One question I often get from syndicators who are doing their first syndication is whether or not they need a license, a real estate license, a securities license, or any sort of license in order to do a syndication or put together a fund. We’re going to answer that question in this video.
My name is Tilden Moschetti. I am a securities attorney with the Moschetti Syndication Law Group. We specialize in Regulation D Rule 506b and 506c offerings in order to raise capital for your business or for real estate.
When I have clients who are new to real estate syndication or putting together a fund, oftentimes they’ll ask me if they need a license from the SEC, FINRA, or a real estate license to do real estate syndication. The short answer is no. You do not need a license in order to do those things. Let’s break it out into securities licensing and real estate licensing, and then we can go through those. Maybe you’ll decide to get a license and maybe you will decide not to.
For securities licensing, oftentimes, having a securities license is an additional problem, rather than a benefit. Under Regulation D, Rule 506b and 506c, the sponsor of that security—that’s you, the syndicator or the fund organizer putting it together—is automatically allowed to sell its own security. You’re already allowed to go and sell all the securities yourself; you do not need a broker-dealer. You need to follow the rules, obviously, of the SEC regulations that say you can’t have non-accredited investors unless it’s a 506b offering, and then up to 35. But then you can’t advertise. All those things need to be complied with, but you as a sponsor can do the advertising.
Why did I say that it was actually more difficult if you do have a license? Well, the problem comes down to what we call suitability—whether the investment itself is suitable for the job that it’s being hired to do. Is your investment in the very best interests of that investor? Broker-dealers deal with suitability all the time, and they make sure that the investments they put their clients into are suitable, but your investment may not actually be suitable for a specific person.
You may not know that that is the case; it may be a perfectly great investment. But if your investment is simply just waiting for this gigantic cash flow at the end of 10 years, and you were trying to sell this security to somebody who was 90 and really just needed that cash flow—they needed monthly checks—well, the investment isn’t suitable for that person. But you wouldn’t necessarily know that as the sponsor. A broker-dealer would need to know that.
So if you had a securities license, you would need to know that. And it’d be a problem if you sold it to that 90-year-old person because then you’re not meeting that suitability requirement. When I have clients who do have securities licenses, the challenge becomes distancing themselves from their securities license itself, making it very, very clear that they are acting in the capacity of a sponsor, and not in the capacity of an RA or a broker-dealer. They’re making no claims about suitability whatsoever and have no input on whether it is suitable or not.
It’s a lot of work to actually separate the two, and it’s not perfect when it’s done. Because if they knew you as a broker-dealer, there’s still the chance that they relied on your information because you were a broker-dealer. That’s the information on why a securities license would be a little bit more challenging than not having one at all. So, not required to have a securities license to sell your security.
When it comes to real estate licenses, that’s a little bit different story. The answer is no, if you’re doing a real estate syndication, you do not need to have a real estate license. However, the real estate license can help you in a lot of ways. Most importantly, it can change your fees. The work that you do as a real estate salesperson or a real estate broker can be used, and you can get those fees that you would generate from things like buying real estate, selling real estate, or being a property manager.
It needs to obviously be disclosed that you’d be acting in that capacity as part of the syndication. But you, as an agent or a broker, would be hired by the syndication itself in order to perform those activities. We also make sure to put in language that makes it very clear that we’re not saying that you, the broker, might have gotten a higher price for the sale of the property or a lower price for the purchase of the property if it had been some other agent or salesperson. That gets rid of the argument later down the road of somebody saying, “Well, we could have made a lot more if we hired my friend Suzy.”
It doesn’t matter because we’ve already described that we’re hiring you. And we’re also saying that it’s possible that the rates would have been different, but we’re going to be hiring this salesperson anyway. So at least long before the money ever came into your hands into the syndication, it was already disclosed and discussed with the investors. They knew at least that it was going on.
I like to have my syndicators have a real estate license if they’re doing real estate syndication because it’s an opportunity for them to get increased fees. And as long as they do good, competent work, that’s a win for everybody because then they know the real estate better than anyone else, and they can sell or buy the real estate that they need to do.
I hope that helps answer the question about licenses and you doing a Regulation D Rule 506b or 506c syndication. If you’re putting together a syndication or fund, feel free to call my office and set up a time for us to talk. We can go through your own situation and see if I am a good fit to help you do that next deal and the deals thereafter to accomplish your goals.