Crowdfunding Lawyers

Fractional Ownership and Syndication through Reg A: An Introduction

August 4, 2023
Fractional Ownership and Syndication through Reg A: An Introduction

Chances are good that you’ve heard the term “fractional ownership” before. It’s a popular concept today. If you’re familiar with timeshares, then you understand the basic concept – a single asset owned by multiple people, each with specific usage rights to the asset.

Today, fractional ownership has expanded well beyond the timeshare world. We have fractional ownership of housing and vacation homes, of art and fashion items, collectibles, rare wines, and more. It’s also something you can use with real estate – which is what we’re going to focus on in this post.

What Is Fractional Ownership?

 

In a nutshell, fractional ownership is a model that democratizes ownership of an asset and breaks it up over a pool of owners. Instead of a single person owning a piece of property, ownership might be split between five or 10.

Fractional ownership doesn’t have to mean that you have use rights to the property in question, either. That’s true in some cases, such as fractional ownership of a vacation property, but not in all. For instance, if 50 people owned a share of an apartment building, each could receive a return based on the property’s rents, allowing them to add their fraction to their individual investment portfolios.

Using Reg A with Fractional Ownership and Syndication

 

Reg A allows you to reach a massive audience with your syndication offering with few limitations. And you can use it with fractional ownership. Essentially, that allows you to apply that $75 million cap and then break it up into different series or asset pools, then use those to acquire different assets, all within the same deal.

Another way to look at this is that you’re building a platform that can allow you to grow for years on end. It ultimately becomes a way to crowdfund almost everything you might want to do, all under the same umbrella.

Can You Use Reg D with Fractional Ownership/Syndication?

 

Yes, you can use Reg D with fractional ownership. However, it comes with quite a few limitations on both how you can market your deal and who you can market to in terms of audience. Essentially, you’re limited to about 10% of America – those people who can be considered “accredited” investors. The other 90% of America is excluded from these deals, which means that you’re severely limited in terms of growth potential.

How Are Fractional Deals Structured?

 

In terms of creating a structure or what a fractional deal looks like, and so that you understand it is very much a Regulation A offering, you must go through the whole qualification process. It’s very similar to any other offering, except you’re disclosing and explaining that you’re going to do a series syndication model.

Underneath this, generally using a series LLC, you’re just filing amendments to create more and more of these separate series underneath the umbrella of Regulation A, so they all meet the qualifications. It’s faster and easier than going through the months and months of dealing with the SEC, getting the comments responding to them; it’s a far faster process once your legal partner does the heavy lifting from the get-go. Ultimately, you have the financial sponsors, and they are controlling the fund as the management. You have the series fund, then create each separate series underneath.

Is Fractional Ownership the Right Option for Your Deal?

 

Fractional ownership can be a remarkable way to accelerate growth and ensure that you’re able to use the same platform for a very long time moving forward. It helps to reduce the hassle and costs involved with doing individual deal after individual deal, and it also ensures you’re able to avoid dealing with the SEC and their requirements.

However, it might not be for everyone. If you only want to do single deals one after the other, then fractional ownership might not be the best path. If you want to only target accredited investors because your deal requires that kind of wealth, then fractional ownership may not be the platform for you.

It’s also important to understand that you should never go down any investment path without access to an experienced legal partner. You’ll need them to help you structure the deal, file paperwork, and ensure that you don’t accidentally step out of bounds, while maximizing the flexibility and growth potential of your offering.

Not sure where your deal falls? Unsure if fractional ownership is the right path or how to get started with it? Get in touch with us at Crowdfunding Lawyers today to schedule your free initial consultation.

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