Restricted Securities Legend for a Syndication: What Rule 502(d) Requires
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Interests sold in a Rule 506(b) or 506(c) syndication are restricted securities: an investor cannot resell them unless the resale is registered or exempt. Rule 502(d) asks the sponsor to take "reasonable care" that buyers are not underwriters, and it names three ways to show that care: ask each buyer whether it is buying for itself, tell each buyer in writing before the sale that the interests are unregistered and cannot be resold freely, and put a legend on the document that evidences the interest. In an LLC syndication with no paper certificates, the legend usually sits in the subscription agreement and the operating agreement. DoorRaise puts all three into each deal's documents.
This post is part of our guide to real estate syndication. For the documents themselves, see the subscription agreement and the syndication operating agreement.
What does Rule 502(d) say?
The rule is short. It says that, except for certain Rule 504 sales, securities acquired under Regulation D "cannot be resold without registration under the Act or an exemption therefrom," and that the issuer "shall exercise reasonable care to assure that the purchasers of the securities are not underwriters." An underwriter, in this sense, is someone who buys from the issuer with a view to distributing the securities to others. If buyers act as a pipe that passes interests on to the public, the private placement stops being private.
The rule then lists what demonstrates reasonable care:
| Step | What Rule 502(d) says | Where it lives in a syndication |
|---|---|---|
| 1. Inquiry | "Reasonable inquiry to determine if the purchaser is acquiring the securities for himself or for other persons" | An investment intent representation in the subscription agreement |
| 2. Written disclosure | Written disclosure "prior to sale" that the securities are unregistered and cannot be resold without registration or an exemption | The PPM's cover page and a risk factor on illiquidity |
| 3. Legend | A legend on "the certificate or other document that evidences the securities" | The subscription agreement and the operating agreement |
The rule also says these actions are not the only way: "Other actions by the issuer may satisfy this provision." In practice, sponsors use all three because they cost nothing and are easy to prove later. Read the full text of Rule 502 at Cornell's LII.
What does the legend usually say?
There is no required wording. Rule 502(d)(3) asks for a statement that the securities "have not been registered under the Act" and that sets out or refers to "the restrictions on transferability and sale." A typical legend in a syndication reads like this (illustrative only):
The interests described here have not been registered under the Securities Act of 1933 or any state securities law. They are being offered and sold in reliance on exemptions from registration and may not be sold, transferred, pledged or otherwise disposed of except under an effective registration or an available exemption, and only as permitted by the operating agreement of the Company.
Many legends also mention state securities laws, because a state exemption or notice may carry its own resale terms. If you raise under Rule 147A instead, that rule has its own resale limits and legend.
Where does the legend go if there is no certificate?
Most syndication LLCs never issue paper certificates. The investor's interest is shown in the operating agreement's member schedule, the signed subscription agreement and the sponsor's cap table. Rule 502(d) speaks of "the certificate or other document that evidences the securities," so the usual practice is:
- Put the legend at the top of the subscription agreement and in the operating agreement's transfer section.
- Repeat the resale limits in the PPM, usually on the cover page and in a risk factor.
- Keep the operating agreement's transfer restrictions consistent with the legend, so the documents agree.
The operating agreement often goes further than securities law. It may ban transfers without the manager's consent, give the company a right of first refusal, and void any transfer that would make the company a publicly traded partnership for tax purposes. See selling a syndication interest for how that plays out.
What does "investment intent" mean in the subscription agreement?
The inquiry step usually becomes a representation the investor signs: that it is buying for its own account, for investment, and not with a view to distribution. A sponsor should also ask, in the investor questionnaire, whether the investor is buying for anyone else. An investor who signs for a trust, an LLC or an IRA is a different case from a nominee who quietly buys for several friends. The second case is the one Rule 502(d) is aimed at. See the subscription booklet and investor questionnaire.
Can an investor ever resell?
Yes, but not freely. A resale needs its own exemption. Holders of restricted securities often look to Rule 144, which sets holding periods for restricted securities, or to private resales to accredited buyers. Even when securities law allows a resale, the operating agreement usually requires the manager's consent. For a single apartment deal, the realistic exit is the sale or refinance of the property. See what happens when the syndication sells.
Common mistakes
- No legend anywhere. The sponsor uses a subscription agreement from a template that dropped it.
- Documents that disagree. The PPM says transfers need consent; the operating agreement allows free transfer among "affiliates" with no limit.
- Disclosure after the sale. Rule 502(d)(2) says "prior to sale." Send the PPM before the investor signs, not with the countersigned copy.
- Nominee buyers. One person signs for a group of friends who never answer an accreditation question. That raises both a 502(d) problem and a verification problem.
How DoorRaise fits in
DoorRaise is a technology platform, not a law firm, broker-dealer, investment adviser or funding portal. Its standard offering documents are written by a neutral party, represent neither the sponsor nor the investors, and put the restricted securities legend at the top of the PPM, the operating agreement and the subscription agreement. The subscription agreement has the investor confirm it is buying for its own account, for investment, and not with a view to resale or distribution, and the PPM says the interests are restricted securities that need the Manager's consent to transfer. Each investor gets the PPM before signing, and the signed subscription agreement and operating agreement carry the same transfer limits. See offering documents and pricing, or create your sponsor page.
FAQ
Are syndication interests restricted securities?
Yes. Rule 502(d) gives securities bought under Regulation D the status of securities acquired under section 4(a)(2), so they cannot be resold without registration or an exemption.
Is a restricted securities legend required?
Rule 502(d) lists the legend as one of three steps that demonstrate reasonable care, and says other actions may also satisfy the rule. In practice almost every private placement uses a legend.
Where does the legend go in an LLC with no certificates?
On the documents that evidence the interest: usually the subscription agreement and the operating agreement, with the same limits repeated in the PPM.
Does the legend stop all transfers?
No. It tells the holder that a transfer needs registration or an exemption. The operating agreement usually adds its own consent requirement.
Does Rule 502(d) apply to 506(c) offerings too?
Yes. Rule 502(d) applies to securities sold under Rule 506(b) and Rule 506(c) alike.
Sources
- 17 CFR 230.502: General conditions to be met (Cornell LII)
- 17 CFR 230.144: Persons deemed not to be engaged in a distribution (Cornell LII)
- 17 CFR 230.506: Exemption for limited offers and sales (Cornell LII)
- Investor.gov: Private placements under Regulation D
This post is general information, not legal or tax advice. Talk to your own securities attorney about your offering. Information is as of November 2026. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.