Most sponsors come to real estate through property, not securities law. The realisation that arrives somewhere in the first deal is that a syndication is a securities offering, and that the rules governing it are unforgiving in a way real estate contracts are not.
An investor benefits from understanding the same framework, because how an offering was conducted tells them something about the sponsor and because certain irregularities are visible from outside.
Why a syndication is a security
A passive interest in an entity that owns property, where returns depend on the efforts of a sponsor, is generally an investment contract under the long-standing Howey analysis — an investment of money in a common enterprise with an expectation of profits derived from the efforts of others.
That is exactly what a syndication is. The consequence: the offering must be registered with the SEC or fit an exemption. Registration is impractical for a single-property deal, so nearly all syndications rely on an exemption, and nearly all of those use Regulation D.
The general framework is covered in Regulation D offerings. What follows is what matters specifically for syndications.
The two routes
Rule 506(b)
No general solicitation. The sponsor cannot advertise the offering publicly. That means no open website promoting the deal, no social media marketing, no public seminars, no mass emails to purchased lists.
Sales are permitted to accredited investors plus a limited number of non-accredited purchasers who meet a sophistication standard — though many sponsors avoid non-accredited investors entirely, because their inclusion triggers substantially heavier disclosure obligations.
Accredited status is generally self-certified through investor representations in the subscription agreement.
The practical constraint is the pre-existing substantive relationship requirement. A sponsor may approach people it already knows in a meaningful way. Building an investor base therefore has to happen before a specific deal is being raised — which is why sponsors maintain investor lists and relationships continuously rather than starting when a property goes under contract.
Rule 506(c)
General solicitation is permitted. The deal can be advertised publicly, listed on platforms, and marketed to strangers.
All purchasers must be accredited, with no allowance for non-accredited investors.
The issuer must take reasonable steps to verify accredited status. This is the trade, and it is a real one. Verification is a higher standard than accepting a representation, and the rule sets out non-exclusive methods including review of financial documentation or written confirmation from certain qualified professionals. Third-party verification services exist for this reason.
The choice between the two is covered in detail in 506(b) vs. 506(c).
Where syndications get into trouble
Accidental general solicitation in a 506(b) offering. This is the most common error and it is easy to commit. A sponsor discusses a live deal on a podcast. A deal page appears on a public website. A post goes out to social media followers. Any of these can constitute general solicitation, and general solicitation in a 506(b) offering can destroy the exemption for the entire raise.
The consequence is not theoretical: a lost exemption can create rescission rights for investors, meaning they may be entitled to their money back — which arrives, characteristically, at the moment the sponsor least wants to return it.
Treating the pre-existing relationship loosely. A relationship formed by someone filling in a web form the week before is not obviously substantive. Sponsors who build lists through public marketing and then raise under 506(b) are operating in an uncomfortable position.
Verification shortcuts under 506(c). Accepting a check-the-box representation in a 506(c) offering does not meet the reasonable steps standard. Sponsors who advertise publicly and then verify as though it were a 506(b) deal have combined the obligations of both rules and satisfied neither.
Integration. Multiple offerings close in time can be treated as one, which can break an exemption. The integration framework was revised in 2020 and the current rules should be applied rather than older understandings.
Missing Form D or state filings. A notice filing with the SEC is required after the first sale, and corresponding state filings are required where investors are located. These are administrative and their omission has consequences that vary by state.
Bad actor disqualification. Regulation D disqualifies offerings involving covered persons with certain disciplinary histories. This requires an actual inquiry into principals and significant participants, not an assumption.
What investors can observe
Some of this is visible from outside a deal, and it is worth noticing:
How did I hear about this? If a sponsor advertised publicly, the offering should be 506(c) and the sponsor should be verifying accredited status. If it is a 506(b) offering that was publicly advertised, something is wrong.
Was I asked to verify or merely to represent? Consistent with the above.
Is there a Form D filing? These are publicly searchable on EDGAR. A missing filing for a raise that has closed is worth asking about.
Is there a real PPM with substantive risk disclosure, or a marketing deck with a signature page?
Does the sponsor have securities counsel? A sponsor that cannot name its counsel, or that treats the securities dimension as paperwork, is telling an investor something about how the rest of the deal is being run.
None of this is a substitute for due diligence on the property and the sponsor. It is a reasonably reliable proxy for operational seriousness, and it costs an investor almost nothing to check.
For sponsors
Three things prevent most of the problems above: choose the route before marketing begins, not after; engage securities counsel at the outset rather than to fix something; and document the relationship trail if relying on 506(b), because the pre-existing relationship requirement is proved by records rather than by recollection.
This guide is educational and general; it is not legal advice. Securities law is technical and fact-specific and Regulation D has been amended in recent years; engage qualified securities counsel.
Frequently Asked Questions
Are real estate syndications securities?
Generally yes. A passive interest in an entity that owns real estate, where profits depend on the efforts of a sponsor, is typically an investment contract and therefore a security. That means the offering must be registered or exempt, and most syndications rely on an exemption under Regulation D.
What is the difference between 506(b) and 506(c) for a syndication?
Rule 506(b) prohibits general solicitation and permits sale to accredited investors plus a limited number of non-accredited purchasers, with accredited status generally self-certified. Rule 506(c) permits general solicitation but requires all purchasers to be accredited and requires the issuer to take reasonable steps to verify that status.
Can a syndication be advertised publicly?
Only under Rule 506(c). A 506(b) offering cannot be generally solicited, which means no public advertising, no open websites promoting the deal, and no social media marketing to people with whom the sponsor has no pre-existing substantive relationship. Doing so can destroy the exemption.
What does verification of accredited status involve under 506(c)?
Reasonable steps to verify, which is a higher standard than accepting an investor’s representation. The rule sets out non-exclusive methods including reviewing financial documentation or obtaining written confirmation from certain professionals. Self-certification alone is not sufficient under 506(c).
What filings does a syndication have to make?
A Form D notice filing with the SEC, generally within a short period after the first sale, and corresponding state notice filings where investors are located. These are notice filings rather than approvals, and missing them has consequences that vary by state.
Sources
- Securities Act of 1933, Regulation D, Rules 501, 502, 503, 506(b) and 506(c)
- Securities Act of 1933, Section 4(a)(2) and Rule 152 (integration)
- SEC v. W.J. Howey Co., 328 U.S. 293 (1946)
