How Do Investors Exit Syndications and Equity Funds?

As a potential sponsor for syndications and equity funds under Regulation D, it's crucial to understand how investors can exit your fund. This usually happens in one of three ways: redemption, sponsor buyout, or right of first refusal. Redemption is common in open-ended or cyclical funds, where investors can get their money back at defined periods. A sponsor buyout allows you to set aside a certain amount for redemptions each year. If more investors want to be redeemed than the fund allows, redemptions are made pro-rata. Finally, the right of first refusal allows investors to sell their shares to other members in case of a life event. It's a market-driven activity, where the investor may have to sell at a discount due to urgency. While you can facilitate the process, it's best to let the negotiation be between the buyer and the seller. Remember, your aim is to ensure that your investors feel safe and comfortable with the process while maintaining control over your fund.

Read more about Reg D - What is Reg D? The King of Securities Exceptions: https://www.moschettilaw.com/reg-d/

Read more about PPMs - What Is In A Private Placement Memorandum?: https://www.moschettilaw.com/private-placement-memorandum-attorney/

Moschetti Syndication Law Group is a boutique syndication law firm, serving small and growth-bound syndicators, as well as private equity firms. Our attorney, Tilden Moschetti, is determined to keep the firm’s ‘boutique’ size so we can tailor the services to each client’s unique needs without turning the firm into a faceless factory churning out private placement memorandums or passing unnecessary overhead expenses onto our clients. (As our client, you’ll only pay a fixed fee, so no surprises.) As for the client experience, we give real-time answers with Tilden Moschetti without making you book an official appointment or get passed along to associates or paralegals. We’ll work with your ambitions and overall vision to help you close the current deal and fill in that ‘missing’ piece – whatever you need – to keep adding more syndications to your portfolio. We keep syndicators syndicating (TM).

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Episode Transcript

Tilden Moschetti (00:00):
It's almost a certainty that at some point,

(00:03):
you will have an investor inyour syndication or your
investment fund, who wants toredeem themselves out who wants
to get out of that investment,get their money back and be
gone? Typically, it's because ofsome life event. Now, how do you
do it? Is it loud? Is it notallowed? Let's go through it in
this video.

(00:31):
So in order for an investor toget out of there have your
syndication or investment fund,this normally happens in one of
three different ways. And welike to have this conversation
at the get go, when I startworking with clients and
understanding what their whattheir structure is going to look
like, because it's probablygoing to be part of the

(00:51):
paperwork somewhere. So thethree ways that we do it, first
off, is redemption. So in thisis extremely common in
investment funds, especiallyopen ended funds, or what I call
cyclical funds. Every year, theykind of turn over on a regular

(01:11):
interval. So there'll be aninvestment period where we say,
okay, investors can get all oftheir money back at these
defined periods. It's in thePPM, typically, it'll say and
said they need a notice orsomething like that. Investors
need do need to recognize thatthis is a revolving fund with

(01:32):
people's money invested, and wecan't prejudice the other
investors by people trying toget their money out too early.
things sometimes take a littlebit longer than the notice
period requires. And they haveto understand that will do their
best to do it. Because they'reyour investors, you want to take
care of them, and they couldvery well be in your next fund.
Or they may very well be afamily member, whatever it is,

(01:54):
you want to take good care ofyour investors. The second way
that investors oftentimes areexiting funds is what I call a
sponsor buyout. A sponsoredbuyout may say something like at
the end of each year, we'regoing to send a notice out that
that says this is the this is anamount of money that's available

(02:17):
to redeem any member who wantsto withdraw some or all of their
money can opt in to this period.But there's only this certain
number of dollars that'savailable for it. So our $10
million fund is only going to besetting aside for this year
$750,000 For redemptions. If youwant to be redeemed, then you

(02:39):
raise your hand, you'd let usknow. And we will then allow you
we will buy you out. Now ifthere is not enough, if there
are more people who want moredollars than the fund is made
available for this redemption,then we do it pro rata. So this
is also kind of the WarrenBuffett model, I've been told
this is the way that heoriginally did his redemptions

(03:02):
for his fund early in hiscareer, and nobody ever took him
up on it. But this is a verygood model because people feel
safe and comfortable about it.But it still gives you as the
sponsor the control over thatover the fun and over those
redemptions. The third and finalway for investors to get their
money back that often is happensprobably in the vast majority of

(03:27):
cases, is what we call a rightof first refusal, or, Hey, I
want out, right, here's how ithappens. The member calls up the
sponsor and says, Hey, I've justhad this life event, I need to
get my cash out. I'm in a reallybad situation, how can I do it?

(03:47):
What the best, the best methodto do is, is you tell the
member? Okay, look, I thinkwe'll probably be able to find
out, but I can't promiseanything. Let me go to all the
members and see if somebodywants to buy you out. In the
meantime, you should look andsee if somebody that you know
wants to buy out your piece ofit as well. So they you call up

(04:09):
you let every member know, hey,we've got this, this member will
needs to make an exit. Is that alife event? Does anybody is
anybody interested in buying hisshares? Or it could that person
could also be you? You saw sogive them a chance in order to
find a replacement. Because atthe end of the day, you want
that person who's getting out tobe able to get top dollar. Now

(04:33):
what do I mean by top dollar isthis is now a market driven
activity, they're probably goingto be selling their spot at a
discount, because they're in anurgent situation. It's just the
way it is. So most of the time,they'll buy it at 90 cents on
the dollar. And that will be thebuyout. Now that's just a very

(04:54):
rough idea on what it is. Butthe market itself will take care
of it. It's negotiated betweenthem Unless you are the one
buying and buying them out, donot get involved in that
negotiating process at all. Youdon't want anything to do with
it. You want it to be entirelybetween the purchaser and the
seller. My name is TildenMoschetti. I am a syndication

(05:17):
attorney for the Moschettisyndication Law Group. We focus
exclusively on Regulation D, andRegulation D offerings, helping
sponsors put together compliantofferings for themselves for
their investment fundssyndications, whether it be for
real estate or raising money fortheir business, or private
equity fund or whatever it is,as long as it's under Regulation

(05:41):
D if we can help you and ifyou're interested in putting
together a fund or syndication,give my office a call. We'll set
up a time to talk and we can gofrom there.