Does a Syndication Need Audited Financial Statements?
Generally, no. Rule 506 does not require audited financial statements when every investor is accredited. The audit question comes up in three places: a 506(b) deal that sells to non-accredited investors (Rule 502(b) then requires financial statement information, audited in offerings over $20 million), a Regulation A Tier 2 offering, and any lender, operating agreement or large investor that asks for audited statements.
First-time sponsors often hear that "real" deals need audits. For a single apartment building raised from accredited investors, that is usually not a securities law requirement. What you do owe investors is accurate information and whatever reporting you promise in the operating agreement. This guide explains the rules and the options. It is not legal or accounting advice.
What does Regulation D require?
Regulation D itself is mostly silent on financial statements when every investor is accredited. Rule 502(b)(1) says the issuer must furnish the listed information only if it sells under Rule 506(b) to a purchaser who is not accredited, and is not required to furnish it to accredited investors. The rule adds a note that issuers should consider giving the same information to accredited investors anyway, because of the antifraud rules.
So a 506(c) offering, which sells only to verified accredited investors, has no specific audit requirement under Regulation D. The same goes for a 506(b) offering sold only to accredited investors. See 506(b) vs. 506(c).
What changes when you accept non-accredited investors?
If a 506(b) deal sells to even one non-accredited purchaser, Rule 502(b)(2) requires disclosure close to what a registered or Regulation A offering would give, a reasonable time before the sale. For financial statements:
- Offerings up to $20,000,000: the financial statement information required by paragraph (b) of Part F/S of Form 1-A (the Tier 1 rules), prepared under U.S. GAAP. Form 1-A says those statements need not be audited and must be labeled "unaudited," but if an audit was obtained for other purposes, the audited statements must be used.
- Offerings over $20,000,000: the information required by paragraph (c) of Part F/S of Form 1-A (the Tier 2 rules), which requires audited financial statements.
For a newly formed LLC buying one building, the issuer has little history, so questions about the property's own past financials come up too. This is detailed work for your securities attorney and CPA. For the full disclosure list, see Rule 502(b) disclosure for non-accredited investors.
Does Regulation A require audits?
Tier 2 does. Form 1-A says audited financial statements are required for Tier 2 offerings, though interim statements may be unaudited. Tier 2 allows up to $75,000,000 in a 12 month period under Rule 251. Tier 1 statements need not be audited. Regulation A is a different path from Rule 506, with SEC qualification of an offering statement, and few single apartment deals use it.
Who else might ask for an audit?
Even when the securities rules do not require one, someone else may:
- Your lender. Loan documents set their own reporting, often periodic operating statements and rent rolls. Read yours before you promise anything to investors.
- Your operating agreement. If it promises audited annual statements, you owe them. Many single property deals promise unaudited annual statements and quarterly updates instead.
- A large investor. A family office or plan may ask for an audit in a side letter. Weigh the cost against the check size. See side letters.
- A future buyer or refinance lender. Clean books help any later transaction, audited or not.
Compilation, review or audit: what is the difference?
Accountants offer three main levels of work on financial statements. In general:
| Service | What the accountant does | Level of assurance | Typical fit |
|---|---|---|---|
| Compilation | Puts management's numbers into financial statement form without testing them | None | Small deals with simple reporting |
| Review | Asks questions and runs analytical procedures | Limited | Investors or lenders who want more comfort without a full audit |
| Audit | Tests records and controls and gathers evidence to give an opinion | Reasonable | Required filings, larger offerings, institutional investors |
Cost and time rise with each level. Ask the deal's CPA for a quote before you promise a level in your documents.
Which situations require an audit? A quick table
| Situation | Audit required by the securities rules? |
|---|---|
| 506(c), all investors verified accredited | No |
| 506(b), all investors accredited | No |
| 506(b) with a non-accredited investor, offering up to $20,000,000 | No, unless audited statements already exist |
| 506(b) with a non-accredited investor, offering over $20,000,000 | Yes |
| Regulation A Tier 2 | Yes (interim statements may be unaudited) |
The table covers only the securities rules described above. Your lender, your operating agreement and your investors can require more.
What reporting do investors actually expect?
For a single apartment building, investors usually look for regular investor updates with occupancy, collections and the business plan's progress, annual financial statements, and their K-1s each tax season. Whatever you choose, be consistent and accurate. A misleading report is a bigger problem than an unaudited one.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5+ units from their friends and followers under Rule 506(b) or 506(c). It prepares the standard offering documents, forms the LLC, files Form D and state notices, and verifies accredited investors for 506(c). DoorRaise does not prepare financial statements or audits; the deal's own accountant does. Investors fund by wire into escrow at Enterprise Bank & Trust, an FDIC-insured bank, and distributions are quarterly by default. Fees are $1,500 to set up (non-refundable), $5,000 at closing (only if the deal closes) and $3,500 a year, with no percentage of the raise.
Raise your apartment deal from the people who already follow you.
DoorRaise is built for apartment buildings with 5 or more units: one link for the deal, escrow until closing and a standard fee card.
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FAQ
Does a 506(c) syndication need an audit?
Not under Regulation D. A 506(c) deal sells only to verified accredited investors, and Rule 502(b) information requirements do not apply to them. Your lender or operating agreement may still require one.
Do I need audited statements if I take one non-accredited investor?
Rule 502(b) then requires financial statement information. In offerings up to $20 million, it need not be audited unless audited statements already exist. Over $20 million, it must be audited.
Is a review good enough for investors?
Often, if that is what your operating agreement promises. Ask large investors early what they expect.
Who pays for an audit?
Usually the deal, as an operating expense, which lowers cash available for distributions. Disclose it in the budget.
Can I promise audits later if investors ask?
You can amend your reporting if the operating agreement allows it, but plan the cost first.
Next step: read Rule 502(b) disclosure for non-accredited investors before you decide whether to accept non-accredited investors.
Sources
- 17 CFR 230.502 (Rule 502(b))
- SEC: Form 1-A, Part F/S
- 17 CFR 230.251 (Regulation A tiers)
- 17 CFR 230.506
This article is general information, not legal, tax, accounting or investment advice. Talk to a securities attorney and a CPA about your deal. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.