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Navigating the world of real estate syndication can be incredibly rewarding, but it also comes with critical legal responsibilities. One of the most vital areas that every investor and syndicator must understand is securities law. Ignoring or misunderstanding these laws can put your entire investment—and your investors—at risk.
In this guide, we’ll unpack the complexities of securities compliance with insights from legal expert Kim Lisa Taylor, helping you build a compliant, trustworthy syndication business and attract more motivated seller leads with confidence.
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Why Securities Laws Matter in Real Estate Syndication
There’s a common misconception among real estate investors that securities laws don’t apply to them. However, once you start raising capital for deals—especially from passive investors—you’re most likely dealing with securities.
Kim Lisa Taylor emphasizes that there are four types of people who ignore securities laws:
- Those who don’t know
- Those who don’t care
- Those who are in denial
- And those who end up in jail
Failing to comply with securities regulations not only jeopardizes your investment but can also lead to serious legal consequences. Distributions can be suspended, and investor funds may be used for legal defense. The risk simply isn’t worth it.
The Three Key Documents Every Investor Should Look For
If you’re a passive investor considering a deal, or a syndicator inviting others into your offering, make sure these documents are in place:
- Disclosure Document – This outlines all potential risks involved in the investment.
- Subscription Agreement – A contract where the investor certifies their understanding of risks and their financial ability to absorb potential loss.
- Investment Contract – Often in the form of an operating agreement or promissory note, this formalizes the agreement between the investor and the syndicator.
Investors should also read educational material—such as Kim Lisa Taylor’s book, which includes a dedicated chapter for passive investors—to better understand what to look for in offering documents.
What is an Exempt Offering?
An exempt offering refers to a legal way of offering securities without having to register with the SEC. Once your deal involves investment contracts or promissory notes, it falls under the definition of a security. At that point, you either:
- Register the offering (a costly and time-consuming process)
- Qualify for an exemption under federal or state regulations
Given the urgency and cost concerns in real estate transactions, registering with regulators is rarely an option. This is where exemptions come in.
Common Securities Exemptions in Real Estate
The two most commonly used federal exemptions are:
Regulation D Rule 506(b)
- Allows: Unlimited accredited investors and up to 35 sophisticated but non-accredited investors
- Restrictions: No general advertising or solicitation
- Requirement: You must establish a pre-existing, substantive relationship with investors
- Verification: Have discussions around their financial capacity, investment experience, and alignment with the deal’s timeline and returns
Regulation D Rule 506(c)
- Allows: Unlimited fundraising from accredited investors only
- Allows General Advertising: You can publicly market your deal
- Requirement: Investors must undergo third-party accreditation verification (based on income or net worth)
What Is a Substantive Relationship?
To comply with 506(b), it's essential to establish a pre-existing substantive relationship with your investors before presenting the deal. This means:
- Knowing their financial background
- Understanding their investment goals
- Ensuring they’re capable of making informed investment decisions
Without this relationship, your offering risks being seen as a public solicitation—making it non-compliant under 506(b).
Understanding State-Specific Offerings
While federal exemptions are most commonly used, there are scenarios where a state-level exemption makes more sense. This is especially true if:
- The property is in one state
- The sponsor is based in that same state
- All investors also reside in that state
In such cases, intra-state exemptions can be used, governed by that state’s own securities regulations. Always consult a securities attorney to determine if this applies.
Why You Need a Securities Attorney
Trying to navigate securities compliance without expert guidance is like walking a legal tightrope blindfolded. A qualified corporate securities attorney will:
- Ask strategic questions about your project
- Determine where your investors are located
- Help identify the best exemption for your deal
Securities compliance isn’t one-size-fits-all. Each deal is unique, and working with a professional ensures that your offering is structured correctly from day one.
Avoiding Costly Mistakes
Illegal offerings can devastate your business. If regulators or even disgruntled investors challenge your deal, you may:
- Be forced to halt distributions
- Use investor funds for legal defense
- Face fines or legal action
The good news? These risks are entirely avoidable with the right preparation and legal compliance.
Key Takeaways:
Securities Laws Apply to Real Estate Syndications
If you’re raising capital from passive investors, you’re likely dealing with securities—and must follow federal or state laws accordingly.
Ignorance of the Law Can Be Costly
Violating securities laws can result in suspended distributions, investor lawsuits, or even criminal penalties.
Three Core Documents Are Non-Negotiable
Every syndication deal should include a Disclosure Document, Subscription Agreement, and Investment Contract (like an operating agreement or promissory note).
Understand What an Exempt Offering Is
Most real estate syndications rely on exemptions (not full SEC registration) to raise capital legally and efficiently.
Most Common Federal Exemptions: Rule 506(b) and Rule 506(c)
506(b): No general solicitation; allows up to 35 sophisticated investors
506(c): General solicitation allowed; investors must be verified as accredited
Establish a Pre-existing Substantive Relationship
To legally raise funds under 506(b), you must know your investors beforehand and evaluate their financial suitability.
State-Specific Offerings Can Be an Option
If your deal, investors, and property are all in the same state, an intra-state exemption might apply.
Work With a Securities Attorney
Legal guidance is essential to ensure your offering is compliant and appropriately structured.
Non-compliance Jeopardizes Investor Funds
Illegal offerings may force you to use investor money for legal defense or result in regulatory shutdowns.
Compliance Builds Long-Term Trust and Growth
Following the law doesn’t just protect you—it builds credibility and lays the foundation for a sustainable, scalable investment business.
Final Thoughts
Building a successful real estate syndication business isn't just about finding great deals—it’s about building trust and ensuring compliance. Understanding and respecting securities laws is the foundation of a sustainable and reputable investment career.
Whether you’re just starting or already scaling, take the time to educate yourself, work with qualified professionals, and protect your investors’ money like it’s your own.
Ready to Grow Your Business With Confidence?
If you're ready to build your real estate business the right way, it’s time to take compliance seriously. Partner with a securities attorney, understand your exemptions, and confidently acquire motivated seller leads knowing your foundation is secure.
Don’t leave your future to chance—invest smart, and stay protected.
