Syndication SEC compliance involves various rules and regulations investors must follow. Real estate syndication put simply is a group of investors pooling their money together. They use the capital to purchase and manage real estate that is usually beyond their ability to acquire independently.
The investors form a legal entity like an LLC to buy and manage the real estate. Investors receive profit in proportion to their investment from the following:
Watch the Royal Investing video featuring securities attorney Stephen Slawinski who specializes in helping real estate sponsors raise capital and stay compliant with the SEC.
The U.S. Securities and Exchange Commission (SEC) sets regulations and laws that investors must follow. The laws protect investors from fraud and ensure that publicly traded companies provide accurate financial information. Companies file reports with the SEC to demonstrate their compliance.
The SEC requires syndications to comply with laws concerning securities selling. Syndications remain compliant by following the regulations controlling private placements found in SEC Regulation D.
Strict rules control a syndication's organization and property transfer. Additional SEC rules for real estate syndicates include the following:
Securities represent financial value and can be traded on a public exchange: stocks, bonds, and options. Non-securities are investments not typically sold on a public exchange, like art and some real estate.
The syndicate's structure determines if your investment is a security or a non-security:
The significant difference is that securities must follow SEC regulations, while the same rules do not bind non-securities.
Four acts affect syndications. We'll discuss each and how to avoid the implications of each act.
Under this law, it's unlawful to sell or offer to sell a security without registering the security with the SEC unless the security is exempt from registration.
Avoid the implication by:
Exemptions under Regulation D, Rule 506(b):
Exemptions under Regulation D, Rule 506(c):
This law makes it illegal to "effectuate" the sale of a security or accept compensation for the sale of a security as an unregistered broker-dealer.
The implication is difficult to avoid because selling interests to your company or passive investors is probably "effectuating" the sale of a security.
Exemptions to this rule appear in Rule 3a4-1.
This law stipulates that a company "engaged … in the business of … trading securities" must register with the SEC.
Avoid the implication:
The law dictates that acting as an investment adviser is unlawful without registering with the SEC.
Avoid the implication with a direct ownership interest in real estate.
Property owned by
The structure might not be a security if each partner has an active role. If it isn't a security, no other security laws apply.
Property owned by
A basic deal structure helps with the acts in the following ways:
Watch the video to learn more about the Fund of Funds structure.
Deal structure impacts SEC legal compliance requirements. The SEC has a specific definition for what constitutes security and non-security. When investing in a real estate syndicate, you'll want to:
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Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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