Apartment complex deal - only accredited investors???

Question

Hi BPers. I need some help! I am putting together my first deal for an apartment complex. I have lined up interested investors, but many of them are not "accredited." Am I only able to accept investment from accredited investors?

I did some research and found the following table describing 506(b) vs 506(c) offerings:

The way I interpret this is as long as there is a pre-existing relationship with the investor(s), there should be no problem, correct?! These are long standing friends of mine, so I'm hoping this will put me in the clear. But what happens if my friends then get other interested parties? They wouldn't pass the "pre-existing relationship" test, but I also didn't "advertise" to them. Ugh...I need a lawyer. Luckily they are plenty of you on here! Any RE lawyer types in Fayetteville, NC?!

Now...how the heck do I "register" as a 506(b) offering?! It's incredible how many rabbit holes you have to explore your first time around!

Andrew Cushman · Answer

@Ryan Franklin, I have worked with Kim Taylor before and can recommend her.  I also work with Gene Trowbridge.  Google makes him very easy to find :-)

Syndication is NOT something to do without a good syndication attorney.  The SEC takes it very seriously, and it's a complicated matter.  You are an investor, and the highest and best use of your time is putting good deals together and raising money.  Hire a good attorney (Kim or Gene!) and let them take care of it.  While the fee isn't small, it's not much when considered in the overall cost of an apartment complex or getting tangled up with the SEC.

To answer one of your questions though: If you are doing a 506(b) offering and not soliciting, you can take "sophisticated" investors.  These are roughly defined as people who aren't accredited but have the knowledge and skill to be able to determine whether or not your offering is a good fit for them.

Andrew

P.S.  Congrats on the deal!

Bruce Petersen · Answer

Please consult an attorney and not just google.

Alexander Felice · Answer

I can't help you but if you do need a lawyer in Fayetteville (I primarily invest there) the one I use for real estate is Duane Gilliam Jr.

Tony Talamas · Answer

@Ryan Franklin you may want to connect with @KimLisa Taylor (securities attorney) and @Brian Adams (CPA who also specializes in syndications)

Scott Meitus · Answer

From a broad perspective, I have found that working only with accredited investors will provide you with quite a bit more protection if the deal goes south.  I have seen too many examples where close friends and family members become very litigious when money is involved.

Bryan Hancock · Answer

No problem @Ryan Franklin.  That's what BP is for.  It's great to see you asking and not jumping in and doing something silly like many newcomers do.

You know what the "e" stands for in e-mail?  When you're working on sydications is stands for "exhibit" or "evidence."  Make sure you have an attorney scrutinize anything you're sharing with investors.  Anything you send in addition to the documents they prepare becomes part of the offering and can get you into trouble.  What happens with most non-trained people is that they use words that can obviously get them into trouble if things go sideways or south.  Words like "best," "greatest," "lowest," etc.  Superlatives are terrible words in securities offerings.  Think of them all like four letter words.

If you shared things with pre-existing, substantive relationships you're probably okay avoid "advertising," but talk to your attorney.  The trouble is those investors shared the information so you'll need some advice there.  There are cooling off periods in the industry and such that an attorney can advise you on.

And yeah....we do have out of state clients ;-)

Ryan Franklin · Answer

@Bryan Hancock, as usual, you're coming to the table dropping some serious knowledge =] I truly appreciate all the assistance you've provided me thus far (and for free, I might add).

One question, what constitutes "advertising." Where am I crossing the line between simply providing information about the deal and actually advertising/soliciting investment? The reason I ask is I have sent an "info packet" to many of my friends, and they have then sent this on to other people that I might not have a previous relationship with.

I'm nearly to the point where I feel obligated to hire you ;-) Do you accept out of state customers?!

Bryan Hancock · Answer

If you have the investors you need from existing relationships you probably will want to use the 506(b) exemption.  There may be some intrastate exemptions in your state you can use though depending on where you're sourcing investors from.

The non-accredited investors need to be "sophisticated" and there is more overhead for having them in your offering.  Make sure you have well-defined liquidity procedures and penalties if they want their money back before your investment matures.

If you're raising less than $1M you should talk to the securities attorney about Reg. CF too.  You'd have to run the investment through a legal Portal to use this exemption, but it would allow you to accept money from non-accredited investors.  The amount they can invest is capped though.  Mark Roderick has some great primers on this on his website.

If you NEED to advertise to get the investors required for your offering you'll either eliminate 506(b) or will need to use Reg. CF.  Using pre-existing, substantive relationships from sophisticated investors without advertising under 506(b) is likely to be your best option.  Rule 504 or 505 may be better for you though.

Talk to an attorney ;-)

Ryan Franklin · Answer

Thanks @Andrew Cushman! Great advice...I just set up an appt with Kim's office.

Ryan Franklin · Answer

Great! Thanks @KimLisa Taylor...will be in touch!

Apartment complex deal - only accredited investors???

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