Getting Into Syndication

Ever wonder how ‘investment groups’ get started and how you can get in on them? If you’re not in the country-club circuit, you can still start building a portfolio.

Expert securities attorney, author and CCIM senior emeritus instructor Gene Trowbridge shares his knowledge. For experience and expertise in the realm of securities law and real estate investment, look no further than Gene Trowbridge, founding partner of Trowbridge Law Group in Lake Forest, California.

Trowbridge received his certification from CCIM (Certified Commercial Investment Member) in 1977, became a senior instructor in 1979, and proceeded to teach for 40 years. His book, “It’s a Whole New Business,” is in its fourth edition.

“I’m now a senior emeritus, which means I don’t teach courses, but I still have a title,” he told California Business Journal. “So if there are special projects or anything they need help on, they can ask me. During my years teaching, I was also a commercial broker. I began my career in Minnesota, right out of college, and started with small investments. I moved my family to California in 1981 and gave up being a real estate broker as a trade – though I still have a license – and became a syndicator, where I raised money from investors to buy real estate.”

His early projects included raising money for multifamily syndications, a home park syndication, and multiple self-storage facilities in the Riverside and San Bernardino County areas.

“I was raising money for my syndications, using the National Association of Broker Dealers (now FINRA) community, and had quite a quite an extensive ‘selling group,’” he says. “It was going very well but there became a point when there was pressure on me to do deals larger than I was comfortable with. I decided I would stop and go to law school and become a syndication attorney. This way, I could stay in the loop by providing counsel but not be forced to do deals I wasn’t comfortable doing.”

After graduating law school in the 1990s, he had 20 years of experience as a syndicator and was now a securities attorney – a specialization that is in high demand because of the risk involved and the prohibitive cost of Errors & Omissions (E&O) insurance.

“I’m not the only attorney in this space but there is a limited number of us doing securities law,” he says. “Many large firms don’t allow it. I’ve often said there are people who may know as much about it as I do, but their hands are tied because their firm won’t let them do the work. So it’s a good place for me. I carry insurance and always have. When people call me, it might be their second or third call, but by the time we get through talking about my experience and how it relates to what they’re trying to do, they usually see I’m a good fit.”

Trowbridge makes a point of interviewing clients for educational content and always asks them how they first got started in real estate investing.

“The answers are almost always the same and they’re consistent with my experience as well,” he says. “I found an apartment building in St. Paul but didn’t have enough money to buy, so I called three fellows I went to college with. They were all established – a CPA, an attorney and an insurance broker. The four of us put up $40,000, or $10,000 each, and we bought our first building.”

That is almost always how it starts. Someone finds a property they want to buy but don’t have enough money, so they reach out to contacts and before long, they are building an investment group. Before you launch into group investing – or syndicating – it’s best to get clear on the differences because each has very specific legal guidelines are a mixture of federal securities law and state real estate law.

“Everything that Wall Street handles is security. I only handle what’s called ‘private placement.’ The rule is that every security must be registered with the Securities and Exchange Commission (SEC) unless it’s exempt. These are governed by Regulation D. So, for the most part, investors are not advertising or going to Wall Street or a stock brokerage firm. You find a building and the investors and once the purchase is made, you run your business with no involvement from the SEC, other than some informational forms at the beginning that we file.”

How big is private placement in the world of investment? Trowbridge said the SEC publishes an annual report every March about the business volume of private placement. In 2022, the figure was $2.2 trillion in the United States. And of that figure, 99% of private placement was Regulation D offerings.

“In the early 1980s, Regulation D was promulgated and there was one part of it which is now called Rule 506b – that’s how I was raising money. You could raise all the money you wanted with all the ‘accredited investors’ you wanted and you could have an additional 35 ‘sophisticated investors,’ but you could not advertise or solicit. You had to have a pre-existing, substantive relationship with them.”

“There’s a lot of money being raised in private placements,” Trowbridge says. “About 95% of that $2.2 trillion is raised in what’s called 506b. When the JOBS Act came out in 2012, they added a rule and that said the original 506 is now going to be called 506(b) and there’s really no change in what we just talked about. You must know everyone. There’s no advertising – unlimited accredited investors, unlimited dollar amount and 35 sophisticated investors. But to promote capital formation – a lot of that $2.2 trillion is used to fund companies that hire people and generate jobs. To increase this, the JOBS Act introduced 506(c).”

506(c) has basically the same structure. You can raise as much money as you want from as many accredited investors as you want. However, you can advertise or solicit and take on investors you don’t know, but because of that, you can have no “sophisticated” investors.

The investors for Regulation D, Rule 506c must meet the criteria of being an accredited investor. Though definitions can vary, broadly speaking, they must be an individual with “an annual income exceeding $200,000 ($300,000 for joint income) for the last two years with the expectation of earning the same or a higher income in the current year. Or a net worth exceeding $1 million, either individually or jointly with their spouse. The SEC also considers a person to be an accredited investor if they are a general partner, executive officer, or director for the company that is issuing the unregistered securities,” according to Investopedia.

“The JOBS Act also added regulation crowdfunding and crowdfunding has gone on for a long time but initially, there wasn’t an expectation of profit whereas investing definitely has an expectation,” he says. “So now, they said, ‘Let’s let people raise money by advertising to everyone but because it’s risky, we’re going to limit it to $1 million in any one offering. They eventually did raise it to $5 million but for the business I’m in, real estate, that isn’t very much. My partner Jonathan Nieh does do some regulation crowdfunding offerings. Some are using this to expand their small businesses but others are using to get into investing and they’re starting with vacation homes.”

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