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Syndications and funds: Raising outside capital for investment

By: Tilden Moschetti, Esq.

What is syndication?

Syndication refers to the process of bringing together a group of investors, known as a syndicate, to participate in a financial transaction such as a debt or equity offering. The sponsor, manager, limited partner or lead investor, is responsible for coordinating the syndicate and may also take on a larger share of the investment. Syndication can allow a company to raise larger amounts of capital than it could from a single investor and can also provide access to a diverse group of investors with different areas of expertise.

What is a syndicate?

A syndicate is a group of individuals or organizations that come together to jointly undertake a business venture or investment. The members of the syndicate typically pool their resources, such as money, expertise, or assets, to achieve a common goal or to access an opportunity that would be difficult or impossible for them to pursue on their own. The syndicate may be informal or formal, and it may be temporary or ongoing.

Syndicates are usually formed to invest in a specific opportunity, such as a new startup or a real estate development project. The investors in a syndicate share the risk and the potential returns of the investment.

What is the difference between a syndication and a fund?

In reality, there is no difference between a syndication and a fund, they are just two different angles on the same thing. A fund is a pool of money that is collected from a group of investors and is managed by a sponsor, manager, limited partner, or lead investor. The fund’s manager uses the money to invest in one or more assets, such as real estate, venture capital, or private companies, with the goal of generating returns for the fund’s investors.

What is a syndicator, and how do they make money?

A syndicator, in the context of raising capital, is a person or a company that brings together a group of investors, known as a syndicate, to participate in a financial transaction such as a debt or equity offering. The syndicator acts as the lead investor, or syndicate manager, and is responsible for coordinating the syndicate, identifying and evaluating investment opportunities, preparing a private placement memorandum (PPM), and managing the ongoing relationship with the other members of the syndicate. The syndicator may also take on a larger share of the investment.

In addition to this role in raising capital, a syndicator can also refer to a person or a company that creates and manages a syndicate of investors for a specific investment opportunity, such as a real estate development project. The syndicator, in this case, is responsible for finding and structuring the investment opportunity, raising capital from the syndicate members, and managing the ongoing relationship with the other members of the syndicate.

Syndicators can be individuals, investment firms, private equity firms, venture capital firms, and other financial institutions that have the expertise to put together a group of investors and manage the investment.

Syndicators make money by charging fees and taking equity in the assets of the syndication fund.

SEC registration exemptions

There are several exemptions to the registration of a security under federal securities laws in the United States. Some of the most common exemptions include:

  1. Regulation D: This exemption allows companies to raise an unlimited amount of capital from non-accredited investors (under Rule 506b) and or accredited investors (under Reg D Rule 506b and Reg D Rule 506c) without registering the securities with the Securities and Exchange Commission (SEC).
  2. Regulation A: This exemption allows companies to raise up to $50 million in a 12-month period from any type of investor, without registering the securities with the SEC. (How does Reg A compare to Reg D?)
  3. Regulation CF: This exemption allows companies to raise up to $5 million from any type of investor, but only through a registered portal. (How does Reg CF compare to Reg D?)
  4. Regulation S: This exemption applies to securities that are offered and sold outside the United States and is available to both domestic and foreign issuers.
  5. Section 4(a)(2) of the Securities Act of 1933: This exemption is commonly referred to as the private placement exemption. It allows companies to sell securities to a small number of investors without registering the securities with the SEC. (How does Section 4(a)(2) compare to Reg D?)
  6. Rule 504 of Regulation D: This exemption allows companies to raise up to $5 million in a 12-month period from any type of investor, without registering the securities with the SEC.
  7. Rule 147A (amended Rule 147): This exemption applies to intrastate offerings, which are offerings of securities that are limited to investors within a specific state. (How does Rule 147A compare to Reg D?)

It’s important to note that while these exemptions allow companies to avoid registering their securities with the SEC, they still have to comply with other securities laws, such as the anti-fraud provisions of the federal securities laws. Additionally, while ‘registration’ isn’t required, almost always a filing will be required.

How to start a syndication

Starting a syndication involves several steps, including:

  1. Identifying the opportunity: The first step in starting a syndication is to identify an investment opportunity that is suitable for a syndicate. This could be a real estate development project, a startup company, or other types of investment opportunity.
  2. Building a team: Once you have identified an opportunity, you will need to build a team to help you manage the syndicate. This may include a syndication lawyer, an accountant, and other professionals who have experience in syndications.
  3. Finding investors: The next step is to find investors who are interested in participating in the syndicate. This can be done through personal networks, industry events, and online platforms.
  4. Structuring the deal: Once you have identified an opportunity and found investors, you will need to structure the deal in a way that is beneficial for all parties involved. This may involve negotiating the terms of the investment, such as the ownership percentages, the management structure, and the exit strategy.
  5. Closing the deal: Once the deal is structured, the next step is to close the deal. This will involve finalizing the legal documents, transferring the funds, and taking any other necessary steps to make the investment official.
  6. Managing the investment: After the deal is closed, the next step is to manage the investment. This will involve making decisions about the investment, communicating with the other members of the syndicate, and monitoring the performance of the investment.

It’s important to note that starting a syndication requires a lot of experience, skills and knowledge of the investment industry, and the laws and regulations surrounding it. Therefore, it may be beneficial to seek professional advice and guidance from a syndication attorney before starting a syndication.

Make informed decisions about your syndication.

Contact our syndication and private placement memorandum law firm today!