Copyright © 2015 Eric Tyson and Robert S. Griswold. All rights reserved.
Most real estate partnerships that seek a broader participation abide by the Securities and Exchange Commission (SEC) regulations, which outline and control the process of raising capital through solicitation. In order to avoid the stringent public disclosure regulations required of public offerings, real estate partnerships are often organized under the simpler private placement rules, and are thus known as private placement partnerships.
An offering to invest in a real estate partnership would qualify as a private placement as long as the organizers follow the requirements of the SEC's Regulation D. Each state also has specific legal requirements about raising money from investors located in that state, with detailed provisions to qualify for a Blue Sky exemption that allows the sponsor of the private placement to avoid the strict formation requirements and ongoing reporting of public offerings. One example is that there may be limits to the total number of investors or requirements that the sponsor have a preexisting relationship with the investor.
Also, there are different rules for each of the proposed participants who meet the criteria to qualify as an accredited investor, which means that they have significant net worth. The SEC wants to make sure that the individuals being solicited for these private partnerships have the experience and skills available to evaluate these complicated and essentially illiquid investments. When raising money from multiple investors, consult with legal counsel and tax advisors who are familiar with both federal and state laws concerning private and public offerings.
Novice real estate investors should avoid any attempt at forming private placement partnerships for investing in real estate. Should you be successful investing at a smaller scale, you may find such investment alternatives attractive. But there are many pitfalls for the inexperienced; you should only consider larger partnerships when you're able to make the full-time commitment to real estate investing, and then you should consult with experienced real estate and legal experts at every step.