Are you interested in owning that high-dollar breeding stallion but just can’t quite justify the initial investment? Although you own a few nice mares, do you wonder how you will secure the remaining thirty to forty additional breedings necessary to recoup costs in an average season? Do you know other business associates who have expressed an interest in the stallion but are unable to actually purchase the stud? If so, you might be a good candidate to utilize a syndication agreement.
1. What is Syndication? Stallion syndications are contractual agreements where multiple parties combine their financial resources to purchase a stallion for breeding purposes. Each contributor or “owner” owns a “fractional interest” in the stallion, typically entitling them to one breeding right per breeding season. The farm or individual syndicating the stallion will generally retain multiple fractional interests. The arrangement provides for lowered costs and a more diverse breeding for the stallion.
2. How does it work? The parties enter into a contract or “syndication agreement” which specifies the owners and their respective interests, rights, obligations and privileges; identifies the stallion and where it will stand; warrants the animal’s health, fertility, and title; specifies transferability of interests and applicable restrictions, deals with the allotment of any extra seasons or nominations in a breeding season, defines each owner’s breeding rights, designates the syndicate manager and his/her respective duties and compensation, establishes liability insurance coverage for the stallion, establishes the stallion’s normal book and methods of accommodating reduction or expansion of the book, establishes health and other requirements for the mares to be bred, and defines the procedures for modifying the agreement.
3. What does the Syndicate Manager Do? The syndicate manager is responsible for the day to day care and management of the stallion. The manager is typically hired by the Farm initiating the syndication agreement, and is responsible for the maintenance, care, management, breeding, advertising, promotion and handling of the horse, as well as accounting and financial duties plus disbursement of funds as necessary to vendors, service providers and owners.
4. What are the tax consequences of this entity? Typically the Syndicate is regarded as a partnership for federal income tax purposes, with each member allocated a portion of the income, expense and depreciation pro-rata to their respective fractional ownership interests.
5. Are there potential pitfalls? The syndication agreement can potentially raise security law considerations, given the sale of fractional interests. In certain instances, the sale of a fractional interest in a stallion syndication may qualify as a sale of a security in the form of an investment contract. This generates costly registration requirements under federal and state law.
6. What is an “Investment Contract”, and do I have to register as a security transaction? An “investment contract” is defined as: (1) an investment of money; (2) with the expectation of profits; (3) in a common enterprise; (4) derived solely from the entrepreneurial efforts of others. While a syndication agreement facially appears to meet this definition, the Securities and Exchange Commission in l977 issued the Gainesway “No Action” Letter. In this letter, the SEC stated that the commission would take no enforcement action against the syndication of a stallion so long as the syndicate agreement contains certain mandatory provisions. These mandatory provisions are: (1) fractional interests are purchased as a commodity, the right to breed the stallion in the purchaser’s business; (2) each fractional interest owner will have complete title to offspring; (3) there is no pooling of income or losses; (4) interests that are not sold are retained by the syndicate; (5) costs and expenses are paid by the fractional interest owners on a pro-rata basis; (6) if, at the end of the first breeding season, the agreed number of nominations is not met, the purchasers of the fractional interests can rescind the transaction; (7) the stallion will stand at the syndicate manager’s farm with the manager acting as agent of the owners for custodial functions; (8) compensation for the syndicate manager is to be an agreed number of nominations; (9) excess nominations during a breeding season are distributed by lottery to the owners; (10) each owner has an insurable interest in the stallion; (11) transfer of the fractional interests are subject to a right or first refusal, and (12) the owners may sell any unused nominations. Each of these provisions can easily be incorporated into the agreement.
While the contractual requirements may seem cumbersome, the process, if handled correctly, provides a viable alternative to costly sole ownership.
Denise E Farris, Esq.
About the Author
Farris Law Firm, LLC
20355 Nall Avenue, Stilwell, KS 66085
Phone: (913) 766-1262
Fax: (913) 766-1262
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