| Since commercial real estate often requires a | | | | D describes a private offering made only to |
| larger down payment than most individuals can | | | | accredited or sophisticated investors. When this is |
| come up with, investors usually pool their funds in | | | | done correctly, it allows full exemption from |
| order to raise sufficient cash to cover the down | | | | registering the security with the federal SEC. |
| payment and other acquisition costs. Doing this | | | | Since registration can cost upwards of $250,000, |
| incorrectly can lead to huge fines from the SEC, | | | | avoiding it is a worthy goal for most of us. |
| not to mention potential liability from lawsuits. | | | | An important definition to bring in at this point is |
| Anytime money is pooled with the expectation of | | | | that of an "accredited investor." There are two |
| making a profit, a security is created. | | | | tests, either of which is sufficient for someone to |
| After the Great Depression, the Securities Acts | | | | be so labeled. Anyone with a net worth, with their |
| of 1933 and 1934 were enacted to protect the | | | | spouse, of over $1 million qualifies as accredited. |
| public against fraudulent securities. It was at this | | | | Otherwise, anyone who has received income in |
| time that the Securities and Exchange | | | | excess of $200,000 ($300,000 if married) for the |
| Commission (SEC) was created to oversee the | | | | last two years, with the expectation of that level |
| implementation of these laws. The person who | | | | of income in the current year, is accredited. The |
| pools investor funds creates a syndication and is | | | | SEC assumes that an accredited investor has the |
| known as a syndicator or a promoter. This | | | | financial acumen to make smart investing |
| person must be very careful to follow all the SEC | | | | decisions without its oversight. |
| regulations because the fines for violations are | | | | Investors who do not qualify as accredited can be |
| very stiff. The laws are not difficult to understand | | | | labeled as "sophisticated investors" by the |
| and follow, but claiming a lack of knowledge about | | | | syndicator and still accepted into the pool. This will |
| them will not be a suitable defense. The | | | | require the syndicator to know this person well |
| syndicator must ensure that all the potential | | | | enough to think they can invest in the project |
| investors are given enough financial and other | | | | without harm to their financial standing. |
| important information regarding the security being | | | | There are three main rules of Reg D that offer |
| offered for sale so that they can make an | | | | the exemption from filing. The least onerous of |
| informed decision about the suitability of this | | | | these is called Rule 506. This rule does not have a |
| particular deal. | | | | cap on the investment size, which the other two |
| In 1946 the Supreme Court heard a case called | | | | do. In addition, it allows a syndication with an |
| SEC v WJ Howey. The Howey Company sold land | | | | unlimited number of accredited investors, and up |
| in citrus groves in Florida and also offered to plant, | | | | to 35 sophisticated investors. No general |
| harvest and sell the fruit for the new landowners, | | | | solicitation or general advertising is permitted. The |
| who were mostly out of state people looking for | | | | promoter must have an already established |
| a passive investment. When things went bad, it | | | | relationship with any investors brought into the |
| ended up going through the courts, and resulted in | | | | pool. |
| what became known as the Howey Test. | | | | Anyone considering becoming a promoter in order |
| This test determines what qualifies as a security | | | | to buy commercial real estate will absolutely need |
| and has four main points, all of which must be | | | | to have an attorney who specializes in SEC work |
| true. | | | | to draw up all the documents involved in creating |
| | | | the syndication. The fees charged will be |
| 1. There must be an investment of money, and | | | | significant, but don't rely on your regular real |
| 2. There must be a common enterprise, and | | | | estate attorney for this work. |
| 3. There must be the expectation of profit, and | | | | In the interest of full disclosure, you need to |
| 4. This will be managed soley through the efforts | | | | know I am not an attorney, and this report |
| of the promoter. | | | | should not be considered legal advice. While I |
| If all four of these are true, a security has been | | | | believe it to be accurate, it is for informational |
| created which falls under the SEC guidelines. The | | | | purposes only. Be sure to solicit the proper legal |
| most critical part of the law for our purposes is | | | | advice whenever pooling investor funds to |
| called Regulation D, usually just called Reg D. Reg | | | | achieve your real estate goals. |