SEC Attorney Simplifies Private Funds | 2021

May 7, 2021

SEC Attorney explains what to look for when investing in private investment funds.

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Transcript:

All right. Pilot investors. I am so happy to have Nate Dotson. Who’s an SEC attorney at crowdfunding lawyers with us today, too. A lot of you, I know have questions in regards to syndications funds. How do I invest in real estate, in somebody else’s deal, which is so important. And the next couple of videos, we’re going to be talking more and more about how you as an investor can make money off somebody else’s deal. So today, Nate, thanks so much for joining us today. 

Happy to be here. Thank you. 

So SCC law is something people are scared of because they don’t know anything about, um, a lot of, you know, some people don’t even know what the sec is. It sounds like, uh, it sounds almost as scary as the IRS. 

Yeah. They’re actually scarier than the IRS. If you, uh, do them wrong, they probably put way more people in prison than the IRS ever has. And just kind of reflect back on the birding, Bernie Madoff’s of the world. Uh, there are definitely people out there that are, uh, unscrupulously taking people’s money and not doing them right. And the sec is the regulatory agency to really protect the investors, protect the industry and it’s the securities exchange commission. Uh, and so really all their focus is, and their entire jurisdiction is on investing in investments. 

Perfect. Yeah. So, so glad, thanks for joining us today to unravel the mystery of this and to protect both people who are investors, people who are looking for private money, both sides. It’s so important to talk to guys like you. So I appreciate it. Absolutely. So first question today is pretty simple.

So how could an investor tell us if syndication is legal?

Like they see something on the internet on YouTube, how do they make sure it’s illegal syndication? 

So kind of interestingly that there’s not a firm and fast rule of exactly how it needs to be presented or qualified. So it’s a little bit of a loaded question. How do you know if it’s legal? Uh, so I’ll just kind of start from the top and get down to a little bit granular, uh, you know, really securities means a investment, but all investments, aren’t securities. And the sec only cares about the securities. Uh, if one person invest into a rental home, it’s their investment, of course, but it’s actually not a security. So a lot of the rules and requirements just don’t apply. Now what a security is under the technical rules is you have the syndicator promoter, some third party manager pooling together, investors money. The investors are, have some commonality they’re just putting in cash where they are passively expecting a return on their investments. 

That that’s what triggers a lot of these securities rules. And at the end of the day with securities and most investments, but not all they need to be either be registered and all the stock markets, stocks and trading and whatnot. Those are registered securities in the alternative. You have exempt securities and that’s, that’s primarily where, uh, we’re crowdfunding lawyers a and I focus, uh, and, but there’s a whole lot of different ways to approach the exempt investment transactions, uh, now to keep it very safe. The most important thing for the investors to know is, do I know everything about the investment, the plans who the management is, their backgrounds, and really the risks in what I’m putting my money into. And so that’s really traditionally that, uh, they call it a private placement memorandum, uh, in the past. So you can call it an offering circular there that goes via a whole bunch of different names. Uh, but at the end of the day, it is a document that disclose the here’s the business plan. Here’s how the investors are interested, their economic interests, their control, what voting rights do the investors have versus the management authority to do whatever the management needs to do as well as very specific risk factors. If you invest in this, uh, the risks of investing into a multifamily property, as an example, are far different than investing into a private chartering jets as an example. 

Wow. It’s, uh, sounds like a lot of exemptions. There’s a lot of different ways it can go. Yeah. Wow. Interesting. So another question.

So what protections does legal syndication provide to the investor and the syndicator?

So the offering circular, the PPM really is there to, uh, really provide protection to everybody, both sides of the transaction, uh, and to, to qualify what you had just mentioned. Actually, if they’re exempt securities, they’re generally not registered with the sec, and that actually becomes kind of a risk factor for investors. Uh, legally forms are supposed to be filed with the sec. They call them reg reg D notices regulation. The, of the securities act of 1933. And that really very high level tells some of the specifics about how the deal is structured, but it doesn’t say much about what’s the business plan other than it’s an investment into real estate as an example. So it gives almost no information there, but that’s the only filing that the sec sees as well as generally, that same thing is filed in every state that investors are invested and that is a searchable database. 

So you can see if the, uh, the offering or the opportunity that you’re investing in has done the proper filings, but because there’s so many different exemptions and different ways to do it, it’s, it’s just not a one size fits all. But to, to actually get to the question and the answer, how does it protect from the syndicators side? It defines the scope of the business plan and as well as the risk factors surrounding that business plan. And we all know with all investments, there’s a level of risk that we all accept, uh, an with private illiquid investments. There’s a risk there. That’s quite literally one of the top risk factors that are always going to be disclosed. Uh, but as long as the syndicator does what they say, they’re going to do use best efforts, abide by all the laws. You know, don’t go outside the scope of what’s been communicated to the investors of as being the plan and the goals. 

And here’s what we expect and anticipate to happen. It does offer that level of protection to the syndicator of best efforts were provided. I acted scrupulously. I did all that I was supposed to do. The investment just didn’t work out. So from that respect, it actually does offer that protection to the syndicator. And then on the investors side, it’s really important to see the structure, the controls of profits, et cetera, because if things don’t work out and there’s plenty of shady people out there in the world, it really is a, okay, we’ve got this document. It said exactly what is supposed to be occurring. We understand our risks. We understand what voting we have versus the management. What could they do? And so really at the end of the day, if, if something has happened with the investment that is outside the scope of the plan, the investors actually may have a good claim against the syndicator or the company. 

And one of the first lines of defense for the investors, if things have not been done correctly, a regulator will do an audit or an investigation. And one of the first things that they may say is, as an example, reg D notices and filed, you do not qualify for the exemption. You did not do these steps properly. And now you owe all the money back to all of your investors and you can’t bankrupt out of that. So it can be some fairly strict stringent requirements. And if you were truly unscrupulous, you know, did investor fraud or something horrible, you could also go to jail. So there are some really high bars too, or penalties, if the syndicator or investment promoter doesn’t do things right. And really it’s going to come down to that, uh, private placement or the offering circular that really defines exactly what the plan is and what’s going on. 

Uh, and so even though this may be legal, this is not safe when somebody says, Hey, I’ve got this wonderful idea. You know, I opened up an LLC, here’s my two page investment agreement. Just sign here, give me a check. And we’re good to go. That offers no protection to the investors. It really is problematic for the syndicator. You will find much more of the unscrupulous operators kind of use that approach. And so that’s something for all of your investors to really take note of, if you don’t get all the information on the investment in writing, watch out. 

Wow. Now, if you don’t mind the up on that, that answer, I’ve taken a look at a few PPMS, no offense to you, but they’re legal ease. And it’s very difficult to go through 57 pages to figure out what’s in it for me. How does the relationship work? So if myself, I bring you a PPM and be like, Nate, can, can you translate this to English? Is that something that you guys could do? Or we don’t do that, 

But there are some attorneys out there that do, I will say hands down that, that the overly legal Lees, uh, offering documents actually can, even that violate the securities rules, one of the premium primary purposes of a private placement memorandum, the offering documentation is everything’s supposed to be written in plain English. Sometimes that’s very difficult to understand, especially when you get to these weird, crazy, you know, get this preferred rate and then this class and that split, and then this split over there, it can absolutely get confusing and there’s no way around that. But in the general sense, it is supposed to be written in plain English. It’s actually a securities regulation that it’s written in plain English. So you should be able to understand the private placement memorandum. Now past that you have the investment documents you have may have bylaws or operating agreements. Those are truly the legal leads. And it’s basically supposed to filter through the legal leaves to be explained in plain English through the offering memorandum. 

Wow. So it’s supposed to be in plain English. Oh, that’s interesting. Okay. Um, so a lot of my investors have been talking or looking at, um, REITs and they’re confused.

What’s the difference between a 506(C) syndication in a REIT?

I, I don’t know myself. I’m super curious. 

Um, there is apples and oranges actually, really, uh, yes. What reg D the [inaudible] B regulation, crowdfunding, all those really just deal with the placement and sale of these securities. That’s all that matters there with it. And so you can do a fund, a real estate fund that looks exactly like a REIT, but you sell it under the regulation. D you capitalize it through regulation, a whatever, uh, but it can really, in general, it does look very similar with a major caveat REITs real estate investment trust. This is where it kind of gets funny. Most REITs aren’t trust. Most REITs are actually corporation. Uh, regardless of the rename REIT is actually just a tax election that allows a corporation. If it’s structured and operated consistent with the REIT rules, they can have pass through taxation of the profits and losses, just like the LLCs and partnership taxes are already done. So there’s honestly, there’s not a huge difference between the two with the re you actually just have a lot more limitations on these side, uh, of how you have to structure it. As an example, 15% is the kind of the management fee management promotes part 85% goes to the investors, but because of the way that they’re structured, the management can also be the investor. So you can, at the end of the day structure it the exact same as what any of these other real estate funds look like, whether it’s a reap or not. 

Wow. So in the end, the investment is almost similar. It’s more of the structure of the organization behind it for tax purposes 

For tax purposes. Absolutely. Yes. 

Oh, okay. Wow. So a lot of my investors there, they’re small investors, they have small apartment buildings and not, and they’re interested in taking on private capital. So, you know, you were talking about there that there’s some fine lines between what the sec requires for exemptions and what’s not exempt. So if somebody wants to raise private money for their real estate acquisition, I, at what point where they would be required to file a register with the sec through crowdfunding lawyers, 

I just to explain a little bit of the process and, you know, Hey, I’ve got this wonderful mastermind idea of something. I want to do a business to start a fund. I want to manage. I want to, you know, acquire this multifamily. You know, really the, the first step is figuring out what you want to do. Second step, you reach out to us. And, uh, so crowdfunding lawyers dot nets, uh, we do just offer free consultations to anybody that is kind of interested in taking those next steps and figuring out what you need to do, how to best do it, to get your deal going on the table and how to best capitalize it, because it’s not really a one size fits all situation. It actually takes some conversation. Uh, and so always kind of set up a series of phone calls where, you know, you get to learn and know a little bit more about the securities realm, as well as give us the opportunity to learn more about your business plans and backgrounds, because the first question is great. 

Where are your investors going to come from?

That one question alone can define what kind of exemptions or registrations or qualifications you have to go, where are you going to find your investors? And what type of investors are they? Oh, they, there are certain rules. They call it an accredited investor. These are generally people that have a net worth of more than a million dollars that except for their house, or they’re making 200,000 a year. If they’re single 300,000 a year, if they’re married and there’s a bunch of other options, but at the end of the day, the sec feels like it doesn’t need to protect those people as much as the smaller investors. So there’s generally certain marketing things, networking things, et cetera, that you can do if you’re really focused on the accredited investors that you can’t do. If you’re working with unaccredited investors on a credit investors, is everybody below the line. Uh, but there’s also different exemptions and requirements that allow you to actually work with an unlimited number of unaccredited investors as well. It’s just how to do it in the best way to do it, and really what you’re targeting. Wow. I started going down the rabbit hole, so I’ll finish it. No, 

No, that’s great. I mean, in the end, 

It’s complicated. It’s definitely complicated. So we step in really at the planning stage, uh, kind of help out with this is what makes sense. This is what we would suggest you do. Uh, ultimately at the end of the day, it’s a client’s decision. Uh, but from there we just kind of walked through the process and we do so many of, uh, funds and syndications and property acquisitions. We really got the system down, uh, as well as with crowdfunding lawyers, we’ve got really an amazing team of, uh, just their securities attorneys. We don’t do anything else. You know, there’s the, the guy that’s been doing it the longest. I think he’s been a securities attorney for 35 years. Almost all of the attorneys come from a top 10 law school and all of them have worked in securities, securities litigation, off wall streets in the past. 

So they’ve got some good pedigree, great backgrounds. And I do want to bring up not to, uh, you know, kick anybody. Uh, there’s a lot of law firms out there that either a, you just get billed out the wazoo and, uh, you know, where you get billed every six minutes that goes by, you don’t even want to call your attorney because that voicemail is going to cost you $60. Well, that’s not how we operate. We just do fixtures with everything. Uh, then you have like the other side of the law firms and, you know, they come in at a great price. It seems like a steal. The reality is as a hand, all the information off to a paralegal, you get no support advice from attorneys, but boom, you got your documents and good luck with your, uh, moving forward opportunity. So we’ve, uh, we’ve tried to kind of, uh, be right in between those where you’re only working with attorneys. We do try to keep the costs down, fixed fees. We want to hear from our clients. We want to make sure that it really goes well for you because you know, our client’s success, our own success. And that’s really how we see 

Fantastic. So whether an investor wants to start small and they, they don’t think that they need to syndication, like you mentioned, there’s a lot of gray areas of work and go if, if the deal goes bad. So no matter what, if you think you need to syndication or not, it sounds like it’s best to call you guys to hear it in black and white. Do I need it or do I not? And if I don’t, what do I need to be careful about? So no matter what size syndication or no syndication, having you guys on the team will, like you said, keep you out of jail at the worst case. Yeah. 

At the best case, we keep you out of jail. At the worst case, we defend it. If you have problems because you didn’t call us early enough. That’s right. 

So I’ve noticed that lately, you guys had some great, great webinars, seminars, online education. So if any of my investor, if any investors on here or interested in contacting crowdfunding lawyers learn a bit more, how what’s the best way to contact you? 

Uh, best ways either. If you’re just trying to find out about what we’ve got going on, go to our website, crowdfunding lawyers, dot net, uh, just get on our mailing list. We’ll let you know every event and thing that’s going on. If you do want to actually speak to an attorney, uh, there, you can use to set up a free no-cost appointment, right at our websites, or you can always call us. We’ve got a couple of different phone numbers, uh, you know, the 800 number 803, three, five Oh six, reg D. So that’s as easy to remember as possible at if you do want to just literally call the office direct equally easy four six, nine four four four nine nine nine, nine. 

Fantastic. Thanks so much, Nate. And I just want to let everyone know. So I subscribe to crowdfunding lawyers, uh, webinars education about once a week, maybe every two weeks, you have, um, amazing educational information and it’s not run by a salesman. You’re going to say this face on it. You’re going to see Nate 

For better or worse. It’s to be me, 

But you’re not going to hear salesmen. You can hear the real information from an experienced attorney. So Nate, thanks so much for how you’re growing your business, the education you’re providing, and thanks for letting everybody know the contact information so they can get in touch with you 

Anytime. Appreciate ya and talk to you soon. All right. Thanks, Nate. Thanks.