laws

Navigating the landscape of securities laws requires specialized knowledge and expertise. While self-education and diligence are vital, the complexities involved often necessitate professional legal guidance. A lawyer specializing in real estate investments can provide invaluable support and help you avoid potential pitfalls.

Legal experts can assist in structuring your offerings to meet specific exemption requirements, drafting necessary documentation like the PPM, and ensuring that all investor communications are compliant. They also stay updated on changes in regulations and offer timely advice that can keep your operations within legal bounds.

Beyond compliance, enlisting a dedicated attorney can enhance your credibility with investors. Knowing that you have taken steps to ensure legal adherence can build trust and confidence, which are essential for long-term investment relationships. This proactive approach not only mitigates risks but also positions you as a responsible and trustworthy syndicator.

Choosing the right attorney to draft your legal documents is of utmost importance. Select one who frequently drafts securities offerings and holds legal malpractice insurance specifically tailored to securities legal work.

The bottom line: While securities laws can be daunting, the guidance of a specialized attorney can make a significant difference. Their expertise ensures you remain compliant, allowing you to focus on your core objectives—building successful and legally sound real estate ventures.

Need help with navigating securities laws for your real estate syndication? Contact our syndication attorneys for expert legal counsel! Shams Merchant is the leading real estate private equity and syndication lawyer in the country, representing clients in award-winning real estate projects. Specializing in real estate syndications, fund formations, securities law, and private placements for commercial property investments and development, Shams has been featured in publications like Law360, The Business Journals, BisNow, and The Real Deal.

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