I find it useful to share, from time to time, some of the common questions I get from clients and prospective clients about the syndication process. You may be wondering the same things they are.
Here’s a question from Beth, who says she “knows just enough about syndication to be a danger to myself. That’s why I need to talk to an expert like Syndication Attorneys!”
Beth writes, “I have recently started real estate investing in earnest. And I am excited at the possibility of joining with two other investors to purchase some property. But I am still a little hazy on the difference between syndications and joint ventures. Does it really matter?”
That last sentence from Beth is the telling one. Yes, it does indeed matter!
Questions to Ask Yourself
Are you using other people’s money for your real estate investments? Then you need to know the difference between a joint venture and a syndicate. The questions to ask yourself are:
- Will investors invest money in a common venture with you? This could be a joint venture or a syndicate.
- Do your investors have an expectation of profits based solely on your efforts, skills or experience? This is the telling answer.
If the answer to both of these questions is yes, then you must comply with securities laws. A failure to adhere to those laws can have dire consequences.
In a joint venture, the other investors must be actively involved in managing the project along with you. They also must stay in control of their own money. In that case, you will need a Joint Venture Agreement.
The agreement clearly spells out who does what and how each is compensated. (It’s also a really good idea to have a buyout provision in case you come to a stalemate on a major decision).
In a syndicate, you control the real estate and the money. But you have to provide disclosure documents to your investors, the corporate structure will be more complex (usually 2 LLCs), investors must sign a Subscription Agreement, and certain filings have to be made with appropriate securities regulators (federal and/or state).
There also are other benefits and drawbacks to each situation, which your attorney can discuss with you.
Don’t be in Denial
Too often, investors don’t want to have to deal with all the red tape and regulations of doing a syndication (aka “securities offering”). So they blithely go along convincing themselves they are not selling securities even when their actions show they are.
That can be disastrous for you and your investors.
The truth is that the consequences of non-compliance with securities laws are steep and simply not worth the risk. Securities litigation fees can rapidly approach six figures, in addition to steep fines that could be imposed by regulators. In the worst cases, you could risk jail time.
Further, if you want to take your company to a higher level, where you are not dependent on just a few investors who must always unanimously agree on major decisions, you need to have a securities offering so that you can be in control of the investment.
You can access the complete article I have written on the subject by clicking here. But please bear in mind that all information in this blog and in the articles is of a general, educational nature. It should not be construed as legal advice pertaining to your specific offering, exemption or situation. Such advice must be sought from your own attorney pursuant to an attorney‐client relationship, after consideration of your specific facts or questions.
New prospective clients can have a free 30-minute consultation with us by clicking here.
Good luck to Beth and all the other investors contemplating such a deal.
It’s an exciting time to be an investor! With the right structure and legal documents that have been drafted by an experienced securities attorney, you will sleep better knowing you and your investors are protected.
NOTE: This information is of a general, educational nature and may not be construed as legal advice pertaining to your specific offering, exemption or situation. Any such advice must be sought from your own attorney pursuant to an attorney-client relationship, after consideration of your specific facts or questions. At Syndication Attorneys, PLLC, we will be happy to discuss your investing goals with you. You can schedule a free, 30-minute consultation by clicking this link.