The moment you raise money from investors for a real estate deal, you're selling a security. This is true regardless of whether you call it a "partnership", "investment", or "joint venture". Securities laws govern how you can offer that security, who you can sell it to, what you must disclose, and how you must file. Violations can result in rescission rights for investors (forcing return of capital), SEC enforcement, state penalties, and personal liability. Understanding the basic legal framework is essential for any syndicator.

This lesson covers securities law fundamentals: what makes a deal a security, the exemptions you'll use, accredited investors, and how to stay legal.

Important caveat: This is an overview, not legal advice. Always work with a securities attorney experienced in real estate syndication. Don't try to DIY securities compliance.

What is a security

The federal definition of a security is broad. Under the 1933 Securities Act and the Howey Test (from a 1946 Supreme Court case), an investment is a security if it involves:

An investment of money
In a common enterprise
With the expectation of profits
Derived primarily from the efforts of others

A typical real estate syndication checks all four boxes:

LPs invest money
They invest in the same LLC (common enterprise)
They expect to make money
The sponsor does the work; LPs are passive

This means a typical syndication is selling a security. Period. You cannot avoid securities law by calling it something else, structuring it informally, or hoping the SEC won't notice.

Direct ownership exception

If multiple people directly buy a property as tenants-in-common with active involvement by all owners, that may not be a security. But this is rare and risky territory; most multi-investor real estate deals are securities.

Joint ventures with active partners

If a small number of partners are all actively involved in the deal, that may not be a security. The line is fuzzy. When in doubt, assume it's a security.

The 1933 Securities Act framework

The Securities Act of 1933 requires that securities be either:

Registered with the SEC (full public offering, like an IPO), or Exempt from registration

Registration is enormously expensive and time-consuming — only large public offerings use it. Real estate syndications use exemptions.

The most common exemptions for real estate syndication:

Regulation D Rule 506(b)

The traditional private placement exemption:

Unlimited capital raise (no dollar limit)
Unlimited accredited investors
Up to 35 non-accredited investors (with restrictions)
No general solicitation or advertising allowed
Information requirements for non-accredited investors
Form D filing with SEC within 15 days of first sale

This is the most common exemption for traditional syndications relying on existing relationships.

Regulation D Rule 506(c)

A newer exemption (post-JOBS Act, 2013) that allows public marketing:

Unlimited capital raise
Unlimited accredited investors only (no non-accredited)
General solicitation and advertising allowed
Verification of accredited status required (more rigorous than self-certification)
Form D filing with SEC within 15 days of first sale

This exemption is preferred when sponsors want to publicly market deals (websites, social media, conferences) but adds the burden of verifying accredited status.

Regulation A+

A "mini-IPO" approach:

Up to $75M raise (Tier 2)
Public marketing allowed
Unaccredited investors allowed
State blue sky laws preempted (Tier 2)
More expensive and complex than Reg D
Used by larger sponsors with consumer-facing offerings

Intrastate offerings

Limited to one state — not commonly used.

For most real estate syndicators, the choice is between 506(b) and 506(c).

506(b) vs 506(c): which to use

The choice depends on your investor sourcing strategy.

Use 506(b) when:

You raise from existing relationships (friends, family, network)
Some investors are non-accredited (limited to 35)
You don't want to publicly market the deal
You want simpler verification of accredited status (self-certification okay)
You're starting out with a known network

Use 506(c) when:

You're publicly marketing the deal (website, social media, conferences)
You want to scale your investor base beyond your network
All investors will be accredited
You can handle verification of accredited status (third-party services available)
You're an established sponsor with marketing infrastructure

A common path is to start with 506(b) for early deals (relationship-based) then move to 506(c) as the sponsor scales and needs broader marketing.

The 506(b) "general solicitation" trap

Under 506(b), you cannot publicly market the deal. This includes:

Public websites describing the deal
Social media posts about the deal
Cold calls or emails to people you don't know
Public events advertising the deal
Conferences mentioning specific deals
Press releases

You can only market to people with whom you have a "pre-existing substantive relationship" — people who you genuinely knew before the offering. This relationship requirement is interpreted strictly. Adding someone to your investor list two days before pitching them a deal probably doesn't count.

If you violate 506(b)'s no-solicitation rule, you lose the exemption. The deal becomes an unregistered offering, exposing the sponsor to rescission and SEC enforcement.

Accredited investors

Both 506(b) and 506(c) rely heavily on accredited investors. Understand what this means.

Accredited investor criteria (individuals)

An individual is accredited if they meet any of:

Net worth over $1M excluding primary residence (alone or with spouse)
Income over $200K in each of the last 2 years (or $300K with spouse) with reasonable expectation to continue
Holds Series 7, 65, or 82 license
"Knowledgeable employee" of a private fund

Accredited investor criteria (entities)

An entity is accredited if:

Total assets over $5M (corporation, LLC, trust)
All equity owners are accredited (smaller entities)
Family office with $5M+ assets under management
Bank, insurance company, registered investment company
Various other institutional categories

Why accredited status matters

The SEC uses accredited status as a proxy for sophistication and ability to bear loss. Accredited investors:

Can typically do their own due diligence
Can afford to lose the investment
Don't need the same protections as ordinary investors

The exemptions allow easier offerings to accredited investors because they're presumed sophisticated.

Verification under 506(c)

506(c) requires that the sponsor "take reasonable steps to verify" accredited status — not just rely on the investor's word. Acceptable verification:

Third-party verification services (VerifyInvestor.com, EarlyIQ, etc.)
Tax returns showing income
Account statements plus letter from CPA/attorney
Letter from licensed professional confirming accredited status

506(b) allows self-certification (the investor checks a box) without verification.

State blue sky laws

In addition to federal law, every state has its own securities laws ("blue sky laws").

State filing requirements

For Reg D offerings:

Notice filing in each state where investors reside
Filing fees in each state ($100-$1,000+ each)
Forms vary by state

The federal Reg D exemption preempts state registration requirements but allows state notice filings and fees.

State enforcement

States can enforce their own anti-fraud and disclosure laws even when federal exemptions apply. State enforcement actions are common.

Practical implications

Identify all states where investors reside before closing
File appropriate notices within deadlines
Pay applicable fees
Keep records of filings

A securities attorney handles this routinely.

Anti-fraud provisions

This is the part that always applies, regardless of exemption.

The federal anti-fraud rules (Rule 10b-5 of the 1934 Act) prohibit:

Material misstatements of fact
Material omissions of fact
Schemes to defraud investors
Practices that operate as fraud

What counts as "material"? Information that a reasonable investor would consider important in making an investment decision.

Examples of fraud or near-fraud

Inflated projections that you don't believe
Hiding negative information about the property or market
Concealing fees or related-party transactions
Misrepresenting your track record
Promising returns that you can't deliver
Using investor money for personal expenses
Commingling funds between deals
Undisclosed conflicts of interest

Disclosure principle

When in doubt, disclose. The PPM is your tool for disclosure. If you tell investors about a risk, you can't be sued for not disclosing it. If you hide a risk, you're exposed.

Bad actor disqualification

Reg D exemptions are unavailable to "bad actors":

Convicted of securities fraud in the last 10 years
Subject to SEC enforcement orders
Subject to state regulatory orders
Suspended from financial industry roles
Various other disqualifying events

Sponsors must check their team and associates for bad actors. A bad actor on the team can disqualify the entire offering.

Ongoing compliance

Securities compliance doesn't end at closing.

Form D filings

Initial Form D within 15 days of first sale
Amendment for material changes
Annual if offering remains open

Tax reporting

K-1s to all investors annually
Federal and state tax returns for the entity
1099s if applicable

Investor communications

Material updates that could affect investment value
Annual reports on operations
Distribution statements

Records retention

Subscription documents
Investor correspondence
Marketing materials
Financial records
Tax filings

Records should be retained for at least 5 years after offering close.

Working with a securities attorney

Securities attorneys are essential for syndication. Don't try to DIY.

What a securities attorney does

Choose the right exemption for your offering
Draft offering documents (PPM, op agreement, sub agreement)
Make federal and state filings
Review marketing materials
Advise on solicitation rules
Handle investor questions
Address compliance issues

Selecting an attorney

Real estate syndication experience specifically
Recent reg D work
Reasonable fees ($10K-$30K typical for first deal)
Responsive communication
Understanding of your business model

Notice filings required for Reg D offerings
Fees apply
Filing deadlines must be met

Florida Securities Act

Anti-fraud provisions enforced by OFR
State enforcement actions occur
Private rights of action for investors

Florida-specific considerations

Many out-of-state investors in Florida deals
Multiple state filings required
Snowbirds create residency questions

Worked example: 506(b) offering structure

You're raising $1.8M for a Lakeland retail center.

Structure decision

Reg D 506(b) because you're raising from your existing network
No public marketing
Up to 35 non-accredited investors allowed (but you decide accredited only for simplicity)
All 12 investors are existing relationships
Self-certification of accredited status acceptable

Documents

Operating agreement for the LLC
Subscription agreement for each investor
Private placement memorandum (PPM)
Investor questionnaire (verifies accredited status)
W-9 and bank info for distributions

Filings

Form D with SEC within 15 days of first sale
State notice filings in all investor states (Florida, Georgia, North Carolina, Texas in this example)
Fee payments in each state

Process

Pre-launch: attorney prepares all documents
Marketing: one-on-one conversations with existing relationships
Subscription: investors complete documents
Funding: wire to escrow
Closing: deal closes, capital deployed
Filings: Form D and state filings filed
Operations: ongoing compliance

Costs

Attorney fees: $20K
Filing fees: $3K (federal + states)
Other: $2K (entity formation, EIN, bank account)
Total: $25K

These are syndication costs the sponsor pays out of pocket or from the acquisition fee.

Common securities mistakes

Calling it not a security — wishful thinking doesn't matter
DIY documents — legal documents require expertise
Public marketing under 506(b) — destroys the exemption
Inadequate accreditation verification under 506(c)
Missing state filings
Inflated projections without basis
Inadequate risk disclosure
Personal use of investor funds
Bad actor on the team undetected
No attorney involvement until problems arise

What to take away

Real estate syndications are securities under federal and state law
Howey Test: investment, common enterprise, expected profits, efforts of others
Reg D 506(b): no advertising, allows non-accredited (35 max), most common
Reg D 506(c): allows advertising, accredited only, requires verification
Accredited investor: $1M+ net worth (excluding home) or $200K+ income
State blue sky laws apply in addition to federal
Anti-fraud provisions always apply, regardless of exemption
Disclosure principle: when in doubt, disclose
Securities attorney is essential — don't DIY
Filing requirements: Form D, state notices, ongoing compliance
Common mistakes: pretending it's not a security, DIY docs, public 506(b) marketing

Next lesson: LP/GP structure and the legal entities that hold real estate syndications.

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