Syndicating with non-accredited investors

[Marcus Gaethke]

As I have been growing my investment portfolio I have had multiple friends and family approach me about investing together.  My business partner and I have decided we would like to invest in an apartment by syndicating funds [under506(b)] with friends and family.  I am unsure of the actual financials of each of the potential investors and would not want to deny them the opportunity do to them not being accredited.  I know that in order to be sophisticated you can either be accredited or "have sufficient knowledge and experience in financial and business matters".  How do you determine that the person "has sufficient knowledge and experience in financial and business matters"?

[Arn Cenedella]

@Marcus Gaethke

A questionnaire is a good idea. 
There are no “black and white” guidelines on what constitutes “sophisticated”.

As an operator who almost exclusively does 506b deals, I try to assess the investor’s overall financial situation. 

Here are some areas of interest to me:

Is their financial house in order? Do they have savings or other investments? What is their credit score? Do they have 6 months of monthly expenses put away for a “rainy day”? Do they have capital above and beyond this rainy day fund to invest? Can they safely invest say $50,000 knowing they won’t get the money back for 5 years? Whats their income and job stability?

One also needs to discuss what the potential investor’s goals are? And determine whether your deal is suitable for them? What’s their tolerance for risk? Do they want to aim for a grand slam and could afford to lose their investment? Or do they just want a 8% to 10% return and safety is primary?

The needs of a 40 year entering their peak earning period are far different than a 60 year looking to “retire”. 

Does it make sense for the investor to invest? Is it logical and appropriate?

A couple rules of thumb (in my opinion):

No one should invest maybe more than 5% to 10% of their net worth in ANY deal. First time syndication investors should only put a few chips into the pot in their first couple of deals. One should not go ALL IN. 

Most operators also have a 30 day wait period before offering any specific investment. 

So there is a cadence to 506b. 

Intro phone call - get to know each other. 

Provide educational resources to investor about syndication investment - these could be your own material or marital produced by others - blog posts podcasts etc. 

Follow up phone call to answer questions after investor does some research on the topic. 

This all takes time.

Them and only then present a specific deal. 

Trust me as an operator you don’t want investors who don’t understand how it works. You don’t want investors who will call you a year into the deal and say I need my money back. 

Go slow - don’t ask for money - just share what you are doing with others. Trust me many will say tell me more. They will self identify their interest. And then go thru the steps and make sure a syndication investment is right for them. 

Good luck.