In the past, generating ongoing success usually meant making offering after offering. You would create a Regulation D offering, submit it, attract investors, then conclude it. Then you’d do it again. It was a case of rinse and repeat, but that repetition was challenging.
Today, there’s a better way. Dubbed the “new syndication model”, it stands the old method on its ear. You no longer need to roll out syndication after syndication, asset after asset. Instead, you can build a thriving business, expand your network of investors, and avoid the headaches and hassles through series offerings.
Note: Please note that this information should not be considered legal advice in any way.
What Is the New Syndication Model?
Before we dive too deep, let’s explain the underlying concept here. In the past, you had to issue PPM after PPM. It was a lot of work and required considerable effort to keep going, project after project. With the new syndication model, you can leverage series LLCs for your investment projects. So, instead of separate PPMs, you set up a singular platform and simply roll out amendments to the offering over time.
It simplifies the process, reduces the amount of time and hassle you deal with, cuts costs, and allows you to build a thriving network of investors on the sample platform. All investors come together into a single LLC through different series, with different assets, targeting different properties, and more. For those doing syndications into real estate, hotels, or anything along those lines, the new syndication model will simplify your life.
The Evolution of Reg D Offerings
Reg D offerings are the most common in the industry. However, that doesn’t mean they were the perfect vehicles for growth, although their ongoing evolution has changed them (and not necessarily for the better).
Traditionally, you were allowed up to 35 nonaccredited investors with no advertising at all. Since 2012, that’s changed. You can now engage in general online marketing, but you’re limited to only verified accredited investors.
What that means is you’re stuck with a shrinking pool of investors, but the ability to market more and attract additional accredited investors.
With those changes, many people have shifted over to Regulation A and Regulation CF. They’re seen as highly usable platforms for going through a qualification or through due diligence with a crowdfunding portal to ensure that your platform is good. Then it’s just a matter of rolling things out.
The Difference with Series LLCs
Series LLCs offer a viable alternative to the traditional method, but assets in those series can have different terms, investor rights, and fees. It truly is that deferring syndication, but you get all the benefits of being able to advertise and market the general solicitation in email blasts. It’s all about availability to investors, while getting the benefit of raising capital for your offering.
Let’s look at a quick example: If you’re traditionally just making it up, doing $5 million PPM Regulation D offerings, we’re saving you money. If that’s your model, you have different rigging tees to get up to the $75 million mark. For many people, that means several years of Regulation D syndications, ongoing legal fees, time spent, and costs incurred just to bring everything together.
With series LLCs, the process is different. You can create 14 different series, still buying those same $5 million equity assets you’ve traditionally targeted. You undergo this qualification process once you complete all state filings, but now you’re just rolling out offerings one after another. You can also advertise online.
You get all the benefits of asset-by-asset investments, but you’re using a platform that only needs to be set up once. It eliminates the costs and time constraints required to start from scratch with a new PPM each time.
While Regulation A has become synonymous with series offerings, Regulation CF also plays a big role. With Regulation CF, there’s a $5 million cap on how much you can raise annually. However, so many people are building short-term rental properties, you may only need $100,000 or $200,000 in equity for every property.
Traditionally, it’s not worth going through all the time, work, and cost to do a separate syndication for each small property. It’s easier to do a fund. However, it’s not easier to capitalize on a fund if you don’t have much experience.
That’s where Regulation CF is beneficial because you can roll into separate series underneath the same LLC, including different rental assets, without having to go through the entire PPM process. Ultimately, it saves you costs while creating new opportunities to market online and complete more deals.
In the past, you might have had 20 different properties, and that would require 21 different LLCs, including the holding company. Each LLC held different assets, but the structure provided some protection. It also came with administrative costs and complexities. However, thanks to the new series LLC rules, you can now do all of that through a single LLC and a separate subsidiary series.
As a platform, it allows you to do more marketing and advertising on a syndication-by-syndication basis. Your fees, investor rights, and everything else can also change series by series. However, you save money, accomplish everything at once, and then add to your series as necessary.
Does the New Syndication Model Always Make Sense?
To be clear, the new syndication model does not always make sense. If you’re not interested in making sequential offerings, then a conventional Regulation D offering might be the best path forward. Understand that there is no one-size-fits-all solution that will account for everyone’s needs.
However, if you’re using a real estate syndication model in which you’re funding projects on a deal-by-deal basis, the new syndication model is a superior way for you to crowdfund to bring in capital through one platform to differentiate it from a blind pool or general funds.
For instance, suppose you have a limited amount of experience. In that case, it’s challenging to capitalize if you cannot show proof of many previous successes. With the new syndication model, you can put more focus on the asset itself, rather than your experience.
It’s also important to note that the new syndication model is well-suited for real estate deals, but it can be used for almost anything. That includes collectibles, art, vehicles, white, baseball cards, and more. This model brings a great deal of versatility to the table, which benefits you and your fundraising success.
Use Cases and Questions Surrounding Series LLCs
Series LLCs are probably unfamiliar to most people. In this section, we’ll discuss some of the specific use cases and important questions surrounding these vehicles to help you better understand them and their value to your fundraising efforts.
Breaking Up Large Projects
One instance in which series LLCs prove very valuable is with large projects. For instance, suppose you have a 500-acre tract of land and want to capitalize on its piece by piece. You might have one section for commercial needs, another for residential use, and yet another for another particular purpose. A series LLC allows you to roll it all together.
However, this means you’re only taking the investments out in bite-sized chunks. You’re not raising $75 million for a master-planned subdivision opportunity. You’re raising $2 million for one part, $2 million for another, $5 million for a third, and so on. Each one can be different, too.
For instance, some may have development fees. Others may have GC fees. This offers a lot of flexibility and the chance to set up offerings that attract specific types of investors or that offer unique benefits.
Series LLCs and PPMs
Is it possible to do a single PPM for a series LLC? You can do Regulation D series offerings. They’re very similar to series offerings under Regulation CF or Regulation A, meaning there’s a general PPM. Then there are separate series supplements that get released as more series are added. These operate like a PPM mini as the separate series are added, but you can do it as a single PPM with the subsidiaries all attached.
Note that “PPM” or “private placement memorandum” is the term we use when discussing Regulation D. Regulation A does not use PPMs. Instead, these deals require a similar document called an offering circular. In CF, the term is “offering memorandum”. However, for all practical purposes, these three documents are the same.
Ultimately, it boils down to a disclosure statement that provides critical information to investors about the issuer and includes a laundry list of risk factors, including all the reasons investors might lose money.
Can You Get around the $5 Million Cap on Regulation CF Deals with Series LLCs?
The short answer is “yes”, but we need to delve into the topic to truly understand what’s going on here. With Regulation CF deals, you’re limited to $5 million per year. It’s not just one company, either. If you have five companies, you’re limited to $5 million across all of them. You’ll reach that ceiling very quickly, which is one reason why these deals can seem quite limiting.
To clarify, if you have five companies all raising money, it attaches to the management and 205 plus owners of those companies. So long as you’re not in the management role and have less than 20% interest, it can be structured where you can keep rolling out offerings.
What About Construction or Mezzanine Loans?
With Regulation A, there’s a limitation on the Investment Company Act. If those mezzanine or construction loans are secured by real estate, they are exempt from the Investment Company Act, and you can use series LLCs. There are many other ways to get around the Investment Company Act, but for both Regulation CF and Regulation A, you’re not allowed to do just securities funds. That includes doing unsecured loans to third parties.
Can the Series Model Be Used in Acquiring Businesses?
Yes, you can use the new series model to acquire a business, but you must be specific. You cannot have a “blank check company” without any type of structure, guidance, or business plan. You must identify your business and state the purpose – to acquire this business and then move forward.
This also ties back to the Investment Company Act. If you’re acquiring an entire business or at least 51% of that business, and you have management controls or the means to control voting, it falls outside of the Act. You can do this on a business-by-business basis with roll-up opportunities.
In Conclusion
Series LLCs give you the ability to amplify your message and market your offering(s). They cut your costs, reduce the time commitment necessary, and offer numerous other benefits. You’ll also find they’re well-suited to things beyond real estate. However, we do tend to see them more in relation to real estate-related projects because it’s the easiest asset class to roll into and a series also provides new opportunities in the form of REITs.
With that said, series LLCs are not right for all needs. Make sure you’re using the right tools for your specific needs and goals. Interested in learning more about series LLCs? Contact us today to schedule your free consultation.