Welcome to Real Estate Capital Syndication 101, class is in session!
Multi-family properties can be a great investment opportunity, but they often require large amounts of capital. For many investors, syndication is the answer. This allows investors to participate in larger deals than they would be able to on their own.
If you’re new to syndication or looking to structure your first private placement, you may be wondering where to start. A great place to begin is by learning some of the basics of syndication and private placements, as well as the differences between Reg. D 506(b) and 506(c) offerings.
Syndication Basics
Syndication is the process of pooling capital from multiple investors to fund a single real estate investment project. In exchange for their investment, investors receive an ownership interest in the property and a share of the profits. The syndicator, or Sponsor, is the person or company responsible for finding the property, conducting due diligence, and managing the investment.
The syndicator typically earns a fee for their services, which is usually a percentage of the profits or a percentage of the equity. Syndicators may also invest their own capital into the deal, which can increase their alignment with the interests of the other investors.
Private Placement Basics
A private placement is a securities offering that must either be registered with the SEC or meet an exemption. Private placements are typically offered to accredited investors, who are defined as individuals with a net worth of at least $1 million (excluding their primary residence) or annual income of at least $200,000 ($300,000 for married couples) for the last two years. There are other ways to qualify, but we’ll keep it simple for the purpose of this article.
Private placements can be exempt from SEC registration requirements under Reg. D. There are few notable exemptions under Reg. D to discuss:
- Rule 506(b): allows companies to raise an unlimited amount of capital, but only from accredited investors and up to 35 non-accredited investors who have a pre-existing relationship with the company or its principals. General solicitation is not allowed.
- Rule 506(c): allows companies to raise an unlimited amount of capital from accredited investors only, but the company must verify the investors’ accredited status. General solicitation is allowed.
506(b) vs. 506(c) Offerings
When structuring a private placement, one of the most important decisions is whether to use Rule 506(b) or Rule 506(c). Both exemptions allow for the sale of securities to accredited investors, but there are some key differences.
506(b) offerings are more flexible than 506(c) offerings. With a 506(b) offering, companies can raise capital from up to 35 non-accredited investors who have a pre-existing relationship with the company or its principals. This can include family members, friends, or business associates.
In addition, 506(b) offerings do not require the company to verify the accredited status of the investors. Instead, the company can rely on the investors’ self-certification. This can save time and money, but it also means that the company is taking on more risk.
506(c) offerings, on the other hand, require the company to verify the accredited status of the investors using reasonable methods, such as having an attorney or CPA review tax returns or bank statements, or using a platform that contains built in third party accreditation, such as Madison Avenue Technology.
A major advantage of 506(c) offerings is that they allow for general solicitation and advertising. This means that companies can market their private placement to the general public, as long as they take reasonable steps to ensure that only accredited investors are participating.
Pros and Cons
Both 506(b) and 506(c) offerings have their pros and cons.
Pros of 506(b) offerings:
- Flexibility: Companies can raise capital from up to 35 non-accredited investors who have a pre-existing relationship with the company or its principals.
- Lower costs: Companies do not have to verify the accredited status of the investors, which can save time and money.
- Lower risk: Companies can rely on the investors’ self-certification, which reduces the risk of violating securities laws.
Cons of 506(b) offerings:
- Limited marketing: Companies cannot advertise their private placement to the general public.
- Limited investor pool: Companies can only raise capital from a limited number of non-accredited investors.
Pros of 506(c) offerings:
- More certainty: Companies must verify the accredited status of the investors, which provides more certainty to compliance.
- Larger investor pool: Companies can market their private placement to the general public, which can result in a larger investor pool.
Cons of 506(c) offerings:
- Higher costs: Companies must verify the accredited status of the investors, which can be more time-consuming and expensive.
- Less flexibility: Companies can only raise capital from accredited investors.
Choosing the right exemption depends on your specific needs and goals. If you have a large network of non-accredited investors who are interested in investing, a 506(b) offering may be the best option. However, if you want to market your private placement to the general public, or if you prefer to have more certainty that you are not violating securities laws, a 506(c) offering may be the better choice.
Structuring Your First Private Placement
Syndicating capital for multi-family properties can be a great investment opportunity, but it requires careful planning and execution. Structuring your first private placement can be challenging, but with the right team of professionals and a solid investment strategy, you can successfully raise capital and maximize returns for your investors. Whether you choose a 506(b) or 506(c) offering, make sure to comply with securities laws and always put the interests of your investors first.
Fortunately, there are unique software solutions, such as Madison Avenue Technology, that offer a comprehensive white label automated Reg. D 506(c) compliant capital syndication platform. Madison is a viable alternative to the expensive, antiquated, time-consuming way of hiring bringing your next offering to market. Madison’s 506(c) compliant digital platform reduces your time & expenses by up to 90% and brings your offering(s) to life with elegant digital PPMs, Sponsor dashboards, investor portals, automated accreditation, and analytics to track it all. It also allows you to manage and grow your investor community using digital technology to mine for new investors specific to your Project(s). Links from a dynamic landing page to a dynamic pitch deck, and to ultimately your digital PPM – a proven 1-2-3 funnel for generating interest in your offering. Being compliant and marketing for investors has never been easier.