What are the SEC Requirements to Invest in a Syndication?
In the world of investing, private securities offer the chance to invest outside the standard investment opportunities available in the public securities sector. Public security offerings would include the stock market, REITs and many other investments with which the everyday employee with a 401(k) plan would be familiar. Private securities would include any other business or real estate investment opportunity not available to the general public. The Securities Exchange Commission (SEC) regulates the requirements surrounding who can and who cannot invest in a private security offering such as a multifamily syndication. The purpose of these regulations is to protect investors who may lack the knowledge to determine if a given investment is within their best interest.
The SEC allows two types of investors to invest in private security offerings. For the purpose of our conversation we will focus on how this applies to multifamily syndications although the same principles apply to any private security offering. A sophisticated investor or non-accredited investor is the first type of investor who can participate in a multifamily syndication. Although a sophisticated investor does not need a certain income level or net worth to invest in a multifamily offering, this type of investor “must meet the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment”1. In addition, a Regulation D 506 (b) offering filed with the SEC allows sophisticated investors to join a multifamily syndication providing that they have a prior established relationship with one of the sponsors who is coordinating the deal. While this requirement might seem rather vague, its fulfillment is simply judged on whether the investor had met, developed a working relationship and discussed investing with the sponsor prior to the given investment offering being presented.
The next level of investor is often referred to as an accredited investor. An accredited investor is someone who in addition to having the knowledge and experience necessary to properly vet a multifamily investment also has a high income or net worth. An investor with high income or net worth is defined by the SEC as an individual with an “income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse or spousal equivalent in excess of $300,000” OR an “individual net worth, or joint net worth with that person's spouse or spousal equivalent, that exceeds $1,000,000”. The assumption from the SEC is that someone with this knowledge and income level is well positioned to freely make their own investment decisions. An accredited investor can therefore invest in a 506 (c) offering which is open only to them. This means that when a sponsor who is coordinating a multifamily purchase files for a 506 (c) exemption that they can openly advertise the deal since it is off limits to any non-accredited investor.
So, what does this mean for the aspiring passive multifamily investor? First, it means that understanding the investment that you are considering is important in order to meet the requirement of being a sophisticated investor who can invest in a 506(b) offering. While this might seem daunting, the truth is there are many resources (such as this blog) that provide free digestible information for anyone who is wanting to understand multifamily investments. Additionally, it is important to connect early and often with sponsors who are syndicating multifamily properties. This relationship is the key final piece in being able to participate in a multifamily investment. It is another great opportunity for learning more about how investing works.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please check out our free ebook "Achieving Financial Freedom Through Multifamily Investing."