A real estate syndication often has an issuer, a manager, a sponsor, property-level entities, and several people whose titles sound important. When investors allege a securities violation, that structure raises a practical question: who had the power to direct the relevant company and the transaction?
Under the Texas Securities Act’s control-person provision, the answer can determine whether someone besides the seller, buyer, or issuer faces liability. In our companion article, we explain the basic theory and its defense. Here we look at the evidence.
Start by identifying the decision and the actor
A useful investigation starts with the specific alleged violation. Was a material fact omitted from offering materials? Was a particular representation made in connection with the sale? Who was the seller or issuer, and who had authority over that person or entity? The answers determine which documents and witnesses matter.
The investor also needs an underlying claim within the statute, not merely evidence that someone was influential. The fact that a venture failed, without more, does not establish a securities violation. Nor does proof that someone controlled one entity automatically establish control over every other entity in the structure.
Read the operating agreement, then ask how it worked
The operating agreement and related documents may identify managers, voting rights, vetoes, removal rights, delegated authority, and the approvals required for a securities offering. Amendments, side letters, management agreements, and board resolutions can change the picture. A provision giving a board authority should be read alongside the rules for how that board acts.
The distinction between group authority and individual authority was central in Davis v. MSR Holdings, LLC, No. 01-22-00451-CV, slip op. at 41–45 (Tex. App.—Houston [1st Dist.] June 28, 2024, pet. denied). The Houston court found insufficient evidence that a minority owner and manager generally controlled the company and examined whether he could control the challenged sale. The court distinguished authority held by the board collectively from authority held by an individual member.
That is a reason to look beyond a chart showing who sat at the table. Who could carry a vote? Who could block the decision? Was authority delegated? Did the written structure match the way decisions were made? The answers may support either side.
Follow the offering materials
Drafts of the private placement memorandum, investor presentations, subscription documents, financial projections, and emails can show who supplied information, requested revisions, approved language, or had authority to stop its distribution. Version histories and contemporaneous messages can be more revealing than a later description of everyone’s job.
Participation in a particular communication and the power to control the relevant activity are related questions, but they are not interchangeable. In Barnes v. SWS Financial Services, Inc., 97 S.W.3d 759, 763–64 (Tex. App.—Dallas 2003, no pet.), the Dallas Court of Appeals declined to require an investor to prove participation in the violation to establish control-person liability. The court applied a test examining control over the company’s operations and power to control the specific activity at issue. It also acknowledged a different formulation by the Texarkana Court of Appeals. A lawyer must account for the governing appellate authority and the actual facts.
Trace money and information carefully
Bank records, signature authority, capital calls, management fees, distributions, and transfers can help map the transaction and the people involved. They can also raise questions about who received reports or directed company operations. But a payment, fee, or signature does not automatically prove control. Its significance depends on the authority it represents and its connection to the relevant company and transaction.
The same is true of investor communications. Someone who answered questions may have had authority over the offering, or may have passed along approved information without power to change it. Meeting minutes, internal emails, reporting lines, and testimony should be considered together.
Preserve the defense evidence, too
Section 4008.055(b) provides a defense when a controlling person proves that the person did not know and, in the exercise of reasonable care, could not have known the facts giving rise to the alleged liability. A sponsor should preserve contemporaneous reporting, requests for information, responses, escalation procedures, and other materials bearing on what was known and what reasonable care would have revealed. Those records may help an investor assess the claim as well.
Preserve records as soon as a dispute is reasonably anticipated and consult counsel about the scope of preservation and any applicable obligations. Avoid deleting messages, replacing versions, or assuming someone else has retained the relevant information.
Build a timeline, not just an organizational chart
An effective assessment brings the documents together chronologically: who held authority when the investment was offered, who received information, who approved or could change the relevant activity, and what each person knew or reasonably could have discovered. The chart is a starting point. The decision trail is where the hard questions usually begin.
Related reading: Who Helped the Deal? Aiding Liability Under the Texas Securities Act.
Matthew M. Clarke represents investors, sponsors, businesses, and individuals in securities, syndication, and commercial disputes. This article provides general information, not legal advice about a particular investment.