Is a Real Estate Syndication a Security? The Howey Test
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Owning a building is not a security. Selling shares of a building to other people usually is. That difference decides whether a sponsor can just post a deal and take money, or has to follow securities rules first. This post is part of our guide to real estate syndication. It is general information, not legal or tax advice.
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The three parts of the Howey test
The test comes from a 1946 Supreme Court case and is still how courts and the SEC look at whether something is an "investment contract", which is one kind of security.
- An investment of money. An investor wires capital to the deal company.
- In a common enterprise. Investors' money is pooled in one company and they rise or fall together with the property.
- With an expectation of profit from the efforts of others. The investor does not run the property. The sponsor finds the deal, arranges the loan, hires the manager and carries out the business plan.
When all three are true, the interest is treated as a security, whatever the paperwork calls it.
Why passive investors tip the third part
The third part is where syndications usually land. A limited partner or non-managing member has little say in daily decisions. The operating agreement gives management to the sponsor, as in manager-managed vs member-managed. The more passive the investor, the clearer it is that profits depend on the sponsor.
A true joint venture where each partner actively helps run the property can look different. Read joint venture vs syndication before you rely on that, because shared control must be real, not a clause in a document.
What it means for the sponsor
If the interest is a security, three things follow.
- Registration or an exemption. Selling a security to the public needs SEC registration. Private deals use an exemption. See what is Regulation D and 506(b) vs 506(c).
- Rules about who can invest and how you find them. Rule 506(b) bars general solicitation. Rule 506(c) allows it, but requires verified accredited investors. See what is general solicitation.
- Anti-fraud rules. Every statement to investors must be accurate, even in a private deal. See Rule 10b-5 and misleading statements.
Filings follow: a Form D with the SEC and notice filings in the states where investors live, covered in blue sky notice filings.
Common mistakes
- Taking "loans" from friends that are really equity with a profit share. See promissory note vs membership interest.
- Posting an open invitation under 506(b). See posted about my deal publicly.
- Assuming a small raise or a close friend circle is exempt. The exemption must be claimed, not assumed.
- Using a template from another deal without checking that it matches this raise.
How DoorRaise fits in
DoorRaise gives sponsors a deal page, e-signature, an escrow account at Enterprise Bank & Trust and the filings that follow a Rule 506 raise. DoorRaise charges a flat $1,500 setup fee and a flat $5,000 yearly administration fee, and neither depends on how much you raise. DoorRaise is not a law firm, so the legal advice on your structure still comes from your own attorney.
Frequently asked questions
Is every real estate deal with partners a security?
No. Buying a building with one or two partners who all help run it can fall outside the test. Selling passive interests to people who rely on the sponsor usually does not.
Does a small raise from friends avoid the rules?
No. There is no small-deal exception to the securities laws for this kind of raise. What small deals often have is a simple exemption path, such as 506(b) with accredited investors.
What happens if a sponsor sells securities without an exemption?
Investors may be able to demand their money back, and regulators can take action. See consequences of violating Regulation D.
Sources
- SEC: Investor Bulletin, Private Placements Under Regulation D
- 17 CFR 230.506, Exemption for limited offers and sales without regard to dollar amount of offering
- SEC: Private placements, Rule 506(b)
This article is general information as of November 2026, not legal, tax or investment advice. Every investment can lose money. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.