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Services Provided
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Syndication
The term
"syndication" applied to a horse generally means division of ownership,
but this division of ownership can take several forms.
One of these forms used for breeding stallions is referred to as an
"undivided fractional interest" syndicate. In this form, each
co-owner, or member of the syndicate has ownership of"an undivided
fractional interest" in each molecule of the stallion, subject to the
terms of the syndicate agreement. The syndicate agreement
usually provides for each co-owner to receive certain breeding rights,
each for their own use. "Shares" of undivided fractional
interest syndicates are considered tangible personal property, so each
co-owner can deduct their cost by depreciation using the modified
accelerated cost recovery system ("MACRS"), or if the co-owner is
eligible to use the "expensing provisions of Internal Revenue Code
Section 179, a co-owner might deduct entirely in the year purchased the
cost of purchase of an undivided fractional interest in a stallion
syndicate.
The undivided fractional interest syndicate, if done properly in NOT
considered a "security" in the sense that the term "security" is used
by the Securities and Exchange Commission". The
conditions and reasons under which an undivided fractional interest
breeding stallion syndicate are considered NOT to be a
security are set forth in "no action" letters issued by the Securities
and Exchange Commission ("SEC") in the 1970's. If
the terms and conditions of these "no action" letters are followed, the
SEC will recommend that its enforcement division take "no
action" against the person or entity selling the stallion syndicate
shares. What this means is that the seller does not need to
prepare a disclosure document such as a "Private Placement Memorandum"
and deliver this document to each prospective buyer before selling a
syndicate share, and that laws which apply to the subsequent sale of
securities need not be followed.
A "security" has been defined by the U.S. Supreme Court as a situation
where a person invests in a COMMON VENTURE with another person (or
entity) with an EXPECTATION OF PROFIT BASED IN WHOLE OR IN
PART ON THE EFFORTS OF THE SELLER OR A THIRD PARTY.
So, if a stallion syndicate where formed under which the buyers or
syndicate members simply bought interests in the stallion, then either
made money, or didn't, based on whether the syndicate manager could
sell breedings profitably and splitting all of the income from the
sales of the breedings, this stallion syndicate would be considered a
security, because the members are in a common venture (splitting the
income from sales of breeding rights) with an expectation of profit
based on whether or not the syndicate manager can sell the breedings
profitably.
There are many different deals struck in the
formation of stallion syndicates. Sometimes,
particularly when strong management control of the stallion by a seller
of the shares (sometimes a breeder/seller wants to maintain more
control than is permitted by the principles of the relevant"no-action"
letters) a stallion syndicate may be a security under the meaning used
by the SEC. This is not necessarily a bad thing.
Profitable and successful stallion syndicates have been formed as
securities. It does mean that the laws for sales of
securities must be followed.
This firm has formed stallion syndicates of both types, as securities
and as non-security undivided fractional interest types. The
form which is appropriate must be determined in a case by case basis,
based upon the needs and desires of the owner/seller in each particular
situation.
Syndicates are also used for racing. In racing, the horse can
only run once in each race, so a horse racing for co-owners is a common
venture. However, if a horse is co-owned by two or
three people, each of whom has equal authority and control in the
management of the racing career of the horse, then the situation would
NOT be a security, because none of the co-owners is relying on the
efforts of a third party to make a profit, but rather are relying on
their own skill and efforts, jointly with their
partners. Some racing partnerships are securities;
other racing partnerships are not securities. This
is a technical area and must be approached on a case by case
basis. The firm can create racing partnerships
(and/or other entities, such as Limited liability companies or LLCs)
for both securities type and non-securities type racing
syndicate.
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