Horse Syndication 101

Equine Legal Solutions has seen a steady increase in the number of buyers contacting us about purchasing a horse for “syndication” and wanting to know if we have a form that will work for them. The short answer is, “That depends.” We’ll need to know more about your situation before we can recommend a solution for your needs. Are you intending to purchase and co-own the horse with a small group of people? Are you intending to sell shares of ownership interest in the horse after you purchase it? What is the goal of the ownership group? First, we’ll discuss how the word “syndicate” became popular among owners in the horse industry; then we’ll discuss the differences between syndications and co-ownership.

So, Exactly What IS a Horse Syndicate?

The Merriam-Webster dictionary defines “syndicate” as “an association of persons officially authorized to undertake a duty or negotiate a business,” and further, “a group of persons or concerns who combine to carry out a transaction or project.” Merriam-Webster also defines “syndicate” as “a loose association of racketeers in control of organized crime,” but that’s a topic for another day.

In the horse industry, a “syndicate” generally refers to a group of people who come together to purchase shares in a horse. There are several kinds of syndicates, but the basic principle is people who buy into the deal become co-owners of fractional interests in a racehorse, show horse or stallion, as the case may be. The main purpose is to share the cost of purchase as well as the ongoing costs needed to maintain the horse. We’ll discuss the various forms of syndicate co-ownership below.

First popularized in the Thoroughbred racing industry, syndicates were historically formed as ways to finance the cost of racehorse ownership and spread the business risk of racehorse ownership among multiple investors. Funny Cide, who won the Kentucky Derby and Preakness Stakes in 2003, is a great example of a group of friends who pooled their resources to purchase a promising 2-year-old Thoroughbred. Ten friends formed “Sackatoga Stable” and chipped in $5,000 each to buy their first racehorse. After a bit of success that added money to their “pool,” they teamed up with trainer Barclay Tagg in 1999, who purchased Funny Cide for the group for $75,000 in 2002. Funny Cide went on to win 11 races out of 38 starts, including five graded stakes, earning $3,529,412 over a five-year race career. Unfortunately, Funny Cide was a gelding and unable to continue making money for his owners in the breeding shed.

In the 1980s, syndication became very popular for show horses, particularly Arabians, as well as racehorses because of certain tax advantages available to syndicate share owners. When those tax advantages largely disappeared with revisions to the Internal Revenue Code, the popularity of syndicates in the horse industry declined steeply.

In the 2000s, syndication of eventing and dressage horses became popular, especially with horses imported to the United States from Europe.

Today, syndicates are most often formed to co-own racehorses, breeding stallions and highly valuable show horses. Syndicated horses can be stallions, mares or geldings.

Potential Advantages of Equine Syndication

Purchasing Power
Syndication can provide the capital for several individuals to purchase a horse that would otherwise be beyond their means. Pooling resources means more purchasing power — 10 friends might each be able to afford a $20,000 horse, but if all 10 of them join together, they can afford a $200,000 horse.

Access to Capital
For a person who owns a horse outright, syndicating that horse can be a way to generate cash to promote and/or compete the horse and thereby increase its value.

Cost-Sharing
Syndication also allows owners to reduce the ongoing costs of horse ownership. If 10 friends join together to purchase one horse instead of each of them purchasing one horse on their own, they would each have one-tenth of one horse’s expenses instead of 100% of one horse’s expenses.

Diversification
If a prospective horse owner has a limited pool of money to invest in horses and spreads that investment over several horses via syndication instead of purchasing a single horse, the investment has a greater chance of being successful than with just one horse. And if one horse suffers a career-ending injury, the investor has not lost her entire investment because she has also invested in other horses.

Professional Management
Horses owned by a syndicate are typically carefully managed by an equine professional with appropriate knowledge and experience. Purchasing shares in a syndicate therefore provides an opportunity to get involved in the horse industry for persons who are interested in horses but lack knowledge and experience. It also affords more experienced horse people the opportunity to be horse owners without having to oversee the animal’s day-to-day care and training.

Limited Liability
Many syndicates are formed as limited liability companies (LLCs), which generally limit the liability of their members to the investments the members have made (and protect their personal assets).

Connections
Syndicate members can benefit from other members’ experience and connections in the industry. For example, if a prospective horse owner is interested in purchasing a top-level show horse stallion but is new to the breeding business, she can form a syndicate with breeders who have the requisite knowledge to succeed. If one of the syndicate members is an equine reproduction expert, they can serve as the managing member of the syndicate who oversees the stallion’s care and collection and shipping of semen.

Potential Risks of Horse Syndication

Poor Management
The success of a syndicated horse depends heavily on designating a manager who has the knowledge and expertise to oversee the horse’s day-to-day care and training as well as plan and manage the horse’s race, show and/or breeding career. Poor decisions could cause the syndicate owners to lose their entire investment via a career-ending injury or poor performance. Similarly, managers who lack business acumen and experience can cause the syndicate to incur unnecessary expenses and miss out on income-earning opportunities.

Lack of Control
Syndicate investors generally have little to zero control over the short- or long-term management of the horse. Read the fine print before investing — the syndicate agreement should specify what voting rights the syndicate members have (if any).

Lack of Liquidity
Shares in a horse syndicate are generally very hard to resell because there is a very limited market for them. Often, syndicate agreements specify the manager must preapprove any sales or other transfers of syndicate ownership.

Unlimited Liability
If a syndicate is not formed as a limited liability company, a limited liability partnership or other structure designed to limit its owners’ personal liability, the result could be financially ruinous. For example, if a syndicate is formed via an agreement among the syndicate members without any formal structure other than a syndicate agreement, the syndicate might be a de facto partnership unless a written agreement says otherwise. The result? Any syndicate member could potentially incur debt in the name of the syndicate, resulting in personal liability for all the syndicate members.

Ongoing Capital Calls
Many syndicates are not “one and done” investments — they require ongoing contributions for expenses. This is particularly true when most or all syndicate members’ initial investments are used to purchase the horse. Unless the horse immediately begins generating significant income through winnings and/or breeding fees (which is VERY rare), the syndicate members must continue to contribute funds to maintain the horse.

Complete Loss of Investments
Horses are exceptionally risky investments. It is difficult to make money on a horse even if everything goes as planned, and even the most talented and carefully managed horse can (and often does) fail to meet expectations. Career-ending injuries are not uncommon.

Syndicate-Ending Disagreements
Just like any other business venture, syndicates can fail when syndicate members can’t or don’t work together to resolve problems. Common disagreements include how the horse should be managed, how to handle setbacks such as injuries and whether, when and at what price the horse should be sold.

Unexpected Tax Consequences
Before forming or investing in a syndicate, always consult with a trusted tax professional.

Unexpected Legal Consequences
Before discussing forming a syndicate with any potential investors, consult with an attorney who is knowledgeable about forming equine syndicates. Otherwise, such a discussion could inadvertently violate federal and state securities laws. Our Attorney Directory, located on Equine Legal Solutions’ website, lists equine attorneys by state and is a good resource if you are considering forming a syndicate.

Before Forming a Horse Syndicate

Create a Business Plan
Before forming a syndicate, the person who will manage the syndicate should create a detailed business plan, including an itemization of all expenses that can be reasonably anticipated, such as the cost of purchasing the horse (if applicable), training, board, veterinary care, farrier care, tack and equipment, mortality insurance, major medical insurance, liability insurance and so on. The business plan should also clearly describe exactly how the horse is expected to generate income, how much income and when it will be generated. The one sure thing about investing in a horse is nothing will go according to plan, so the business plan should also include details on managing foreseeable setbacks such as injuries that require extensive rehabilitation, fertility issues, failure to perform as expected (or at all), market declines that cause horse prices to plummet and even death.

Seek Legal Advice
Obtaining legal advice from an attorney well-versed in horse syndicate formation can help limit liability, prevent problems and spark discussion among prospective syndicate members about important details they might not have considered otherwise. Refer to our Attorney Directory, located on Equine Legal Solutions’ website, for an equine attorney in your state who can assist you in forming a syndicate.

Seek Tax Advice
A qualified tax professional with horse syndicate experience can help maximize potential tax advantages and minimize potential adverse tax consequences, as well as assist in preparing and filing necessary tax documents.

Before Joining a Horse Syndicate

Investor Expectations
Before deciding to buy into a syndicate, a potential investor should make a list of their expectations. Are they only interested in potential financial return? Or do they want to have some involvement with the syndicated horse? For example, do they want to be in the barn when the horse is being prepared for its race or class? Do they want to be able to stop by the barn at any time and pet their horse? Is the horse’s trainer willing to allow them to be present in the barn area? Will they be in the winners’ circle photos? These are all important considerations for prospective syndicate investors.

Investor Requirements
Besides capital, what will be required of the investor? If your horse will be raced, you will likely be required to obtain an owner’s license from the state racing commissions that govern racetracks where your horse will be running. If you have a felony conviction on your record, you probably can’t obtain an owners’ license. If your horse will be competing in breed or discipline shows, you might be required to become a member of the breed or discipline association. Before deciding to join a syndicate, a potential investor should be aware of all requirements expected of them.

Red Flags for Potential Horse Syndicate Investors

An Inexperienced Manager
The syndicate manager should have previous successful experience managing equine syndicates and managing the type and level of horse the syndicate will own. For example, if the horse to be owned by the syndicate is an Olympic-level dressage horse, the manager should have previous experience successfully managing horse syndicates as well as Olympic-level dressage horses.

A ‘Problem’ Manager
A potential investor should do their due diligence and look into the individual(s) who will be setting up and managing the syndicate. Just because the person is “well-known” in that faction of the horse industry does not mean they are honest and would not sacrifice their reputations to make a quick buck.[1] An investor should do their homework and, if the investment is a significant amount, even consider hiring a professional to learn more about the people setting up and managing the syndicate. Even a Google search could turn up lawsuits they might have been involved in. And if they have been in trouble before, what makes one think they couldn’t be in trouble again?

Lack of Documentation
The syndicate manager should provide all potential investors with a detailed business plan and proposed syndicate agreement asking them to come up with cash.

Urgency
Forming a syndicate should be a carefully considered and well-planned decision, not a last-minute fundraising method to send a particular horse (and its rider/handler) to a particular competition.

Lack of Responsiveness
A syndicate manager should pleasantly provide whatever information potential investors request and do so in a timely manner. If that is not happening prior to the investor contributing cash, the situation will not magically improve post-investment.

Defensiveness
A syndicate manager should be open and honest in communicating with potential investors and answer their questions directly and respectfully. For example, a syndicate manager should not respond to any potential investor’s question with, “That’s just the way it’s done in this industry.”

Lack of Transparency
A syndicate manager should be able to tell potential investors which horse the syndicate will own (or, if the syndicate plans to purchase a horse, exactly how that horse will be identified for purchase). The syndicate manager should also be able to tell potential investors the total number of syndicate members, when the syndicate will be fully funded (i.e., closed to new investors) and (within reason) the identity of investors who have already committed to invest.

Equine Co-Ownership Agreement vs. Horse Syndicate

Our equine attorney developed our Equine Co-Ownership Agreement, which will work for many horse co-ownership situations. It can be used for investment, sale and show horses, as well as horses used for pleasure riding. The agreement identifies each owner and the percentage they own, as well as who is responsible for the horse’s ongoing costs (emergency and routine vet care, board, training, farrier, insurance, competitions, etc.). If the horse will be competing and winning money and awards, the agreement defines how those winnings are to be distributed. Decision-making responsibilities are also covered, including decisions to sell or retire the horse. And, like all our contracts, our Equine Co-Ownership Agreement also provides liability protection for all co-owners. The agreement is designed to be effective in all 50 states, and you can purchase it on our website.

Horse Syndication Services

When the co-ownership arrangement is more complicated than provided for in ELS’ Equine Co-Ownership Agreement, the co-owners will need legal advice and a customized syndicate contract. For example, if the syndicate members will have breeding rights, such as the right to breed a certain number of mares to a stallion or the right to harvest embryos or oocytes from a mare, the syndicate members will need a customized syndication agreement. Another example is if the syndicate will sell a large number of shares or sell shares on an ongoing basis. If you reside or do business in California, New York, Oregon or Washington, we would be happy to offer you a consultation and discuss creating a horse syndication agreement for you.

Are you located in California, New York, Oregon or Washington? Interested in forming a horse syndicate? Have questions about investing in a horse syndicate? Just contact us — we’ll be happy to assist you!