I was having lunch with a friend of mine telling him about the world of Multifamily Syndication. He had a puzzled look on his face and said “So Dan, this sounds like a great way to invest in real estate, but why haven’t I heard of a real estate syndication’s before?”
The answer is that these private, unregistered securities are offered under an exemption by the Securities and Exchange Commission. This exemption is Regulation D, Rule 506 b and does not allow the syndication sponsor to use general solicitation to market these securities. This is commonly referred to as the “Friends and Family Exemption”. This means that you would only have heard about a Real Estate Syndication deal if you had a preexisting relationship with the sponsor where they really knew you. Today, about 93 percent of these private offerings have used the 506 b exemption to comply with the SEC rules.
In September of 2013 the SEC was directed by the JOBS act, enacted by congress, to allow sponsors to use general solicitation to promote their securities. This change allows sponsors to openly advertise and sell their private securities ONLY to accredited investors. The sponsor must also take reasonable steps to verify that the purchasers of their securities are accredited. This is part of Regulation D, Rule 506 c exemption. You may be seeing more of these offerings on Facebook, LinkedIn and Podcasts, I know I am and they note at the bottom of the solicitation that it is a 506 c offering. The reason for this change is that congress believed that accredited investors have the means to evaluate these private securities with their advisers and that if they sustain a loss it would not have a substantial impact to the investor.
So you may be asking, what is an Accredited Investor?
An “accredited investor” is a natural person who either: earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
This is important because if you are accredited, you can participate in both 506 b and 506 c deals and easily become aware of them through social media. As time goes on, I believe more and more sponsors will elect to use the 506 c exemption which means that sophisticated investors cannot participate in these deals.
So the reason you haven’t heard about these deals is that the sponsors are selling a Private Security that is regulated by the SEC. To sell them to you, 97 percent of sponsors have elected to use the 506 b exemption which means they cannot advertise the security or talk to you about it unless they have a substantial, pre-existing relationship with you.
Its one of those secrets that you want to know about so you can diversify your portfolio into several real estate syndication’s like I have!
Here’s to you Wealth and Happiness!
Dan Engdahl, Co-Founder Multifamily Connections, LLC