Securities Regulation and Offering Frameworks

Under the Howey Test (SEC v. W.J. Howey Co., 1946), an investment contract is a security if it involves: (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profits, (4) derived from the efforts of others. Real estate syndications and fund offerings clearly meet all four criteria—investors contribute capital to a common pool (the LLC or LP), expect profits from property appreciation and income, and rely on the sponsor's expertise and effort. This classification triggers registration requirements under the Securities Act of 1933, unless an exemption applies.

Regulation D provides three exemptions from SEC registration that are widely used in real estate capital raising. Rule 506(b) allows unlimited capital from unlimited accredited investors and up to 35 sophisticated non-accredited investors, but prohibits general solicitation (advertising). Rule 506(c) allows unlimited capital from unlimited accredited investors with verified accreditation status and permits general solicitation. Rule 504 allows up to $10 million from any investor type with fewer restrictions but no federal preemption of state laws. Most real estate syndications use 506(b) for its flexibility with non-accredited investors or 506(c) for its ability to advertise.

An accredited investor is an individual with income exceeding $200,000 ($300,000 with spouse) in each of the last two years with reasonable expectation of the same, or net worth exceeding $1,000,000 excluding primary residence. Entity accreditation requires $5 million in assets. Under 506(c), the sponsor must take "reasonable steps" to verify accreditation status—typically through third-party verification letters, tax returns, or financial statements. Under 506(b), investor self-certification is sufficient. Approximately 13% of U.S. households qualify as accredited investors.