Too many GPs: the hidden compliance risks

Some real estate syndications get structured with 10, 20, or even 30 general partners — sponsors brought in to expand the network of investors the deal can raise from. Each GP brings their personal investor relationships into the deal, and the structure rewards them with a piece of the management. The intent is usually growth: more GPs means more investor outreach, more capital raised, faster fundraising. The problem is that the structure has two distinct issues, and the second one is a serious securities compliance question that often gets missed.

The first issue is operational. A general partner has authority to make management decisions on behalf of the deal. With 20 or 30 GPs, decisions become impossible to coordinate, so most sponsors structure the deal so only two or three GPs hold actual decision-making authority and the rest are nominal. This solves the operational problem but creates the second issue. Under the federal issuer exemption, a person raising capital on behalf of a company they manage doesn't need a broker-dealer license. The exemption requires that the person actually be a manager of the company. A nominal GP without real management authority is, in legal substance, raising money for a company they don't manage. That's an unregistered broker-dealer, and the SEC has pursued enforcement on this exact theory: in In the Matter of Ranieri Partners LLC, the SEC sanctioned both a private equity firm and a senior executive for facilitating capital raising by an unregistered broker, with $450,000 in combined penalties and an industry bar against the broker. Investors in a deal structured this way also bear risk: securities sold by an unregistered broker-dealer can produce rescission rights, regulatory exposure, and litigation downstream.

Jon walks through the structural and legal sides of this in the video above, including how the proper structure looks (a small number of actual decision-making GPs who are the only ones legally raising capital) and what to look for as either a sponsor structuring a deal or an investor evaluating one. Anyone seeing the 20-or-30-GP pattern in a real deal, whether as sponsor, investor, or counsel, should treat it as a structural and compliance issue worth working through with an attorney.