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Raising Capital for Real Estate Deals: Understanding Securities Laws and the Role of PPMs

 

        Raising capital is the lifeblood of most real estate investment deals—especially in high-cost markets like New York City. But if you're bringing in money from friends, family, accredited investors, or even the public, you're likely dealing with securities—and that means you must comply with securities laws.

 

        Whether you're syndicating your first multifamily deal, structuring a TIC (tenancy in common), or launching a Reg A offering to scale your capital base, understanding the legal framework is essential. Missteps can lead to investor lawsuits, SEC enforcement, or even criminal penalties.

        1. Common Misconceptions About Securities Laws in Real Estate

        When raising capital for real estate investments, many sponsors make dangerous assumptions about what does and doesn’t trigger securities law compliance. Unfortunately, relying on misinformation can lead to serious legal and financial consequences.

 

        Here are some of the most common myths—and why they’re wrong:

 

• “Sales to friends and family are automatically exempt.”
  Not true. There’s no exemption just because the investor is a personal connection. If you’re offering a security, the law still applies—even if it’s your childhood friend.
• “If I’m selling to fewer than 35 people, I don’t need to worry about compliance.”
• False. There’s no magic number that exempts you from securities regulations. Even one investor can trigger registration or exemption requirements.
• “Accredited investors don’t require any disclosures.”
  Wrong. While disclosures may not be legally required in all cases, failing to disclose material risks can still result in liability—even with accredited investors.
• “Interests in real estate funds or syndications are not securities.”
  If investors are contributing money and relying on your efforts to generate a return, that almost always meets the legal definition of a security.

        2. What Is a Security—and Why It Matters in Real Estate?

        A security is broadly defined under U.S. law. If you’re pooling funds from investors with the expectation of profit based on your efforts, you're likely offering a security—even if it’s wrapped in an LLC or real estate joint venture.

 

        The key case here is SEC v. Howey, which established the “Howey Test” for determining whether an investment qualifies as a security. If your investors are passive and relying on you to manage the deal, it almost certainly does. On the other hand, if the investors are all business partners that will equally participate in the operations and efforts for return on investment, this is less likely to be a security. 

 

        This triggers the requirement to either:

 

• Register the offering with the SEC (costly and time-consuming), or
• Rely on an exemption under Regulation D, Regulation A, Regulation S, or another applicable rule.

        

        Most real estate sponsors don’t register with the SEC—instead, they rely on exemptions, particularly Regulation D, to legally raise funds.

        3. Common Exemptions for Real Estate Capital Raisers

        To pick the right exemption, the key questions sponsors should answer are:

 

• Do they seek to raise capital from non-accredited investors? An Accredited Investor is someone who has net worth or annual income above the statutory threshold.
• Do they wish to advertise the investment opportunity to the public?
• Where do your investors reside?

 

Regulation D (Rule 506(b) and 506(c))

• 506(b): You can raise unlimited capital from accredited investors and up to 35 non-accredited (but sophisticated) investors. No general solicitation allowed.

 

• 506(c): You can advertise your deal publicly—but only accept accredited investors and must verify their status (not just accept self-certification). Verification can be done by the sponsor via reasonable means, such as bank statements, tax returns, or other financial documents. This verification process does have a safe harbor – by obtaining a verification letter from 1 of 4 professionals: CPAs, Attorneys, Broker Dealers, or Registered Investment Advisers.

 

        ✅ Fast, flexible, and widely used in real estate syndications.

 

            Regulation A (“Reg A+”)

• Allows you to raise up to $75 million from the general public (including non-accredited investors).

 

• Regulation A, like a public offering, requires SEC approval and it allows general solicitation and broader participation by non-accredited investors, with limits on total capital raised. A key issue is state compliance: Tier 1 requires registration in each state where securities are sold, while Tier 2 preempts state law but imposes additional compliance requirements.

 

• Great for building a long-term retail investor base.

 

        ✅ Ideal for sponsors looking to scale with retail capital—but comes with upfront compliance cost.

 

            Regulation S

• For raising capital outside the U.S. from non-U.S. persons.
• Often used in international syndications or cross-border real estate funds.

 

        ✅ Useful for global capital raisers, but must keep offerings truly offshore.

 

            Intrastate and Crowdfunding Exemptions

• More limited in scope but potentially useful for local projects or smaller raises.

• Often burdensome in NY due to state-level requirements.

 

 

Exemption	Rule 506(b)	Rule 506(c)	Reg A Tier I	Reg A Tier II
Capital Raise Limit	No limit	No limit	$20M in 12 months	$75M in 12 months
State Law Preemption	Yes	Yes	No	Yes
Limitations on resale of securities	Yes	Yes	Limited	Limited
Accredited Investor Verification	Not required	Required	Not required	Not required
General Solicitation / Advertising	Not allowed	Allowed	Allowed	Allowed
SEC Qualification / Review	No	No	Yes	Yes
Investor Limits	Unlimited accredited + up to 35 non-accredited investors	Unlimited accredited only	2,000 accredited investors / 500 non-accredited	No specific limit, but may trigger Exchange Act reporting if thresholds are met
Ongoing Reporting Requirements	File Form D	File Form D	Exit report and annual state-level approval (no ongoing reporting to the SEC)	Audited financials + semi-annual, annual, and current event reporting (ongoing reporting to the SEC, preemption from state securities laws, simplifying the process of raising capital across multiple states)

 

        4. Structuring Real Estate Deals Without Violating Securities Laws

        To stay compliant, real estate professionals must carefully structure how they present investment opportunities. Key tips:

 

• Don’t pitch deals casually. Talking about ROI or “letting friends invest” can inadvertently trigger securities law.
• Use proper offering documents. These include a Private Placement Memorandum (PPM), subscription agreements, and investor questionnaires.
• Avoid guarantees or misleading projections. Promising returns can be a huge red flag.
• Disclose all material risks. Investors must be given a fair picture of the opportunity and its risks.

 

        In addition to complying with federal securities laws, real estate sponsors must also adhere to state Blue Sky laws and ensure that all necessary filings are completed in each applicable state.

        5. Understanding Private Placement Memorandums (PPMs)

        A Private Placement Memorandum (PPM) is a legal disclosure document provided to potential investors. It outlines the terms of the deal, potential risks, how funds will be used, information about the sponsor team, and other critical information.

 

        A well-drafted PPM does a few things:

 

• Clearly discloses the key terms of the investment
• Outlines the risks and uncertainties
• Describes investor qualifications and restrictions
• Demonstrates a good-faith effort at regulatory compliance

 

        It’s your legal and professional shield—and even when not legally required, it can help build investor confidence and credibility.

        6. When Is a PPM Required in a Real Estate Deal?

        Whether a PPM is required depends on which exemption you're using under Regulation D.

 

       There is no statutory or regulatory mandate requiring companies to issue a Private Placement Memorandum (PPM) when conducting unregistered offerings. However, the laws and regulations—particularly Regulation D—do impose various requirements for such offerings, and providing a PPM is a widely used method to help satisfy those obligations.

 

    Issuers should provide: (a) a PPM, (b) a Subscription Agreement/Investors Questionnaire, and (c) a copy of the Operating Agreement/Limited Partnership Agreement of the issuer.  A subscription agreement is a key document completed by prospective investors to formally commit to purchasing equity in a real estate offering. It includes representations that the investor is purchasing for their own account, understands the risks involved, has sufficient investment experience, can bear the potential loss, and has reviewed all disclosures and had the opportunity to ask questions. The agreement also requires confirmation of accredited investor status, which is typically supported by an investor questionnaire providing additional details about the investor’s financial background and sophistication.

Even if you’re raising money exclusively from close friends and family, a PPM helps clarify terms, protect relationships, and ensure legal compliance.

 

    Even if you’re raising money exclusively from close friends and family, a PPM helps clarify terms, protect relationships, and ensure legal compliance.

 

        Whether you're raising capital under Rule 506(b), Rule 506(c), Regulation A, or certain state-level exemptions, it’s considered standard and best practice to use a Private Placement Memorandum (PPM) or similar offering document (sometimes referred to as a prospectus).

 

        In the eyes of regulators, courts, and serious investors, a PPM shows that you’re doing things professionally and transparently.

        7. Posting on LinkedIn to Raise Capital? You May Be Trigerring Securities Laws        

        Here’s a common pitfall: You post on LinkedIn saying, “We’re raising money for a great real estate deal—let me know if you’re interested.” Innocent, right? Legally, maybe not.

 

        Under Rule 506(b), general solicitation—publicly marketing your deal—is strictly prohibited. That includes social media posts, emails to large groups, and even public webinars.

 

        If you’re relying on Rule 506(c), you can advertise, but you must take reasonable steps to verify that all investors are accredited before accepting any money. Simply “knowing” someone is wealthy isn’t enough.

        8. When to Work with an Attorney

        If you're raising funds from anyone who isn’t a close partner or co-sponsor, assume you’re dealing with securities. The real estate/securities attorney should handle:

 

• Helping you choose the right exemption.
• Drafting or reviewing your PPM and investor docs.
• Advising on regulatory filings (e.g., Form D for Reg D offerings). Whether relying on Rule 506(b) or 506(c), the sponsor must file an annual notice with the SEC using Form D (Form D is a notice filing, not a request for approval). Additionally, the Fund must submit a copy of Form D to each state jurisdiction where its investors are located. A Form D must be filed electronically with the SEC within 15 days of the first sale.
• Ensuring marketing stays within legal limits.

       9. Penalties for Noncompliance with Securities Laws

        Failing to comply with federal securities laws can have serious consequences. One of the most common remedies is rescission, which requires the issuer to return invested funds to investors—essentially undoing the transaction. The SEC may also impose civil monetary penalties, including disgorgement of profits and fines, which in some cases can be up to three times the amount of the unlawful gain. Additionally, the SEC can issue cease-and-desist orders, which may prohibit an individual from continuing the current offering or participating in future securities offerings.    

 

        In addition to regulatory enforcement, issuers may face private lawsuits from investors.

        10. Final Thoughts: Build Your Capital Base the Right Way

        Raising capital can unlock transformative real estate deals—but it also comes with serious legal responsibilities. By treating your investors’ money with respect and following the rules, you not only stay out of trouble—you build long-term trust and credibility.