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As a founding partner of Trowbridge Law Group LLP, Gene’s law practice concentrates on the syndication of commercial and investment real estate through both debt and equity. Gene has represented over 650 clients in this area of practice. The median offering size is $3,000,000, but he has done individual offerings of over $6 Billion. His practice writes offerings under Rule 506b and 506(c) of Regulation D.
As a former syndicator, who for ten years raised investor capital through the broker-dealer community, he is able to communicate with his clients on both the technical and the practical aspects of state and federal securities laws. As a long-time CCIM and CCIM Senior Instructor, Gene has won numerous awards for his teaching ability. His book “It’s a Whole New Business!” is really a “how-to manual” on real estate syndication.
In this episode, Gene Trowbridge discusses the importance of pre-existing relationships with syndicators and how it needs to be built on trust and mutual respect. He addresses questions every passive investor should ask themselves to better equip them to make informed decisions.
Gene explains the main difference between a 506b and 506c offering and uncovers what an accreditation status is to prove to the government that you’re not a liability that they need to protect. He also shares how you can use your assets as an accreditation, such as property or tangible assets.
Mr. Trowbridge shares his vast experience and knowledge on syndication, and reveals some fascinating insights that you won’t want to miss!
In This Episode
- How Gene got into the real estate space.
- Questions every passive investor should ask.
- Is the industry shifting more towards 506c offerings?
- How and why you need to obtain an accredited investor status.
- What is the mission of SCC?
Welcome to today’s show on Wealth Strategy Secrets. We’ve got another great episode for you today, and we’re joined by Gene Trowbridge. As a founding partner of Trowbridge Law Group, Gene’s practice focuses on the syndication of commercial and investment real estate through both debt and equity.
Gene has represented over 650 clients in this field, with the average offering size being $3,000,000, though he’s worked on individual offerings exceeding $6,000,000,000. His practice includes offerings under Rule 506(b) and 506(c) of Regulation D. As a former syndicator who raised investor capital through the broker-dealer community for 10 years, Gene has the unique ability to communicate with clients about both the technical and practical aspects of state and federal securities laws.
Additionally, as a longtime CCIM and CCIM Senior Instructor, Gene has earned numerous awards for his teaching abilities. Gene is also the author of the book It’s a Whole New Business, a comprehensive guide to real estate syndication. Gene, welcome to the show.
Thank you, Dave! I appreciate you having me on here. It wasn’t necessarily the easiest thing we had to do today, but it worked!
You’re in Florida, and I’m in California. It’s raining heavily here. I live in the desert, so this is unusual.
At least we’re not in Buffalo.
Exactly. That’s for sure. I’m a Minnesota native, so I got out of there. I remember those cold winters all too well. This is more than anyone needs to know, but I played a lot of hockey when I was younger. That was a long time ago, and I got a lot of frostbite. Even now, when I go to Chicago in the winter, my feet are always cold. They just never warm up.
No fun at all. I gave up the winters—and the state taxes. I’m glad to have moved further south.
Good for you. I appreciate you taking the time, Gene. You’ve got such a unique background, having raised capital in the private offering space and then transitioning into law. I think our listeners are going to learn a lot from you, especially the passive investors who are focused on amplifying their wealth. I’m sure you have some great insights on legal aspects, due diligence, and things to watch out for. But first, could you tell us a little about your background and how you got started in this space?
Sure, Dave. I started as a commercial real estate broker in Minnesota, selling commercial real estate after college. I had an accounting degree but didn’t want to be a CPA, so I decided to sell the biggest ticket item I could find, which was real estate. I did that for a while, and like many others in this industry, I eventually became an investor. I came across a property that was too big for me to buy on my own, so I needed to raise money from other people. That’s when I learned about syndication and what security is.
The first half of my career was as a commercial real estate broker and a syndicator. I did 16 offerings, most of which involved two properties per offering. We built self-storage throughout Southern California—poured a lot of concrete and painted a lot of doors orange because, at that time, we were selling our projects to Public Storage. Back then, they weren’t building properties; they were just buying existing ones. I was raising the capital through the broker-dealer community.
Then one day, a couple of things happened that made me reconsider growing my business in a way I didn’t want to. So, I went home to my wife, and we sat around the kitchen table—where all the great decisions in my life have been made—and I said, “You know, I think I’m done trying to get bigger.” Back then, there weren’t back-office companies that could help with the business side of things. You were doing everything yourself. Scaling up just wasn’t within my comfort zone, so I told her, “I think I’ll do what I’ve always wanted to do—I’ll go to law school.”
At 42, I enrolled in law school. At 45, I passed the California bar, and since then, I’ve been practicing law. When I went to law school, I knew exactly what I was going to do. I was going to be a securities attorney—and that’s what I did. I’ve had a few partnerships, and my current firm is Trowbridge Law Group. There are six of us, and we work entirely virtually, with everyone spread across the country. It’s been a good run.
As you mentioned in the introduction, having some practical experience—and probably having made both good and bad decisions—helps me when I work with my clients. It’s important to ensure that what syndicators are doing is truly supportive of passive investors because that’s really what it’s all about. When you get into syndication, it’s not just about the real estate—it’s a people business.
Syndicators are often seen as having all the money, but in reality, they don’t. That’s what everyone assumes, so they need to trust that the syndicator is managing their money within the right framework. And that’s where securities laws come in. Did the syndicator give full disclosure to the investor before they invested, allowing them to make an informed decision? That’s one aspect of syndication law. The other is ensuring that the people raising money for syndications are the right ones.
That’s what the securities laws—both from 1933 and 1934—are about: full disclosure and making sure the right people are involved in raising money. So, yeah, it’s great to be in this space. And I love it, Dave, when I get a call from people who’ve been in the passive investing world for a while and say, “Gene, I’ve been in 10, 15, 20 deals, and now I want to be a syndicator.”
That always makes me pause, and after a thoughtful moment, I ask, “Why? Why would you want to do that? Aren’t you doing well as a passive investor?” “Oh yeah, I’m doing well, but I could make so much more money,” they say. And my response is always, “Yes, but with so much more risk.”
So, it’s an interesting shift from being a passive investor to becoming a syndicator. However, there are a lot of things passive investors should look at when considering investments, and I’m happy to talk about those.
That’s a really interesting insight, Gene. The risk factor is often underestimated. But I think what our audience would appreciate is understanding the basics, especially those who may be new to this.
Many are familiar with investing in Wall Street, but when they transition to the private space and get into their first syndication, all of this is new to them. Let’s level-set for them. Could you explain the Regulation D exemption, Rule 506(b), Rule 506(c), and other securities laws in a way that a new investor could understand?
I could explain that, but I think there are a few questions that passive investors should ask before we dive into the details. And for any syndicators out there, they’d better be ready to answer these questions, because if they can’t, they might not be fulfilling their duty to investors. The priority is making sure investors are protected.
The first question a passive investor should ask is, “I like your deal, Dave. I have $50,000 and I’m ready to invest with you. What happens next?” What happens if something happens to you? That’s a stopper right there, isn’t it? You better have an answer. Our company won’t take on a client who says, “Well, you know, we’ll figure it out.” No.
We need to have that addressed upfront. We need to have a manager LLC with at least two people. The lender is going to require that there are at least two people, so someone can take over. I’m not just talking about death. You know, we’ve had COVID, hurricanes, and all sorts of things that have happened, diminishing the sponsor’s capability to manage the money that other people have given them. So, it’s important to have continuity.
The next thing I think an investor should ask is, “Have you done this before, Dave?” And if Dave has to answer, “No,” then what does he have in his bag of tricks or experience to tell the investor that just because he hasn’t done it before, it doesn’t mean they shouldn’t invest with him? Because all of us have had to answer the question, “No, I haven’t done it before.” We all need to get past our first deal.
I’m not saying that a passive investor shouldn’t invest if the person hasn’t done a deal before. I’m just saying, what else is there? In my case, when I went out to do my first deal, I probably owned 10 properties and I was a CCIM. I was teaching people. I had a college degree, and I had some background. The first people who invested in my first deal were people who knew me, and that’s where you’re going to have to start. So, I always laugh when I hear the question, “Have you done this before?” I say, “Hell yes, once!” You need to get to that point. Once you get there, then you’re on your way.
The next thing an investor should ask is, “Hey, Dave, are you going to have any skin in the game?” Skin in the game could mean money you’re going to invest or the fact that you’re going to have to sign on the note, whether it’s recourse or nonrecourse. There’s still liability on your part if you sign on the note. An investor needs to know that the syndicators in this deal with them have invested their own money and time and are willing to take on the risk. It’s a team effort.
And then the last thing I think the investor should ask is, “Hey, if I need my money back, Dave, how does that work?” Dave needs to know what his operating agreement says about liquidity, and he should be able to explain it in a way the client can understand.
Those are the first four questions I think anyone should ask when doing due diligence on the syndicator and the deal. We haven’t even talked about cash flow or what product type it is. Those are just crucial questions. And you can’t do a securities offering if you don’t have the answer to those questions. That’s fine, but I’m more concerned right now with protecting investors and being successful in answering these particular questions. Was that okay?
Passive investors should be mindful of who they want to invest with and assess the worst case scenario prior.
I agree with that, Gene. At Pantheon, we have a very extensive due diligence process that includes every one of those questions and many more. But I like how you summarized them in terms of priorities, because let’s face it, everyone is busy, right? As a passive investor, people are busy, so you need to be able to prioritize your due diligence and ask the right questions of the team. I 100% agree with that so people feel comfortable in making that investment.
I think that’s right. One of the things you know is that investors are looking at a lot of deals, and unfortunately, sometimes it comes down to one deal projecting a 6% cash-on-cash return and the other projecting 4%. And the investor makes a decision based on 6% versus 4%.
That’s a good question to ask, and it’s a good way to make a decision, but after some other questions are answered, in my opinion. The securities laws are the realm of the sponsor or syndicator. What I think the passive investor needs to know is that, for the most part, the syndicator is going to be raising money from people that they know. They won’t be advertising broadly to the public through social media or anything else.
If that’s the case when the passive investor reads the documents — which is one of the biggest mistakes we all make, both the syndicator and the passive — don’t read your documents or follow your documents. Boy, that’s terrible. But when the passive read the documents, they’ll see all sorts of garbled information about securities law, and they’ll see 506(b), as in “boy,” pop up. That’s a regulation that allows the syndicator to raise money from people they have a preexisting, substantive relationship with. That’s where most of the money is raised.
Dave, the last figures the SEC came out with, and they’re about a year old now (they’ll come out with new figures in March), was that the private placement business, which is what we’re talking about, was $2.2 trillion in the last 12 months that they analyzed.
That’s huge. It’s even bigger than the IPO market on Wall Street. And 94% of that money, which is a lot, is raised through 506(b) offerings, where the syndicator or sponsor raises money from people with whom they have a relationship. Now, this is somewhat complicated because most of the money is raised within the broker-dealer community. Broker-dealers, through their educational events, financial planning, and consultations, already have a base of investors. They don’t need to advertise, and in fact, they don’t want to advertise.
They already have their—this is going to date me—Rolodex, or their computerized list of investors. All those people are individuals with whom they have a pre-existing relationship. That’s where the money is raised. My most prolific client, since I started keeping track in 2014, has done 164 offerings with me, Dave, and they’ve all been 506(b).
He even goes so far as to say, “I’m only taking accredited investors.” So these are all people he knows—rich and smart individuals who can read the documents, understand the risks, and handle the types of deals he does. He doesn’t do any advertising. His database is closed. You couldn’t even get in today to invest.
That rule came out way back in 1981, and it was simple: raise as much money as possible from accredited investors, up to 35 sophisticated investors, and with no advertising or solicitation. That continued until 2012, when the JOBS Act came along, adding the ability to broadly solicit, advertise, and generally solicit.
They decided to keep what we used to call 506 as 506(b) but introduced 506(c) with the ability to advertise. Now, with a 506(c), you can go on social media and try to raise money from people you don’t know. But you can imagine how challenging that would be without a track record. I’m not going to send you a check for $50,000 if I don’t know who you are. You better have a good track record and a way for me to communicate with you ahead of time.
506(c) is available, but over 90% of the money is still being raised through 506(b). That means most of your investors will come from a syndicator or sponsor they already have some familiarity with. Wouldn’t you agree?
I was going to ask you, Gene, if you’re seeing the industry shifting more towards 506(c). It seems like that’s the direction things are headed.
In my company, we do a lot of offerings—10 to 15 a month—and we might do one or two 506(c) offerings every month. In many cases, it’s a newer syndicator who might have some track record but wants to generally solicit and advertise to build their database. So they go out, talk to people, get them into their database, and establish a relationship. Later on, they may switch to a 506(b) offering with those investors.
Another thing I’ve noticed is that a lot of syndicators have raised a lot of money in the past 5 or 6 years. It’s possible that their clients are tapped out—the money that was available for real estate is already invested. My client may not be able to do another $10 million offering with their existing clients. So, they turn to a combination of 506(b) and 506(c) in the same offering. Have you seen that?
I haven’t seen that, no. That’s something relatively new. In 2021, the SEC issued a rule on integration that made this possible.
In my practice, when we do that, we start with a 506(b) offering—people you know, up to 35 sophisticated investors. Then, we specify in the offering documents that at some point, we may switch to a 506(c). When that time comes, we notify the SEC with a Form D to indicate that the 506(b) portion is over. Then, we file another Form D to indicate that the 506(c) portion has started. At that point, we can begin to advertise, bringing in new investors that we don’t have a pre-existing relationship with.
The important thing is to be clear about the point at which the switch happens. Often, this happens when they’re closing and need to raise just one more million dollars or so. So they structure the deal so that they can advertise to get new investors into their database.
506(b) is easier for accredited investors because they just check a box to confirm their status. But if you’re going into a 506(c) offering, where the syndicator is advertising and doesn’t know you, you need third-party documentation to prove your accredited status.
When I mentioned my most prolific client, none of his accredited investors wanted to go through third-party verification. They don’t want to submit tax returns or provide additional documentation, so he just stays with 506(b).
Now, let’s talk about the accredited investor status. Why is the SEC asking for that, and what’s the best way to prove your status? And if someone’s on the fence, like if they have some single-family rentals, how do they value those assets?
When the securities laws were passed in the 1930s, advertising was not allowed, and only those who were considered “rich and smart” could invest. No one knew exactly what that meant, though. In 1981, the SEC introduced Regulation D, which clarified the definition.
In Regulation D, Rule 501 defines an accredited investor as someone whom the government believes doesn’t need protection. Essentially, if you have enough wealth and are financially literate, you should be able to read the documents, understand the risks, and make informed decisions. If the syndicator follows the rules of full disclosure, there’s no need to protect these investors.
It’s the people who aren’t rich and smart that we need to protect. So, definitively, in 1981, with the addition of Regulation D, the SEC established some markers. The only marker they put down at that time was if you had a $1,000,000 net worth, or you made $200,000 a year if filing an individual tax return, or $300,000 if married and filing jointly. You met the definition of an accredited investor—rich and smart. There wasn’t a term like “accredited” before 1981, and they defined it simply in terms of dollars and cents.
With little change, that’s still the primary way we look for accredited investors: Do they have a $1,000,000 net worth? Do they make $200,000 as an individual or $300,000 if married? A $1,000,000 in 1981 was significant, but with inflation, what is it today—maybe $2.5 million or $3 million? What about $200,000? Is it $750,000 today? I don’t know. But they’ve never changed those numbers, even though they’ve adjusted the accreditation rule several times. Some people in my space have speculated that this year they will change the numbers, and maybe they will. It’s probably long overdue. However, in 2021, when they had the biggest chance to change the numbers, they didn’t. What they did do, though, is expand the definition.
First, they expanded the definition of “married and filing jointly” to include spousal equivalents in the household. There are many households where two people run the household but aren’t legally married. Now, they can count their net worth and income collectively. That was a significant change, and I’ve seen it affect a lot of offerings.
Another change involves family partnerships. If there are 6, 8, or even 10 people who are members of a family partnership, including kids, does each need to have a $1,000,000 net worth to invest? That could be problematic if the offering is only for accredited investors. So, they introduced a rule that says, that if the entity (the family partnership) has $5,000,000 in assets, the entity is considered accredited, regardless of the individual members’ financial standing.
Lastly, there has been a request for the SEC to develop a test that investors could take, essentially going back to the concept of “rich and smart.” If they pass the test, they will be considered accredited. However, so far, the SEC has not pursued this. I’ve heard enough SEC commissioners say, “No, we’re not in the testing business.”
However, they did create a workaround. If you hold a securities license in three different areas, you’ve already been tested—your background has been checked, and you’ve been thoroughly vetted. No matter what your income is, you’re considered smart enough to be accredited.
These changes, like those from the 506 offering, are all intended to provide more opportunities for capital formation. It’s all about raising capital. When you think about the $2.2 trillion raised, only a fraction of that goes into real estate. Most of it goes into businesses. There are many large businesses out there raising money in private offerings, and they employ a lot of people. So, we need to continue promoting capital formation.
That was a great answer. Sorry for interrupting.
No problem.
With that accredited status, we’re trying to create a set of rules where the SEC, with its limited resources and time, doesn’t have to protect everyone. They’re just focusing on protecting those who truly need it.
Exactly.
That was going to be my next question: What do you believe is the fundamental mission of the SEC? Are they there to protect the investor, as you mentioned with the accredited status, or are they there to promote capital formation? The private securities space seems to keep expanding, and there’s a lot of opportunity there. Fundamentally, what do you believe they’re trying to promote?
They’re trying not to stand in the way of capital formation. Let’s put it that way. I don’t think that’s their number one goal. I think their primary goal is protection—protection of investors under the ’33 Act.
The premise of the Act was to provide full disclosure of all material facts to the investor ahead of time, so they can make an informed decision. That’s the essence of it. The ’33 Act also established a licensing program, ensuring that people selling securities are the right kind of people. The goal was to prohibit and eliminate fraud both in the sale of securities and in the preparation of the offering documents. So, protection is their primary goal.
But there are too many people to protect—too many people. I think they say that around 15 to 16% of households in the U.S. are accredited. And that number has increased as they’ve kept the $1,000,000 and the $200,000 or $300,000 thresholds unchanged.
In 2013—or maybe it was 2008, after Dodd-Frank—they removed the value of your primary residence from the calculation of net worth. I was in California at the time, and many people on the coast, living with an ocean view, had wealth tied up in their homes.
They paid $50,000 for their house, and now it was worth $2,000,000. They were accredited but didn’t necessarily need protection. But after the 2008 crash, the government decided to exclude the home value from net worth calculations, which made sense. This change cut the number of accredited investors by about two-thirds, primarily in coastal areas.
That would have applied in Northern Michigan or Northern Minnesota, but certainly in Florida and California.
Gene, a common question we get from investors trying to meet the accredited status is: if you have a business interest or real estate property, like land, commercial, or residential, how do you calculate the value for the accredited test? Do you use mark-to-market valuation, or what’s the safest way to approach it?
You need appraisals. My law partner, Jonathan, worked for a company doing 506(c) offerings and handled in-house accreditation. There are third-party companies that specialize in this and know exactly how to do it. Jonathan tells a story about a client whose net worth was based on his Rolex watch collection. Jonathan had to take a crash course on valuing Rolex watches to verify that this client had $1,000,000 in assets. It’s complicated, but that’s what you have to do.
Makes sense. Gene, if you could give just one piece of advice to listeners about how they can protect themselves in the world of securities law when doing deals, what would it be?
For passive investors, I would go through the four questions I ask, then I would get the offering documents and read them carefully. If there’s anything that doesn’t make sense, I’d ask the syndicator to explain it. Syndicators often get carried away—they have a 60-day escrow period, and 30 of those days are spent securing financing and documents. Once they have the documents, they need to raise money in 15 days. They might seem rushed, but they should still have time to answer your questions. Don’t be bashful.
Most documents today don’t include an extensive track record, but if you want to see it, ask for it. Syndicators usually have a track record, even if it’s not part of the offering documents. At one point, there was a law dictating the format for reporting track records, but that law is gone now. Although the information provided wasn’t always easily understood, it was there.
I’d ask, “Have you done this before?” If they have, I’d want at least a narrative track record of what they’ve done. If they’re hesitant to provide it, I’d walk away. There’s plenty of money out there to invest—there’s more money than there are deals.
But on the other side of the coin, there are plenty of deals. So if you have money and want to invest, take your time. Find the deals that make sense to you and invest in those. You don’t have to take the first deal that comes along.
Sage advice, Gene. I can’t thank you enough for spending your time with us today and sharing such valuable insights to protect investors as they invest their precious capital. We take that very seriously, so we appreciate you sharing that. If people would like to connect with you or explore more about your offerings, what’s the best way to reach you?
The best place would be our website, Trowbridge Law Group, at TrowbridgeLawGroup.com. Or, our YouTube channel is great—we have a lot of educational content and interviews with 37 syndicators I’ve worked with. There’s a lot of valuable information in those interviews. Or, just send me an email directly at [email protected].
Excellent. We’ll be sure to include those links in the show notes as well, in case folks are driving. Gene, thanks again for your time. Really appreciate it.
You’re welcome, Dave. I’m glad we put this together today.