THE VALUE OF A SYNDICATION ATTORNEY IN APARTMENT SYNDICATION TRANSACTIONS

WHO IS A REAL ESTATE SYNDICATION ATTORNEY?

The real estate attorney plays a key role in a real estate syndication. They take care of all of the legal basics of real estate syndication and conduct all of the real estate syndication work and the legal framework for all involved. The formation of a successful real estate investment syndication requires specialized knowledge in both the unique characteristics of pooled real estate investment vehicles and the exempt securities offering framework. 

They prepare any particular legal document needed such as the operating agreement, the private placement memorandum (PPM), and the subscription agreement for all of the parties involved so that everyone has an in-depth understanding of what to expect when they invest in this particular piece of real estate.

A syndication attorney, experienced in drawing up contracts, should be consulted when purchasing the property. A syndication attorney can help you fully assess the tax, liability, and other implications of an LLC, corporation, or limited partnership in your venture. A syndication attorney can also help you craft the necessary operating documents that define each party’s rights and responsibilities.

 

The services of a real estate syndication attorney include:

• Advice and consultation regarding corporate structure, state of formation, and optimal entity type.
• Preparation of organizational documents and operating agreements or partnership agreements for fund and management vehicles.
• Advice and consultation regarding offering terms, including the introduction of blockchain-based digital securities tokens to the offering or post-offering plan.
• Advice and consultation regarding optimal securities exemption that fits your unique capital raising strategy.
• Preparation of disclosure documents (i.e. private placement memorandum, offering circular or Form D).
• Preparation of subscription agreement and investor questionnaires.
• Advice and consultation regarding accredited investor verification methods as needed.
• Advice and consultation regarding marketing rules and restrictions.
• Introductions to marketers, broker-dealers, accountants, and other trusted vendors, as needed.
•  Ensuring the syndicator conforms to the necessary laws and requirements, such as private placement memorandum (PPM) compliance and blue-sky laws compliance.
• Guiding the sponsor on the appropriate syndication documents and handling paperwork to ensure the sponsor’s validity and legality.

 

 

Rule 506 of Regulation D

Generally, under the Securities Act of 1933 (the “ ‘33 Act”), securities must be registered with the Securities and Exchange Commission (SEC), unless the sale of securities qualifies for one of the exemptions to registration. SEC Regulation D provides exemptions for private placement capital raises, which is the sale of securities to pre-selected investors or institutions. Rule 506 of Regulation D provides two distinct exemptions from registration for companies when they offer and sell securities. Companies relying on the Rule 506 exemptions can raise an unlimited amount of money.

Companies that comply with the requirements of Rule 506(b) or (c) do not have to register their offering of securities with the SEC, but they must file what is known as a “Form D” electronically with the SEC after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s promoters, executive officers, and directors, and some details about the offering, but contains little other information about the company.

 

Rule 506(b)

Under rule 506 b, issuers of securities are exempt from the registration requirements of the Securities Act for unlimited-size offerings. However, to qualify under this rule, the securities that are being offered can only be bought by accredited investors and no more than 35 unaccredited investors. These unaccredited investors must also meet certain requirements, such as being an officer of the company that is offering the securities.

Under Rule 506(b), a “safe harbor” under Section 4(a)(2) of the Securities Act, a company can be assured it is within the Section 4(a)(2) exemption by satisfying certain requirements, including the following:

• The company cannot use general solicitation or advertising to market the securities.
• The company may sell its securities to an unlimited number of “accredited investors” and up to 35 other purchasers. All non-accredited investors, either alone or with a purchaser representative, must be sophisticated, that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.
• Companies must decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. This means that any information a company provides to investors must be free from false or misleading statements. Similarly, a company should not exclude any information if the omission makes what is provided to investors false or misleading. 
• The company must be available to answer questions by prospective purchasers.

 

Rule 506(c)

Rule 506(c) permits issuers to broadly solicit and generally advertise an offering, provided that:

• All purchasers in the offering are accredited, investors.
• The issuer takes reasonable steps to verify purchasers’ accredited investor status and that certain other conditions in Regulation D are satisfied.

Purchasers in Rule 506(c) offering receive “restricted securities.” A company is required to file a notice with the Commission on Form D within 15 days after the first sale of securities in the offering. Although the Securities Act provides a federal preemption from state registration and qualification under Rule 506(c), the states still have the authority to require notice filings and collect state fees. Purchasers of securities offered pursuant to Rule 506 receive “restricted” securities, meaning that the securities cannot be sold for at least six months or a year without registering them.

Companies that conduct an offering relying on Rule 506(c) can raise an unlimited amount of money from an unlimited number of verified accredited investors. Issuers relying on Rule 506(c) may solicit and generally advertise and must comply with any relevant requirements of Reg D. The purchasers receive restricted securities, and the company is required to file a Form D with the SEC within 15 days after the first sale of securities under the offering, and despite a company’s compliance with a 506(c) offering is exempt from state qualification and registration, the company must still comply with any state notice requirements and state filing fees.

 

 

What Is a Private Placement Memorandum (PPM)?

A private placement memorandum (PPM) is a document given to potential investors that introduces an investment and discloses information about it. The PPM is part of a securities offering process called private placement. A PPM is a document created to sell investments in securities (typically stocks and bonds) to private investors. This type of offering is called a private placement because it’s offered privately to individual investors. The real estate syndication attorney would participate in the creation of the PPM and make sure it has all the important elements.

Private placements are regulated by the Securities and Exchange Commission (SEC). They are not required to go through the same registration process as public offerings, but they must follow specific SEC rules to be exempt. A real estate syndication attorney is expected to add every PPM section that is beneficial and also helps you review this document and provide legal advice. 

 

Operating and Subscription Agreements

In the structuring of private funding securities, a real estate syndication attorney drafts and designs a Subscription Agreement for investors to complete. While Operating Agreements are drafted by the real estate syndication attorney to outline how the real estate syndication will be managed.

 

Subscription Agreements

Subscription agreements, also known as share subscription agreements, are legal contracts that allow an investor to buy shares of a company as a subscriber and shareholder with limited partnerships (LP) or private placement rights. They establish terms and conditions around key provisions of the transaction, such as the number of shares and capital contribution requirements. A subscription agreement tracks current disbursements and outstanding shares.

 

Operating Agreements

An operating agreement is a legally binding document that limited liability companies (LLCs) use to outline how the company is managed, who has ownership, and how it is structured. The operating agreement outlines a business’s functional and financial decisions. If a company is a multi-member LLC, the operating agreement becomes a binding contract between the different members. In addition to clarifying ownership and structure, the operating agreement can also name the registered agent, give details like when meetings are held, select managers, and explain how the business can add or drop members. 

 

SEC Form D 

SEC Form D is the form used by companies to notify the SEC that they have made an offering of securities but that they haven’t registered these securities with the SEC. This exemption from offering securities without registering them is covered in SEC Regulation D (Reg D), a section of the Securities Act of 1933. 

SEC regulations, as noted above, are established to protect investors against fraudulent securities offerings. But the securities registration process is lengthy and complicated, and it usually requires many months and the services of expensive experts to guide a company through the process. A real estate syndication attorney helps to file an amendment to Form D and ensures the details are accurate.

 

CONCLUSION

It’s crucial to understand SEC regulations to avoid legal and financial burdens of non-compliance. To do this, you should choose a sponsor who has the backing of a real estate syndication attorney. Real estate syndication attorneys are knowledgeable about security legalities. Thus, they efficiently handle the SEC aspect of the investment.

Therefore, a syndicator working with an attorney has more chances of success in the realtor syndication business. Thus, it’s vital to thoroughly review a syndication company before agreeing to work with them. It is important to watch out for some of the markers of a syndicator’s competency in their profile.

 

As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.