If you are thinking about investing in real estate syndications or launching your own deal, it is crucial to know how US securities laws work.
The Securities and Exchange Commission oversees syndications because pooling money from multiple investors to buy real estate interests creates an investment contract. That makes syndications a security under federal law. Failing to comply can lead to heavy fines, lawsuits, and even criminal charges.
Why SEC Rules Apply to Real Estate Syndications
Many people believe real estate is always a non-security investment. However, when investors pool funds in a shared project and expect profits from someone else’s efforts, the SEC considers it a security. This concept comes from what is called the Howey Test.
Across the USA, these laws help protect investors and keep investment offerings transparent.
Key SEC Exemptions for Real Estate Syndications
Most real estate syndications avoid registering with the SEC by using exemptions. The most common exemptions used nationwide are:
- Regulation D Rule 506(b)
- Regulation D Rule 506(c)
- Regulation A Plus (Tier 1 and 2)
Regulation D – Rule 506(b)
Regulation D Rule 506(b) allows syndicators to:
- Raise unlimited capital
- Include up to 35 sophisticated but non-accredited investors
- Avoid general advertising or public marketing
This exemption is popular because it lets sponsors work with people they know, like friends, family, or business contacts, even if those individuals are not accredited investors.
Regulation D – Rule 506(c)
Rule 506(c) was introduced under the JOBS Act and allows syndicators to:
- Advertise publicly through social media, websites, or events
- Raise unlimited funds
- Accept only accredited investors
- Require proof to verify accredited status
Many sponsors across the country choose this exemption because it expands marketing opportunities and increases the pool of potential investors.
Regulation A+ (Tier 1 and Tier 2)
Regulation A Plus allows sponsors to raise money from the general public, including non-accredited investors.
- Tier 1 permits raising up to 20 million dollars in a 12-month period with fewer ongoing reporting requirements.
- Tier 2 permits raising up to 75 million dollars in a 12-month period but includes more detailed SEC filings and reporting.
While Regulation A Plus provides access to a broader group of investors, it comes with higher legal and compliance costs.
Understanding the Difference Between Accredited and Non-Accredited Investors
Knowing who qualifies as an accredited investor is critical because many SEC exemptions depend on this status.
- Accredited investors include individuals with a net worth over one million dollars excluding a primary residence, or an income of over 200 thousand dollars individually or 300 thousand dollars jointly for the past two years, with the same expectation for the current year.
- Non-accredited investors do not meet those thresholds and receive stronger protections under federal securities laws.
Across the USA, accredited investors often include professionals, high-net-worth individuals, and certain institutional investors.
Additional Legal and Compliance Considerations
Syndicators in the USA should keep several compliance details in mind, including:
- Forming legal entities like limited liability companies or partnerships
- Filing Form D with the SEC when using Regulation D exemptions
- Following communication rules when speaking with investors
- Understanding fiduciary responsibilities to protect investor interests
It is essential to work with attorneys experienced in securities law because even honest mistakes can cause significant legal and financial consequences.
Subscription Documents and PPM
Proper documentation is a key part of running a legal real estate syndication. Sponsors typically prepare:
- Subscription Agreements which investors sign to join the project
- Private Placement Memorandum (PPM) which details the business plan, risks, fees, and all material information about the investment
A solid PPM helps establish trust and protects the sponsor by providing full disclosure to investors.
Blue Sky Laws
Besides federal rules, each state has its own securities regulations known as Blue Sky Laws. Even when using a federal exemption, syndicators usually must file notices and pay fees in every state where they offer securities.
General Solicitation Rules
If you plan to advertise your syndication publicly—through social media, emails, or webinars—you must use Regulation D Rule 506(c) and verify every investor’s accredited status.
Under Regulation D Rule 506(b), public advertising is not allowed. All investors must come from existing relationships or established networks.
Penalties for Non-Compliance
Breaking SEC rules can result in severe consequences such as:
- Civil penalties and fines
- Being forced to return investor funds
- Personal liability for syndicators
- Criminal charges if fraud is involved
Given the SEC’s focus on investor protection across the USA, staying compliant is critical for anyone involved in real estate syndications.
Conclusions
Real estate syndications provide excellent opportunities for investors and sponsors alike, but only if you follow the law. Understanding SEC regulations helps protect your investments and reputation.
Are you ready to explore real estate syndications further?
