Partners vs Syndication

[Matt Willis]

At what point does the SEC get involved when it comes to partnering? I hear sydicators mention SEC rules around their deals. But if I were to raise money for a sfr, or small multi family, could I not just form an LLC and have the silent(money) partners own a percentage of the LLC and cut them a cheque quarterly from the cashflow. Is there a certain dollar value, or number of investors where the SEC gets involved? Any help would be great. Thanks in advance

[Brian Burke]

The SEC “gets involved” when the investment goes to s#!t and an aggrieved investor files a complaint stating that they were sold a security without proper disclosure of the risks and their money vanished. 

They don’t get involved in the process of you raising money.  If you do it wrong but the investment goes great and everyone makes tons of money you’ll most likely never hear from anyone at the SEC.

If you do it wrong and the investment doesn’t go well you could not just get sued, you could go to prison.  So it’s just better to do it right because if you do it right and the investment goes bad you might just get sued. You reduce your chances of prison and you reduce your chances of losing those lawsuits. 

Your question, however, is contradictory. You mention partnering and you mention silent investors. These are two entirely different concepts and the differences are critical.

Partnering means you and some other people that you know get together for a common enterprise and everybody has a role to play. Let’s say you find the deal, your contractor fixes it up, your real estate agent sells it and your friend does the design and staging. Each of you contribute money and each of you have voting rights for all decisions. This is a partnership and even if it goes bad the others would have a tough case to say that SEC rules were violated. 

Now take the scenario where you are handling everything and have decision authority.  You get some passive investors to contribute money and you do the rest. No matter how many investors and no matter how much they contribute, you have sold a security to each of these investors and there are proper ways to do that. Violate those rules at your own peril. 

The common way that many raise money from one investor on their deal is to have that investor make a loan secured by the property.  As long as the terms of the debt are commercially reasonable, you most likely have not sold a security. Pool multiple “lenders” into this loan and that could be a problem with securities laws and/or other state laws governing lending. 

Bottom line: your freedom is at risk so get good legal counsel and follow their advice. I’m not a lawyer so nothing here should be considered anything more than my observations over more than two decades of raising money for my projects.