Are most syndicators only taking accredited investors?

Question

I just posted a response to another question where it was stated in the thread that "most syndicators are only taking accredited investors" (paraphrasing).  I'd love to hear from fellow investors on this.  Are people just echoing what others have said or is this statement actually true.  I know several larger orgs that I invest with who will only work with Accredited investors via 506(c) but I've also invested on a few smaller projects that accepted Sophisticated investors, or non-accredited, via 506(b).  I personally have accepted many sophisticated investors who are able to invest $50k or $100k at a time in syndications but they are just under the Accredited thresholds.  Other than the ability to advertise under 506(c), why wouldn't you just go with 506(b) and accept Sophisticated investors?

Robert Borr · Answer

@Steeve Breton under a 506(b) exemption the syndicator must have an established pre-existing relationship with all of the investors. Tracking the development of the relationships with potential investors may become a cumbersome task - and the burden of proof is placed upon the syndicator to prove that the pre-existing relationship was formed at the time a potential investor was provided a 506(b) deal package. Layering that on top of a heavy deal flow may become problematic if the syndicator is highly active in networking with potential investors. To answer your question (aside from the ability to advertise, which is significant) a 506(c) does not require the pre-existing relationship requirement.

Account Closed · Answer

Steeve,

My friend!!

I’m in a 506(b) on the GP Side right now & other than the ability to advertise under 506(c), one reason one wouldn't go with 506(b) and accept Sophisticated investors is increased liability.

We feel comfortable and run a tight ship so we’re not too concerned; However, our SEC attorney has drafted all docs (operating agreement, subscription, & PPM) and has encouraged us to have the PPM be a more robust version because we are allowing sophisticated investors to colloberate.

So there’s extra liability on the GPs when allowing sophisticated investors in.

This would likely only come to friition and be an actual concern if the deal went south, which we don’t anticipate which is why we’re confidently moving forward with the deal.

We’re fully subscribed with a waiting list!

This is my thoughts, there may be many others. Hoping that this was helpful and informative.

Your Friend,

Dino

Steeve Breton · Answer

@Michael Bishop I'd like to get confirmation on this:

"from my understanding, once there is a non-accredited investor in a 506b deal, there are a few additional pieces of self-verification information that the Sponsor must collect, and once they have to collect if from NA folks, they must collect it from ALL."  Perhaps kim Lisa Taylor can chime in on this one.  I've had a mix of Accredited and Sophisticated investors in a 506b and the attorney said that it wasn't necessary to have the Accredited investors provide all the additional info.

@Joel Owens Agreed, I keep my min at $50k and figure if someone can't meet that then perhaps they shouldn't be looking to invest in our offering.

Regarding " If an investor came to me unaccredited but wanted to invest substantially say 300k or 400k I might look at it".  I have had a Soph who wanted to invest $250k in his first real estate investment ever (my syndication).  I only accepted $100k and suggested he hold some for the next opportunity.

Just seemed like high risk of having a very needy investor for the next 5 years.  I even offered to introduced him to a fellow sponsor.

Joel Owens · Answer

I guess it depends on your network.

I do run across times where someone inherited money say 600k but they do not qualify as accredited investor.

My thought is mainly take accredited investors as they are generally used to this type of investing and the liability and hurdles of reporting and documenting tends to be way less.

If an investor came to me unaccredited but wanted to invest substantially say 300k or 400k I might look at it. If someone is wanting to do the 10k or 25k stuff I am not interested in it as a sponsor.

I look at headache, equity return, and time with the relationship. I want to vet and qualify them  as well.

Sometimes it's better for me to say NO to a passive investor or a direct buyer wanting to be my client if our goals do not line up.

Jay Hinrichs · Answer

that's the pilot in me... and the only water landings I like is in a float plane going fishing LOL

Steeve Breton · Answer

Hey Dino, nice job on the raise!  Yes, more liability but I've not been concerned with that to date, but like most contracts, nobody is all that concerned until things go sideways... or in the event of a water landing as @Jay Hinrichs said (I'm stealing that one by the way).

@Robert Borr  Great points.  Thanks.

@Michael Le  thank you for the direct answer. I agree.  Most of my investors are accredited too.

@Gino Barbaro , I'm with  you.  I'll keep going with 506(b) so long as my friends and family want to participate.  Though with an audience like yours you could probably raise > $10mm just by mentioning a 506(c) deal in one episode.

Hope to see a few more posts on this.  Still too early to call but I'm leaning toward this being a false claim.  More importantly It's good to hear some of the reasons why some might lean toward 506(c) with Accredited only... and hey, who doesn't want to advertise!

Michael Le · Answer

Hi Jay, I think you're thinking of Title III which allows non-accredited investors but limits the raise to $1M in a 12 month period.

Gino Barbaro · Answer

@Steeve Breton

Hey Steeve,

we have yet to syndicate a deal, and are looking at 506b so we can market to our friends and family. Once we have one or two deals, we may switch to only accredited.  Our decision is based on the sheer number of sophisticated investors we have attracted.

I think there is no right or wrong answer. I think it is a question for the syndicator's credibility and experience.

Gino

Account Closed · Answer

@Jay Hinrichs

Unlimited amount can be raised. 35 sophisticated and unlimited accredited can participate in the 506B.

Jay Hinrichs · Answer

just a bug smasher I am... but anyway.. POL came on the scene and they were doing HML at very high rates and points in NJ .. so my back ground other than recreational private aviation that I pay through the nose for.. :)  is HML  and I am thinking wow .. this is going to some heartache and sure enough some of the folks that posted have done like 10 loans and 7 are in default.. the foreclosure time in NJ and NY two states I personally would never be a lender in is 2 to 3 years.. and by the time you get the asset back its ouch time.. and that has played out for some folks and there is a high profile one in Atlanta that has been going on for years.. suppose to sell at 6.5 million and its listed under 3 now.. although I think they may get their principal back or most of it but its been 2 or 3 years.. and you know how investors get stressed.. and then the other issue I saw coming with crowd funding .. and remember my background is I have owned 2  Hml companies over the years one of them in Oakland CA with 250 clients and about 50 million under management..

these guys went about raising money from 5 to 10k investors and would literally have 20 or 30 investors in one loan.. Again just me I got to thinking well there is not time in the day to do proper client communication and service.. people are going to be calling and want specifics so to me it just seemed like something that would get pretty unmanageable in the Case of a WATER LANDING..  PS I love Float planes one of my favorite things to fly but those land on the water on purpose..

Are most syndicators only taking accredited investors?

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