Subscribe
Share
Share
Embed
A brief look at why syndicators seeking investor liquidity often mistakenly look to Rule 144A, and why Regulation D remains the practical choice for mid-market raises.
Syndication Attorney Field Notes is a short-form educational podcast from Tilden Moschetti for sponsors, real estate syndicators, fund managers, and business owners raising capital through Regulation D offerings, private placements, syndications, and investment funds.
Each episode breaks down one issue from the legal notebook: finder’s fees, broker-dealer registration, Rule 506(b), Rule 506(c), investor verification, private placement memorandums, subscription agreements, Form D, Blue Sky filings, fund structure, and the mistakes that show up before the documents are drafted.
Plain-English field notes. One issue, one misconception, one practical takeaway. Public education only, not legal advice.
This is Syndication Attorney Field Notes. I'm Tilden Moschetti. Today's note is about Rule 144A... and why it's usually the wrong tool for a mid-market syndicator.
Sponsors often hear that 144A gives investors a secondary market — a way to trade their shares and not get locked up for five years. So they ask me to build the deal under 144A instead of Regulation D. Here is the problem with that.
The surface question is, "Should we use 144A?" But that's not the real issue. The real issue is who Rule 144A was actually built for. And once you see that, the answer gets pretty simple.
Let me lay out the two rules in plain English.
Regulation D is the workhorse. It's how a mid-market syndicator raises capital. Under Reg D — that's Rule 506(b) or Rule 506(c) — you're raising money from accredited investors. An accredited investor is, roughly, an individual making a couple hundred thousand a year, or with a net worth over a million dollars outside their home. Doctors. Lawyers. Business owners. Small family offices. That's your normal investor pool. That's who Reg D is designed for.
Rule 144A is a completely different animal. It's an institutional tool. It exists to let big institutions trade unregistered securities among themselves. And the people allowed to buy in that world are not accredited investors. They're Qualified Institutional Buyers — QIBs.
Now here's the gap, and it's a canyon, not a crack. To be a QIB, you generally have to own and invest at least a hundred million dollars in securities. A hundred million. That's not a wealthy individual. That's an insurance company. A pension fund. A large asset manager.
So when a sponsor says, "I want 144A so my investors can trade," what they're really saying — without knowing it — is, "I want to build a deal for players who manage nine figures." And that's almost never who's on their list.
Let me put this on the whiteboard. This is a hypothetical, but it's the exact conversation I have.
A sponsor is raising a fifteen-million-dollar fund. Solid deal. And they want to give investors an exit — a way to sell their shares down the road. Somebody told them 144A is the answer, so they come in wanting to structure the whole thing under 144A to create that trading market.
Here's what happens in the real world. They take that 144A deal to their investor list. And their investor list is... doctors, a couple of lawyers, some business owners, maybe a small family office or two. Good people. Accredited investors. Exactly who you'd want in a Reg D deal.
But not one of them is a QIB. Not one of them owns and invests a hundred million dollars in securities. So under a 144A structure, none of them are even legally allowed to buy.
Think about what that means. The sponsor just built a liquid structure... and then boxed themselves out of their own market. They created a secondary market for buyers they don't have and can't reach. The fund doesn't get more liquid. The fund just doesn't get funded.
Now, could you technically try to go find QIBs? Sure. You can do that. I just don't think you'll like the problem it creates.
Because now you're not raising fifteen million from your existing relationships. You're trying to break into an institutional world where you have no track record and no access. That's a sales problem you did not have yesterday. And on top of it, you've taken on all the administrative complexity that comes with an institutional structure — for a mid-market deal that never needed it.
That's the tradeoff. Liquidity sounds great in theory. But liquidity you can't deliver, for buyers you can't reach, isn't a feature. It's friction. And in the real world, friction at the raise is fatal. A liquid deal that can't close is worth nothing. A slightly less liquid deal that actually funds and performs is worth everything.
So my judgment is straightforward. For a standard mid-market raise, 144A is the wrong tool. Regulation D is the right foundation. That's not a knock on 144A — it's a great tool for what it's built for. It's just not built for you.
So here's the practical takeaway.
Match your legal structure to the investors you actually have. If your buyers are accredited individuals and small family offices, Reg D is the path. Use a solid Reg D private offering package — the PPM, the operating agreement, the subscription documents — built around 506(b) or 506(c). That's what raises mid-market capital efficiently.
And if your investors are genuinely worried about being locked up — which is a fair concern — you don't fix that by changing the securities exemption. You fix it inside the Operating Agreement. You can build in transfer provisions, so an investor who wants out can sell their interest to another qualified buyer, subject to your approval. Or you can consider a limited, discretionary redemption right — where the fund can buy them out under conditions you control, so you're not forced to write a check at exactly the wrong time.
That's how you address liquidity honestly. You give investors a realistic path without blowing up the exemption that lets you raise the money in the first place.
So before anyone sells you on 144A as the liquid alternative to Reg D, ask one question: are my investors managing a hundred million dollars in securities? If the answer is no — and it almost always is — then 144A isn't your answer. Reg D is, and you solve liquidity a different way.
That's the note for today.