Syndicators & Capital Raisers: Avoid SEC Trouble!!

[Grant Shipman]

Hey BiggerPockets Community,

If you’re raising capital for real estate syndications, you need to be aware of SEC regulations—because one wrong move could put you in serious legal trouble.

Many new syndicators think they can just start pooling money from investors without following the proper rules. That’s a massive mistake. The SEC enforces strict guidelines on raising capital, and violating them can lead to hefty fines, investor lawsuits, and even criminal charges.

Let’s break down some key takeaways from SEC Rule 506(b) of Regulation D and why you MUST have a Private Placement Memorandum (PPM) and Subscription Agreement in place.

1. No General Solicitation or Advertising

Under Rule 506(b), you CANNOT publicly advertise your investment deal. That means:
🚫 No posting on social media
🚫 No blasting your deal to an email list of strangers
🚫 No promoting your syndication on a podcast

The SEC is clear: “No general solicitation or advertising to market the securities.”

If you want to publicly advertise, you’d need to use Rule 506(c)—which requires investor verification and limits you to accredited investors only.

🚨 Warning: If you advertise a 506(b) deal publicly, your entire offering could be invalidated, leading to legal consequences.

2. You Can Only Have 35 Non-Accredited Investors

Rule 506(b) allows an unlimited number of accredited investors but restricts you to only 35 non-accredited investors.

However, there’s a catch:

• Non-accredited investors must be financially sophisticated.
• They must have enough experience to evaluate the investment risks.

From the SEC:

If you’re planning to include non-accredited investors, make sure they qualify—or you could be violating SEC rules.

3. Full Disclosure is Required for Non-Accredited Investors

If any non-accredited investors participate in your deal, you must provide them with detailed disclosure documents.

The SEC states:

This is where having a Private Placement Memorandum (PPM) and Subscription Agreement becomes absolutely necessary.

A PPM outlines:
✅ The risks of the investment
✅ The structure of the deal
✅ The terms and conditions
✅ The use of funds

A Subscription Agreement ensures:
✅ Investors acknowledge they understand the risks
✅ They meet SEC requirements
✅ They legally commit their capital

🚨 Not providing these documents could leave you vulnerable to investor lawsuits.

4. Investors Receive "Restricted Securities"

Syndication investors receive restricted securities, meaning:

• They can’t freely sell their shares like a stock.
• They must hold the investment for a certain period.

Additionally, you must file a Form D with the SEC within 15 days of the first sale of securities.

5. States Can Still Require Additional Filings

Even though 506(b) offerings are exempt from state registration, individual states can still require notice filings and fees.

This means you need to check with each state where your investors reside to ensure compliance.

Final Warning: Don’t Cut Corners – Follow the Law!

Too many new syndicators think they can get away with skipping legal requirements—but the SEC isn’t playing around.

If you’re raising capital, DO IT RIGHT:
✅ Use a PPM & Subscription Agreement to protect yourself and your investors
✅ Avoid general solicitation (unless using a verified 506(c) offering)
✅ Understand accredited vs. non-accredited investor rules
✅ File your Form D and comply with state laws

🚨 Failing to follow these regulations could mean SEC fines, investor lawsuits, or worse. 🚨

***quotes copied directly from SEC.gov ****

Questions for the Community:

1️⃣ Have you seen capital raisers violate these rules? What happened?
2️⃣ Do you always use a PPM & Subscription Agreements for your syndications? Why or why not?
3️⃣ What’s your strategy for educating investors about SEC compliance?

Let’s discuss below! 👇👇👇

[Grant Shipman]

Great added points!  I'm just glad someone taught me this when I was started out- Garret Sutton first opened my eyes up to it, and then I started a relationship with a stellar SEC attorney in Denver.  It's always up to investors/etc to decide their risk profile, but those who haven't been exposed to this stuff can't even know this is an exposure.