So, you've learned a bit about the basics of real estate investing and are starting to see how much work your money could do for you. Before you get started down your path of investing in apartment complex syndications, it is important to understand the rules around investing in these types of deals and what the SEC allows for different individuals.
To understand better the rules around investing in a deal with Desert Lily Properties, first let's review the definition of a syndication offering. Anytime you have a collection of investors and they pool funds into a single property that is managed by partners who have sourced the deal, you have created a security according to the Security and Exchange Commission (SEC). As such, these offerings are strictly monitored and only open to individuals who meet the criteria as an accredited or sophisticated investor.
An accredited investor is free to invest in any syndication offered so long as they are able to raise the capital needed by the terms of that deal. To be considered an accredited investor you must certify that you meet one of the following criteria.
Option A: Have a yearly gross income of $200,000 (single) or $300,000 (married) that has been maintained over the two most recent years. In this option, you also need to be confident that the level of income will be maintained or increased during the current year.
Option B: Have a net worth (either single or jointly if married) that exceeds $1,000,000. The net worth would be calculated excluding the primary residence of the investor.
There are other ways to become an accredited investor but they are not commonly used. Some of these include being a financial professional with Series 7, 62 or 65 licensing, managing a trust containing over $5 million in assets or even working as a director or executive in a company that issues securities for sale.
If you have investing knowledge and expertise but do not meet the requirements of an accredited investor, you may be a sophisticated investor. There are no specific requirements to become a sophisticated investor like there are for accredited investors. However, the SEC defines non-accredited (sophisticated) investors "as those investors with sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment" (www.investopedia.com/terms). This opens up investing into deals that may have only been available to those with substantial financial means, to those who may have knowledge but not as much funds.
Understanding what you qualify as becomes important due to differences in what kinds of offerings that the SEC allows. In the multifamily syndication space, you will find either a 506(b) or 506(c) deal looking for investment. Many of the rules that govern these two types are the same, but there are key differences to be aware of. The chart below highlights the critical differences between the two offerings.
How many investors are allowed?
Up to 35 sophisticated investors and unlimited accredited investors
Unlimited accredited investors (only accredited investors are allowed)
What kind of advertising is allowed?
No advertising is allowed, only those who have pre-existing relationships with the offering company can be presented with a chance to invest
Any and all advertisement types are permitted (social media, radio, television, ect)
How is the investor status verified?
If an investor believes they qualify for "accredited investor" status, they may complete a form or submit a statement, essentially self-verifying their status
The group offering the deal or investment opportunity must verify their investors are accredited and often will utilize a third party company to complete this step on their behalf
What information must be provided?
If one or more of the investors is considered sophisticated, specific disclosures and financial statements are required
No specific information is required but should be provided to ensure all investors are aware of the offering in detail
After reviewing all this information, most potential investors will have questions surrounding the financial requirements governing accredited investors. The two most frequent questions are "Do I have to prove that I qualify?" and "What happens if I lie?".
First off, these questions likely only apply to 506(b) offerings as 506(c) offerings have more rigorous checks in place to verify your qualifications as an accredited investor. If you do decide to provide false statements to enter an offering, it is primarily on the group putting the investment opportunity together. Meaning, if they suspect you are providing them with dishonest information, it is their responsibility to keep you out of the deal or comply with current laws governing securities. Additionally, there may be laws (depending on the state) that allow for sophisticated investors or other non-accredited investors to back out either during a set time period or at anytime during the investment.
However, the SEC created both the accredited investor and sophisticated investor classification to ensure that only those with enough knowledge or experience would be allowed into syndications or securities. This means that it is very common for syndication documents to require that forms are signed waiving action against the syndicators or group governing the security.
Assuming that the investor has provided a signed statement, any required certification or proof of their status and signed away rights to complain about lack of qualifications, any repercussions or money lost in the investment is entirely on the investor. For this reason, we strongly encourage any and all potential investors to be transparent about their eligibility for different levels and we are always happy to answer questions for any interested investors.
We welcome inquiries from investors seeking multifamily investment opportunities.
Location: 2550 E. Rose Garden Lane #71235 Phoenix, AZ 85050
© 2023 Desert Lily Properties All Rights Reserved.
© 2023 Desert Lily Properties. All Rights Reserved.