Investor Testimonials in Syndication Marketing: The Rules

Generally yes, within limits. No federal rule bans a syndication sponsor from quoting its investors, but the antifraud rules forbid any statement that is misleading in context, and testimonials mislead easily: praise from the happiest investors, returns that look typical when they were not, or a quote from someone who was paid. Under Rule 506(b) a testimonial cannot appear in public promotion at all, and the SEC's marketing rule, which sets detailed conditions for testimonials, applies only if the sponsor is an investment adviser registered or required to register with the SEC.

This post explains which rules apply and gives practical rules for using investor quotes honestly.

Is there a rule that bans testimonials in a syndication?

Not for a typical sponsor. The ban many people remember applied to registered investment advisers, and the SEC replaced it with amendments to its marketing rule in December 2020, which allow testimonials with conditions (compliance was required from November 4, 2022). An apartment syndication sponsor selling interests in its own deal is usually an issuer, not an investment adviser, though whether a sponsor is an adviser depends on what it does. Ask counsel if you advise others about securities.

That does not make testimonials free of rules. The antifraud rules apply to every communication used to offer or sell a security, and testimonials are judged by what they lead a reasonable investor to believe.

How do the antifraud rules limit testimonials?

Rule 10b-5 makes it unlawful, in connection with the purchase or sale of a security, to make an untrue statement of a material fact or to omit a material fact needed to make the statements made not misleading. Section 17(a) of the Securities Act says much the same for offers and sales.

A testimonial can be literally true and still mislead. Common problems:

Selection. Quoting the three investors who did well, while others lost money, implies a pattern that is not there.
Typical results. "I earned 18% a year with this sponsor" suggests new investors can expect something similar. One deal's outcome says little about the next one.
Hidden connections. A quote from a relative, a business partner or someone who got a fee discount carries a connection the reader would want to know.
Timing. Praise given in year one of a five-year deal can look different by year four.

See Rule 10b-5 and what sponsors can't say for more on misleading statements.

Can you use testimonials under Rule 506(b) and 506(c)?

Rule 506(b). Rule 502(c) bars offering or selling by any form of general solicitation or general advertising. A testimonial on a public website or social post that promotes the offering is part of that general solicitation. You can still share materials privately with people you have a pre-existing, substantive relationship with, and the same antifraud limits apply.

Rule 506(c). General solicitation is allowed, so a testimonial can appear in public marketing, as long as every buyer is a verified accredited investor and the marketing is not misleading. See what general solicitation is.

When does the SEC marketing rule apply?

The marketing rule applies to "any investment adviser registered or required to be registered" with the SEC. For those advisers, a testimonial or endorsement in an advertisement must come with clear disclosures: whether the person is a current client or investor, whether they were paid, and any material conflicts. Paid testimonials also need a written agreement in most cases, and the adviser may not pay certain disqualified people for them. The SEC staff answers questions on the rule in its marketing FAQ.

Even if the rule does not apply to you, its disclosures are a good model: say who the person is, whether they invested, and whether they received anything.

What about paying for testimonials or referrals?

Be careful. Section 17(b) of the Securities Act makes it unlawful to publish a communication describing a security for consideration from the issuer without fully disclosing the consideration and its amount. Paying investors for each new investor they bring in raises broker-dealer questions. See paying capital raisers. For consumer advertising generally, the FTC's Endorsement Guides also say a testimonial about results is read as typical unless the ad discloses what people generally achieve; see FTC endorsement rules and sponsor videos.

Which testimonials are lower risk?

Testimonial (made-up examples)	Risk	Safer way to use it
"The reports came every quarter and answered my questions."	Lower	Use it as is, with the person's written permission and their real name or initials
"The sponsor called me back the same day when I had a question."	Lower	Same as above
"I earned 18% a year on my last deal with them."	Higher	Do not use it as marketing, or show the full record of every deal next to it
"Easily my top investment ever."	Higher	Opinions about results imply returns; skip it
A quote from an investor who received a fee discount	Higher	Disclose the discount, or do not use the quote
A quote from a relative or partner	Higher	Disclose the relationship

A made-up example

This example is made up. A sponsor has run four deals. Two returned investors' capital plus a profit, one returned capital with no profit and one is still running behind its plan. She wants testimonials for a 506(c) deal page.

She picks quotes about reporting and responsiveness from investors in all four deals, not only the two that made money.
She does not quote returns. Instead, her track record section lists all four deals with their actual outcomes, including the one behind plan.
Each quoted investor signed a short permission form, and none received anything for the quote.

The result tells a reader what working with her is like without suggesting that this deal will match her best one.

Practical rules for using testimonials

Get written permission and keep it.
Use real investors only, and say they invested.
Do not pay for quotes, and disclose any benefit the person received.
Avoid return claims. If you discuss past results, show every deal, not only the winners.
Date them. A quote from three years ago should say so.
Keep them out of public 506(b) promotion.
Review them with counsel before they go on your deal page or in a pitch deck. See what to include in a syndication pitch deck.

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). DoorRaise prepares the standard offering documents, forms the LLC, files Form D and state notices, and verifies accredited investors for 506(c) deals. Escrow is at Enterprise Bank & Trust, an FDIC-insured bank, investors fund by wire only and distributions are quarterly by default. Fees are $1,500 at setup (non-refundable), $5,000 at closing (only if the deal closes) and $3,500 a year, with no percentage of the raise and no part of the promote. DoorRaise is not a law firm, broker-dealer, investment adviser, funding portal or bank, and the sponsor is responsible for what its marketing says.

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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Ready to raise? Create your free sponsor page or see pricing.

FAQ

Only if the quote is honest about what it describes. A testimonial about your course is not evidence about your deal, and presenting it next to the offering can imply experience you do not have.

Can I quote an investor anonymously?

You can, but anonymous praise is harder for a reader to weigh. If you use one, still keep the investor's written permission on file.

Do I need to include a disclaimer with testimonials?

A disclaimer cannot cure a misleading testimonial, but a clear note that results vary and past deals do not predict future results helps context. The quote itself must still be fair.

Can investors post their own reviews about my deal?

They can say what they want. If you share, pay for or edit those reviews, you may become responsible for them.

Next step: read Rule 10b-5: what sponsors can't say to investors before you write any marketing for a deal.

Sources

This article is general information, not legal, tax or investment advice. Talk to a securities attorney about your deal. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.