A joint venture and syndication may often look alike, but are governed by vastly different laws.
A joint venture primarily governed by contract law and involves a few business partners who, regardless of whether they invest in the deal or not, are all actively involved and each contribute unique skills to the overall success of the project. Unique skills may include, for example, construction management, property management, due diligence, underwriting, searching for financing, handling accounting and legal, etc. However, these must all be real significance skills. Getting a group of people together every Tuesday to drink wine and vote on the color of the paint for the building, for example, doesn’t rise to the level of a unique skill.
In a syndication, one or few people are part of the sponsor or managing team. They are responsible for the overall success of the project and they each bring a unique skill. Everyone else who contributes money but is not actively involved in the deal is considered a passive investor. Syndications are a type of securities offering.
A security, or investment contract, is defined by the Howey test, which is a four prong test. It defines an investment contract or security as:
- an investment of money due to
- an expectation of profits arising from a
- common enterprise which
- depends solely on the efforts of a promoter or third party.
In a joint venture, because all business partners are involved, they are not relying on a third party for the venture to be successful. In a syndication, passive investors rely on the sponsor or management team to realize an ROI.