Ever wonder what SEC regulations apply to apartment building syndications? There is a lot to this subject and while it’s not crucial that you know everything, nor should you try, it is important that you have a basic understand of what’s involved and what to look out for.
This week I’m joined by SEC Attorney Steven Rinaldi who has been handling private offerings of securities for over 26 years. Steven is extremely knowledgeable and competent, and this episode is packed full of useful info!
[2:25] Definition and example of a syndication
[5:00] The types of entities Apartment Building Investors should use for Syndication
[8:08] How to structure a deal
[10:31] Legal documents required for syndication:
- Operating Agreement
- Prospectus/Private Placement Memorandum (PPM)
- Subscription Agreement
- Form D. File this in the states where the investors are located (not the property)
[13:12] Advantages of Delaware LLC’s
- Hard to break up
- Discourages disgruntled investors from filing lawsuits
- Delaware judges see these cases all of the time and are very familiar with business law
- Get out of trouble for as little as 10K vs. 250K
[17:38] What makes an investor an “Accredited Investor”
- Net worth of one million or more excluding their house, car and life insurance
- Husband and wife with a salary of 300K or more, with every expectation that will continue
- Or one spouse makes over 200k per year, (with every expectation that will continue)
- Less common
- Trust fund of more than 5 million, Corporation, Partnership or LLC worth more than 5 million
- Banks, Broker/Dealers, Mutual Funds, Insurance, Small Business Development Companies
[19:18] What qualifies as a “Prior Relationship”
[21:10] How to go about advertising to accredited investors
- Go to a broker/dealer that specializes in alternative investments
[21:52] The difference between advertising and networking
[22:37] The importance of doing a PPM
- You are required to provide a PPM to all non-accredited investors
- You want to provide a PPM to accredited investors because they can sue you for fraud for not disclosing all "material information"
- If you don’t, and the deal goes sideways you could easily lose everything you have. In most states that includes your house and your kid's college fund.
- In most states, you cannot discharge a securities law judgment or fraud judgment in bankruptcy
- ALWAYS DO A PPM!
[26:43]- Time and cost of drafting an Operation Agreement and PPM
- Three weeks for initial draft
- Could be completed in as little as five weeks
[29:10] The basics of crowdfunding
- You can advertise to non-accredited investors BUT pay attention to the rules
- You must refund all money if you don’t hit your goal.
- More work for an attorney, therefore, more expensive
Connect with Steven Rinaldi
Phone number: 240-481-2706