Syndication is pooling investment capital from several individuals (the syndicate) to start a business. The business can be in real estate, a joint venture, banking, or research and pharmaceutical development.
The advantages of syndication are many: pooled resources can buy bigger and better properties, the velocity of money increases, and investors can spread their risk by investing in multiple deals. However, because state and federal securities laws govern the sale of interests in a property through syndication, it’s essential to understand the basics before diving in.
This article will overview key aspects of securities law related to syndications-from what makes security, to exemptions from registration requirements, to prohibited practices. Here’s a compact guide that will come in handy for those considering investing through syndication.
What Is Syndication Law?
Syndication law is the body of law that governs the syndication of securities. Securities syndication is how a group of investors pool their money to invest in security. The syndicate is typically led by an investment bank, which helps to sell the security to the public.
Syndication law includes federal and state laws and regulations promulgated by securities commissions. The most important federal law governing syndication is the Securities Act of 1933, which requires that a syndicate register its offering with the Securities and Exchange Commission. The Blue-Sky laws also play an essential role in syndication, as they govern the offer and sale of securities within each state.
Syndicate law is a complex and ever-changing area of the law, so syndicates need to consult with experienced counsel from firms like Moschetti Law before entering into any syndication transaction.
Tax Liability In Syndication
When it comes to taxes, syndications can be a bit of a confusing topic. This is because syndications are taxed as partnerships, meaning that each investor is taxed on their share of the income. However, there are some important distinctions to keep in mind.
First, depreciation and amortization expenses are divided among the partners based on their ownership interests rather than deducted per property. This can have a significant impact on an investor’s tax liability.
Additionally, any debt used to finance the syndication is also divided up among the partners, affecting an investor’s taxes. As a result, it’s essential to work with a qualified tax advisor to ensure that you are correctly paying taxes on your syndication investments.
Syndications have significant tax benefits to investors. First, investors can claim depreciation as they hold properties for over five years before selling. Secondly, they get low capital gain tax rates and better mortgage interest deduction rates. Finally, even though investors can earn passive income quarterly, they can be exempted from self-employment tax.
Filing Form D
If you’re syndicating a real estate deal, you’ll need to file Form D with the SEC. This form is used to disclose information about the offering, and it’s required by law if you’re selling securities. The process can be confusing, but we’ve got a step-by-step guide to help you get it done.
First, you’ll need to gather all of the required information. This includes the total amount of money raised, the number of investors, and the deal terms.
Once you have all this information, you can start filling out the form. Again, it’s vital to be accurate and complete in your answers, as this form is used to protect investors.
You’ll need to file it with the SEC once you’ve finished filling out the form. You can do this online, or you can mail it in. Either way, once it’s filed, you’ll be able to move forward with your syndication.
Exemption In Syndication
Under Rule 506 of Regulation D of the Securities and Exchange Commission, there are two types of private placement: 506(b) and 506(c).
With a 506(b) placement, an issuer can raise unlimited money from many accredited investors and up to 35 non-accredited investors. 506(c) placements are ‘generally speaking’ only open to accredited investors.
The main difference between the two types of placements is the ability to advertise. Issuers doing a 506(c) placement can use general solicitation or advertising for marketing their offering, while issuers doing a 506(b) placement cannot.
For this reason, 506(b) placements are sometimes called ‘traditional private placements,’ while 506(c) placements are called ‘public’ or ‘broad-based’ private placements. The increased ability to market a 506(c) placement comes at a cost, though, as issuers must take extra steps to verify that all purchasers are accredited, investors. So, the right type of placement for you depends on your goals and situation.
As you can see, syndication law is complex. This guide is by no means exhaustive, but it should provide a good foundation for understanding the basics of the law.
If you have any specific questions about syndication or would like more information, it is advisable to consult an attorney.