My name is Tilden Moschetti. I am a securities attorney with the Moschetti Syndication Law Group. We specialize in Regulation D, Rule 506b, and Rule 506c offerings for syndicators and funds. Today, we’re going to look at a question that I get fairly regularly once my clients have a deal already going, and that’s whether or not an LLC can invest into their syndication.
So you’re an active syndicator, you’ve got the deal out there, you’ve got the fund out there, and you’re working on getting investors. One of the potential investors says, “Yes, I’d love to come in with my LLC.” The question that comes normally to me at that point is, can this LLC invest in my syndication or fund? The answer is sometimes.
First, we need to look at what rule it’s coming in under. If it’s coming in under Rule 506c, then the answer is maybe. We need to look at every single one of those investors. For all the people underneath the LLC, we need to determine whether or not they meet that test. Or if the LLC itself has assets greater than $5 million, it can also be considered an accredited investor just in and of itself.
If it has less than $5 million in assets, what we need to look at then is every single member underneath there. If this is a 506c, that means we need independent verification of each member of that LLC to make sure that they are all accredited. It’s very clear in Regulation D Rule 501, paragraph (a)(8), that all the members need to be accredited investors in order to invest or be counted as such. Because under 506c, everybody must be an accredited investor.
If you are doing a Regulation D Rule 506b, on the other hand, then the answer is maybe, maybe not. Say this person who wants to invest with their LLC has five people, two of whom are accredited, and three of whom are non-accredited. You can certainly bring them in, but the three people who are not accredited investors are going to count individually off that limitation of no more than 35 non-accredited investors in any 90-day period. So you now have three non-accredited investors as part of that pool.
The other issue that comes up under 506b is whether or not you’ve had a substantive relationship with that LLC. Now, if the head of that LLC, the manager of the LLC, or the managing partner is the person that you know, I would still go through the extra step of meeting every single person underneath that as a member of that LLC. The issue here is because you have a relationship with that one person, so you haven’t made a general solicitation to those other members who you may not know. But we want to make sure that they have the opportunity to get to know you, to get to know whether they trust you, to get to know whether or not you believe that they should have enough of a mindset about investing to know whether or not it’s a good idea for their LLC. It’s still just a good idea to meet them. Now, if you know all the people in the LLC anyway, this isn’t an issue, but what we’re really trying to do is make sure that we’re as compliant as we can be with that prohibition on general solicitation under Rule 506b.
So I hope that helps. Yes, LLCs can absolutely invest in Rule 506b and 506c offerings if they are accredited investors and they have a relationship with you. No issue whatsoever. If it’s a Rule 506c, and they’re all accredited investors, no issue whatsoever. If they are not all accredited investors under Rule 506c, and the assets of their LLC are less than $5 million, no, they cannot invest. If it is a Rule 506b offering, you count each individual person, whether or not they are an accredited investor or not. It goes off the 35 number limitation of non-accredited investors. And then you need to make sure to build that relationship just to make sure you’ve locked in that issue on whether or not you’ve made a general solicitation or not.
I hope that helps you. If you need any assistance putting together a Rule 506b or 506c offering, that’s what we specialize in. That’s what we do. We prepare private placement memorandums, operating agreements, subscription agreements, file everything with the SEC, notify the states – all the work that goes into that. But we also are there to help make you successful. That’s what we care about at the end of the day, and that’s what keeps our clients returning to us deal after deal.