Episode 34: Subscription Agreements & Investor Questionnaires – What You’re Actually Signing

Welcome to Building Passive Income, the podcast for professionals, entrepreneurs and investors who want to build wealth, diversify beyond Wall street, and create true financial freedom through passive commercial real estate investing. I'm Wayne Courageous III, founding and managing principal of Crei Partners, a leading commercial real estate company, I created CreiCollen, an AI powered resource to serve as your investor education guide. Built on the insights and experience we've developed at CREI Partners, Creicollen is here to educate you through passive invest tax strategy topics to help your journey in passive investing. Just a quick disclaimer. This podcast and CRA Colin is for educational purposes only and is not legal tax or investment advice. Always consult with your attorney, CPA and financial advisor before making any investment decisions. I've spent nearly two decades helping investors understand the power of commercial real estate from multifamily to storage to retail. Each episode is under 15 minutes, simple to follow and and packed with insights to help you grow your income and protect your capital without becoming a landlord. If you're ready to learn quickly and invest smarter, you're in the right place. Welcome to Building Passive Income. Let's build wealth together. Here's creicollen.

Before we begin, an important legal disclaimer. This episode is for educational purposes only and does not constitute legal tax or investment advice. The information provided is general in nature and may not apply to your specific situation. Always consult with a qualified securities attorney, CPA and financial advisor before making any investment decisions or signing any legal documents. Here's a moment that makes a lot of new investors nervous. You've reviewed the deal, you've read the ppm, and now the sponsor sends you the Subscription agreement and and Investor questionnaire. You open the documents and see pages of legal language, representations, warranties, and questions about your income, net worth, and investment experience. And you think, what exactly am I signing? What am I agreeing to? Here's the the Subscription Agreement and Investor Questionnaire are the final legal documents you sign before you invest. They formalize your commitment, verify your eligibility, and create a binding contract between you and the sponsor. Understanding what you're signing isn't just good practice, it's essential. I'm Crei Collin and this is Building Passive Income, where we give you the strategies to build real wealth through passive real estate investing. Today, we're breaking down subscription agreements and investor questionnaires. You'll learn what they are, what you're agreeing to, what information you'll need to provide, and what to watch for before you sign. Let's dive in. A Subscription agreement is the legal document that formalizes your investment in the syndication. Think of it as the purchase contract. When you sign the subscription agreement, you're officially committing to invest a specific amount of capital in the deal. The subscription agreement Typically your personal information, contact details, and tax reporting information, such as a W9 and a tax ID, and any additional information required by the Sponsor's administrator. Investment amount the dollar amount you're committing to invest. Entity information if applicable. If you're investing through an llc, trust or retirement account, you'll provide the entity's name, tax id, and formation documents, representations and warranties. These are statements you're making about yourself, such as you meet the eligibility requirements for this offering. You've received and had the opportunity to review the PPM and the governing agreement. You're investing for your own account, not on behalf of someone else. You understand the risks and can afford to lose your entire investment, and you're not relying on the sponsor for legal, tax or investment advice. Signature and date. Your signature and the date you signed. Once the sponsor accepts your subscription and funds are processed, you are generally committed and there may be limited ability to unwind the investment. This is why it's critical to review the subscription agreement carefully before you sign. Read the entire subscription agreement before you sign. Don't rush through it. Make sure you understand what you're agreeing to. An investor questionnaire is a document that collects information about your financial status, investment experience and and eligibility to invest in the syndication. Investor questionnaires are commonly used in private offerings to document eligibility and support compliance. The investor questionnaire typically asks Accredited Investor Status Are you an accredited investor? If yes, how do you qualify? Income and net worth what is your annual income? What is your net worth excluding your primary residence Investment experience? How many private placements have you invested in? What types of investments do you have experience with? Source of funds? Where is the money for this investment coming from? Purpose of investment Are you investing for income appreciation, tax benefits, or diversification? Entity information if applicable. If you're investing through an entity, you'll provide information about the entity's structure, ownership, and purpose. The Investor Questionnaire serves two purposes. It helps the sponsor verify that you're eligible to invest under the offering structure, and it provides documentation that the sponsor can use to demonstrate compliance if they're ever audited or questioned by regulators. Answer the investor questionnaire honestly and accurately. Providing inaccurate information can create serious issues for you and for the offering's compliance. When you sign the subscription agreement, you're making a series of representations and warranties. Here are the most common ones and what they Representation 1. Accredited Investor Status or other eligibility. You're representing that you meet the eligibility requirements for this offering based on its structure, including accredited status, if applicable. What this means if you falsely claim to be accredited when you're not, you could face legal consequences and the sponsor could have regulatory issues. You've received and had the opportunity to review the ppm. You're representing that you've received and had the opportunity to review the private placement memorandum and all exhibits. What this means. You're acknowledging that you've been informed of the risks and structure of the deal. You can't later claim you weren't aware of something that was disclosed in the ppm. You understand the risks. You're representing that you understand the investment is speculative and risky and you could lose some or all of your capital. What this means. You're acknowledging that this is a high risk investment and you're investing with money you can afford to lose. Representation 4. You're investing for your own account. You're representing that you're investing for your own benefit. The investor of record must be eligible under the offerings rules and nominee or agency arrangements may be restricted. What this means. You can't invest on behalf of someone who isn't eligible to invest in the deal. Representation 5. You're not relying on the sponsor for advice. You're representing that you're not relying on the sponsor, the placement agent or anyone else involved in the offering for legal technologies, tax or investment advice. What this means. You're responsible for conducting your own due diligence and consulting with your own advisors. Representation 6. You have sufficient knowledge and experience. You're representing that you have sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the investment. What this means. You're acknowledging that you understand what you're investing in. Representation. 7. You can afford to lose your investment. You're representing that you have adequate means to provide for your current needs and contingencies and losing your entire investment would not adversely affect your lifestyle. What this means. You're investing with risk capital, not money you need for living expenses or emergencies. Read the Representations and Warranties section carefully. Make sure you can honestly make each representation. If you can't, don't sign. Many syndications are limited to accredited investors. Here's what that means and how it's under SEC Rule 501. An accredited investor is someone who meets one of the following income annual income of $200,000 or more in each of the last two years or $300,000 or more jointly with a spouse or spousal equivalent and a reasonable expectation of the same income in the current year. Net worth Test. Individual or joint net worth of $1 million or more and excluding the value of your primary residence. Professional credentials. You hold certain professional certifications such as Series 7, Series 65 or Series 82 licenses. Entity test. Certain entities may qualify based on assets, ownership structure or other criteria. Your offering documents will specify what the sponsor will accept. Under Rule 506, sponsors must take reasonable steps to verify accredited status, often through documentation or third party verification. Under Rule 506, sponsors typically rely on questionnaires and a reasonable belief standard, though practices vary. Common documentation includes tax returns for the last two years for income test, bank statements, brokerage statements or a letter from a CPA verifying net worth for net worth test a copy of your professional license for credentials test and entity formation documents and financial statements for entity test. Some sponsors use third party verification services to streamline this process. Some syndications allow non accredited investors under 506B, but there are strict limits on how many non accredited investors can participate, typically up to 35 per offering. If you're not accredited, the sponsor may require you to demonstrate that you're a sophisticated investor, someone with sufficient knowledge and experience to evaluate the investment. If the deal requires accredited investors and be prepared to provide documentation, don't falsely claim accredited status. It can have serious legal consequences. Many investors choose to invest through an entity rather than as an individual. Here's what you need to know. Why invest through an entity? Asset protection. Investing through an LLC can provide an additional layer of liability protection. Estate planning. Investing through a trust can simplify estate planning and transfer of assets. Tax investing through a retirement account Self directed ira or solo 401k allows for tax deferred or tax free growth. Retirement accounts can be powerful, but be mindful of custodian rules and potential tax considerations like prohibited transaction rules and UBIT or udfi depending on the deal. What documents you'll need for an llc Articles of organization or certificate of formation Operating agreement ein and resolution Authorizing the investment and identifying the authorized signer for a trust Trust agreement EIN and certification of trust or trustee certification for a retirement account Account statements and letter from the custodian authorizing the investment. Important considerations if you're investing through a retirement account, make sure the custodian allows investments in private placements. Confirm how the sponsor determines entity eligibility and accredited status for the investing entity. Consult with your attorney and CPA before investing through an entity to ensure it's structured correctly. If you're considering investing through an entity, work with your attorney and CPA to ensure the entity is properly formed and the investment is structured correctly. Before you sign the subscription agreement and investor questionnaire, here are some final checks and red flags to watch for. Red flag 1. Pressure to sign quickly if the sponsor is pressuring you to sign immediately without giving you time to review the documents or consult with your advisors, that's a red flag. A great sponsor gives you time to conduct due diligence and ask questions. Missing or Incomplete Documents if the sponsor hasn't provided the ppm, operating agreement or other key documents, don't sign. You need to review everything before you commit. Red flag 3. Unclear wiring instructions Always verify wiring instructions by phone before you send funds. Fraud is common and scammers impersonate sponsors to redirect wires. Changes to Terms if the subscription agreement includes terms that differ from what was presented in the PPM or during your conversations with the sponsor, ask for clarification before you sign. Red Flag 5. No opportunity to ask questions if the sponsor is unwilling to answer your questions or dismisses your concerns, that's a red flag. Final Checks before you sign have you read the entire ppm? Have you read the operating agreement or partnership agreement? Have you reviewed the subscription agreement and investor questionnaire? Do you understand the risks? Have you consulted with your CPA and attorney? Are you comfortable with the sponsor, the deal, and the structure? Can you afford to lose your entire investment? If the answer to any of these questions is no, don't sign yet. Take your time. Don't rush through the subscription process. Make sure you're fully informed and comfortable before you sign. Alright, let's recap. The subscription agreement and investor questionnaire are the final legal documents you sign before investing in a syndication, and understanding what you're signing is critical. Here's what you need to know. 1. The subscription agreement formalizes your investment and includes your personal information, investment amount, and representations and warranties about your eligibility and understanding of the risks. 2. Investor questionnaires are commonly used in private offerings to document eligibility and support compliance, collecting information about your financial status, investment experience, and accredited investor status.

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When you sign the subscription agreement, you're making representations about your eligibility, your opportunity to review the ppm, your ability to bear risk, and your investment experience. Answer honestly and accurately.

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Under Rule 506, sponsors must take reasonable steps to verify accredited status through documentation or third party verification. Under Rule 506B, sponsors typically rely on questionnaires and a reasonable belief standard, though practices vary. 5. If you're investing through an entity, LLC, trust or retirement account. You'll need to provide formation documents and ein and authorization documents. Consult with your attorney and CPA to ensure the entity is structured correctly and be mindful of tax considerations for retirement accounts. Six red flags include pressure to sign quickly, missing documents, unclear wiring instructions, changes to terms, and unwillingness to answer questions. Take your time and verify everything before you sign. Here's your action step before you sign your next subscription agreement, review this episode and use it as a checklist. Make sure you understand what you're signing and that you've completed all due diligence. If you're ready to build a diversified syndication portfolio with sponsors who provide clear documentation and welcome investor questions, let's talk. Check the show notes for a link to schedule a call with us@creipartners.com Next time on Building Passive Income, we're diving into understanding accredited versus sophisticated investor status. Until then, remember, financial freedom isn't a dream, it's a decision. And it starts with understanding what you're signing. I'm Crei Collin. Let's build wealth together.

Thanks for tuning in to Building Passive Income. Today's episode helped shift your mindset or gave you a new tool to grow your wealth. Do us a favor and like, subscribe and share this podcast with someone you care about. Want to go deeper? Join our free Passive Investor coaching program@ passiveinvestorcoaching.com it's the perfect next step to start building wealth through commercial real estate the right way. Remember, financial freedom isn't a dream, it's a decision. And it starts with Building Passive Income. We'll see you in the next episode. Sam.