Joint venture v.s syndicated

[Account Closed]

Can someone please explain the difference between a syndicated and a joint venture

[Don Konipol]

@Dovi Zagelbaum

Different people have different definitions for these two terms.

My definition is that a syndication involves and active partner, and inactive or passive partner(s). A joint venture is a partnership for a specific deal usually for a limited time in which both partners are “active” participants.

The definition of active vs passive when used in this connections is not what the general public would think, it relates more to the right to make decisions rather than an amount of time or effort.

In reference to previous answers on this thread, the securities laws in the United States regard any investment in which a participant is “passive”, that is there is someone else making most of the financial decisions, as a security or sale of an investment. If all equity holder participants are “active”, it would be regarded as a business, not a security or sale of an investment.

So, any security or investment sale must be registered with the SEC, or be exempt from registration.

There are two principal “exemptions” from securities registration. One is for an intrastate offering. If the investment or security is offered only to investors residing in a single state, then the Federal government has no jurisdiction over the offering. However, compliance with that state’s securities regulations and Securities Board is required. The securities regulations of the states differ widely.

The other exemption is for a “private placement”. A private placement would be defined as an offering not made available to the general public, an offering limited to investors with whom the issuer has an existing relationship ( this has been modified with a recent addition to the “safe harbor” filing, explanation to follow). In a private placement offering nothing has to be filed with any Governmental body, this is known as the general exemption from registration for private placement.

However, utilizing the general exemption has some negatives, especially as it relates to risk for the issuer. First, when utilizing the general exemption the issuer has no statutory defense and no definitive defense if sued by a disgruntled investor. This means that his defensive will have to depend on contract law, state or Federal. Local judges have been known to expand the “rights” of disgruntled investors, and every representation, promise, forecast, etc that the issuer used to attract investment will be scrutinized, challenged and torn apart by the plaintiffs attorney in an effort to give a judge and or jury a reason to find for his client.

In addition, when utilizing the general exemption, one never knows if the SEC will sometime in the future decide that the issuer did not satisfactory comply and as a result declare that registration should have been completed, with huge fines and penalties a real possibility.

In the 1960s, the SEC created a “safe harbor” exemption from registration, know as Regulation D 504, 505, and 506 (b). The utilization of the safe harbor has the advantage that (1) if complied with the SEC can not decide later that it was not a private placement, and (2) statutory and definitive defensive available in case of lawsuit. This means that absence fraud, the mere fact that the issuer complied with the safe harbor exemption will be a successful defense against a disgruntled investor lawsuit. As a practical matter a plaintiff attorney won’t waste time filing a lawsuit against a securities issuer who has complied with the safe harbor private placement exemption, unless fraud can be proven.

To comply with the safe harbor Reg D requires the production and distribution of a Private Placement Memorandum that meets specific SEC requirements; the filing of a Form D notice with the SEC, and compliance with filing in individual states where investors in the offering reside.

In 2011, the SEC as directed by Congress in the JOBS act of 2008, created Reg D 506c, a section that allows for general solicitation and advertising of securities in a private placement, especially the offering of securities in online platforms or websites. This has opened a whole new world for the raising of capital efficiently. Previously, offering securities publicly required registration of the offering with the SEC; which took a minimum of 4 months and a minimum of $250,000 in legal and regulatory fees. Nearly the same thing can now be accomplished (the exemption is limited to accredited investors while the registration is not, however almost all investors of any significant size are accredited) for about $10,000 with the safe harbor Reg D 506(c) offering.