My name is Tilden Moschetti. I’m a syndication attorney with the Moschetti Syndication Law Group. We specialize in helping syndicators put together funds and syndications using Regulation D Rule 506b and 506c. In today’s video, we’re going to take a deep dive into what I call the alphabet soup, going through the different regulations that have exemptions from registration with the SEC. This way, it’s clear what your options are when it comes to syndication. It’s not just about Regulation D; there’s also Regulation A and Regulation CF. We’re going to see how everything fits in.
When I came into the world of syndication, I had been a real estate attorney for about 9 or 10 years. A deal came my way when a partner asked me to look at it and said, “Is this a deal that we should syndicate?” I had to look into it. It sounded like a good deal to me; the property was fantastic, and I definitely knew we could make money on it. I just needed to figure out exactly how to get it done. I had heard of real estate syndication before but never put one together. As I began my research, there was a mountain of soup, right?
I had this great idea; I wanted to build this great thing that was going to make me a lot of money, make my partners a lot of money, make my investors a lot of money. But I was stuck because there were all these different letters and numbers, and I couldn’t figure out which was which. So there I was, poring through books, trying to figure it all out. It wasn’t until I came up with the whole framework and put it all into context that things started to make sense for me. Now I’m going to take advantage of the knowledge I have and hopefully make it much easier for you, making it very clear what the different exemptions are.
Let’s start with Regulation A. Regulation A has two tiers. Tier One is the simpler of the tiers, and Tier Two is more complex and expensive to put together. Regulation A is often very expensive and takes a long time because it actually gets sent to the SEC. We’ll go over all that in just a minute.
Regulation A Tier One: How much money can be raised? Up to $20 million. Can we accept non-accredited investors? Absolutely. Do we have to make regular disclosures? Absolutely. To do a Reg A, we need to file Form 1-A, which is reviewed by the SEC before you can accept money. You can start marketing it but cannot accept money until it’s been approved by the SEC. Can we advertise? Definitely. You can put up a billboard as soon as you file Form 1-A; you just cannot touch anybody’s money until it’s been approved by the SEC.
Regulation A Tier Two has a much higher limit: $50 million. We can still raise money from non-accredited investors. We still need to do our disclosures as part of Form 1-A, and the scrutiny from the SEC is going to be much higher because the dollar amount is higher. The kinds of questions you’re going to have are certainly stronger, and the amount of audited financials required is certainly a higher bar because of the much bigger dollar amount. Can we advertise? Yes, you can.
Typical turnaround time for putting together a Reg A offering is about six to nine months. In terms of fees, most attorneys charge at least $60,000 up to $100,000 to put together a Reg A offering, with Tier Two being on the higher end and Tier One on the lower end. It takes a long time, and there need to be audited financials as well, so you’d have to hire an accounting team to prepare those for you.
What about Reg CF? You can raise up to $5 million with Reg CF. You can accept non-accredited investors, and there are still some disclosures that must be made. The advertising for Reg CF is where it gets tricky because all offerings must be made through an SEC-approved platform or a broker-dealer. The SEC and FINRA have to approve that platform. It’s a third party doing all of the management and control of the investors. They also charge fees, which I hear are around 10% most of the time. That greatly reduces the returns your investors are getting if 10% is immediately going to the portals.
Regulation D Rule 504 used to be the big dog, the heavyweight champ in the Regulation D world, but it’s not anymore. You can raise up to $10 million under Regulation D Rule 504. You can occasionally accept non-accredited investors, but the rules fall under the rules of the states in which your investors are coming from. That’s where things start getting really complicated because when you do a Reg D Rule 504 offering, every state’s local blue sky laws must be analyzed to see if it fits. This greatly adds to attorney fees because a whole squad of attorneys needs to look at every state’s local rules to figure out if your offering is compliant or not.
Do you need to make regular disclosures? No, but with an asterisk: if it’s required by those local states, then you certainly do. Is advertising allowed? No, with a note that you actually can advertise if it’s within a state that allows it, and typically that will require substantial disclosure documents as well. Rule 504 is out of fashion just because it’s very expensive and complicated to put together.
Enter the world of 506b. 506b probably represents somewhere around 50 to 60% of the clients we represent. It is a terrific platform; it is very efficient. You can raise an unlimited amount of money – you could raise $1 or $1 trillion under Rule 506b and its cousin 506c. Under 506b, you can have non-accredited investors, but no more than 35 in any 90-day period, and they must be considered sophisticated. The bar for sophisticated is fairly low; I have other videos that talk about that.
Under Rule 506b, you will still need to make disclosures. This is your private placement memorandum (PPM). This is the main document that my law firm helps you put together because you need to make substantial disclosures about what you’re doing and what the risk factors are. It is required for a securities offering that your investors know what they are getting into. It is held to a high standard. I have other videos that talk about what those different standards are and how there is no such thing as a true friends and family syndication where you don’t need to do a PPM or where it’s irrelevant to file a Form D.
Can you advertise with 506b? No, that’s the downside. There is no general solicitation of investors. You cannot put it on Facebook and invite the world to come invest in your syndication.
Rule 506c, on the other hand, also allows you to raise an unlimited amount of money. Rule 506c does not allow non-accredited investors. All investors should be verified by a third party as being accredited. You need to take reasonable steps to make sure that everybody is accredited. Most of the time, that means hiring a third party.
In terms of disclosures for 506c, the answer is no with an asterisk. I have never come across a single entity that’s been sophisticated that’s put together a Reg 506c offering that has not made substantial disclosures or put together a private placement memorandum. Why would you skip that? It is your insurance. Putting together a PPM is almost always paid for by the investors anyway, and it’s your insurance that nobody can come back to you and say, “Oh, well, I would never have invested if you had told me blank.” The PPM tells them everything they need to know, makes all those risk disclosures, all the conflicts of interest, all the disclosures you need to make so that those investors cannot ever say, “Well, you never told me, so I get my money back.”
Can you do advertising with 506c? Yes, you can advertise to your heart’s content. You can advertise on TV, radio, put a billboard out on the internet, whatever you want. You just need to make sure before you accept their money that you’ve verified they are an accredited investor.
I hope that helps. This is Regulation D Rule 506c. Regulation D Rule 506b is the other one of the rules under Regulation D that my firm specializes in. If we can help you put your syndication together, we’d be happy to do so. We would welcome a call from you to set up a consultation, see if there’s a good fit, and we can go from there. My name is Tilden Moschetti, Moschetti Syndication Law Group.