Passive Investor in a Syndicated Deal

[Collin Borns]

BP,

Is it hard to find deals where you can be a passive investor, but not an accredited investor? Specifically in deal sizes that are 30+ units?

Thanks 

[Jillian Sidoti]

Hello everyone,

I have done a lot of Rule 504s in my time. I do NOT recommend them at all. The state securities boards are NOT friendly to them at all. Here are some reasons why:

1. Some states (like Michigan and NH) do not even allow Rule 504's in their states.

2. Rule 504 offerings (and Rule 505) are not federally covered securities. This means the states that do allow 504 offerings may require you to send all of your offering documents to the state for review prior to allowing you to sell in their state.

3. Some states (like Arkansas) will require you to provide a list of investors to the state.

4. Although it is true that the SEC expanded Rule 504 (or is in the process of doing so) this does not change the way the states will treat Rule 504. It is also true that the change to Rule 504 will eradicate Rule 505. 

My recommendation is to stick with Rule 506 offerings, under either (b) or (c).

506(b)

1. You need to have a "substantive pre-existing relationship" with a potential investor prior to making an offer to invest. This means having an "intimate awareness of one's financial ability to invest." This can be accomplished with an investor qualification form.

2. No general solicitation allowed.

3. Up to 35 sophisticated (unaccredited) investors and unlimited accredited investors.

4. Raise as much money as you  want.

506(c)

1. No pre-existing relationship required.

2. General solicitation allowed.

3. Only accredited investors.

4. Raise as much money as you want.

I hope this helps.

@Todd Dexheimer if you want me to check on any states for you, I am happy to do that.