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Transcript:
As an airline pilot, you have an opportunity to do what most can not
[inaudible].
Yikes. Well, unless you’ve been living under a rock lately, you’ve probably noticed that the stock market has been crazy this week. In fact, Tuesday, Wednesday dipping below with losses below 500 points each day. Now, if you’re playing this tomorrow stock market with fund money, it probably doesn’t hurt so bad, but…
Are you willing to risk your retirement on a rollercoaster ride?
No. But where would you put your money? Well, instead of looking at the public stock market, have you ever considered looking at private markets now? You’ve probably heard the word private equity groups and you probably thought, Oh, those are only for the rich, but that’s not really the case. You don’t need to be rich, but you do need to be in the know. And that’s what this video is all about.
My name is Richard Robin dad. I am a partner here at grad funding lawyers, and, uh, I’m going to get right started here. I don’t have any sales pitch for you guys. I don’t have any programs or classes or anything. Can you to sign a poor? So from this point on, I am just offering, uh, contents. And, uh, I’ve been told when you do these kinds of things that you do, 80% ice cream and 20% broccoli. And, uh, it’s not really my style. So, um, uh, for better or worse, I’m going to give you guys a lot of broccoli and a really talk of just about a lot of the nuts and bolts of the stuff and not a whole lot of fluff. So, uh, let’s get right into it. I’m going to start with the mandatory disclaimer because we’re lawyers. Uh, so this is not legal advice.
You’re not paying us for legal advice. Uh, we’re not creating an attorney client relationship from this, uh, presentation. This is just for your information. So you can have a working idea of what syndications are and how to put them together. Uh, and if you’d like to continue with us in form an attorney, client relationship later on the road, we’d love to have you, uh, but that’s my disclaimer. So, uh, take that. Uh, so let’s jump right in what is a syndicate and very simply a syndication is just pooling investor money to make a specific transaction. Uh, so this is different from a fund, for instance, where I’m pooling money. And once I’ve pulled a whole bunch of money, I’m going to decide what transactions to make or what things to buy. I’ve already identified something that we’re going to purchase usually real estate. It might be hard.
It might be a sports car that we’re investing in, opening appreciates, something like that. Uh, but we’ve already identified that the object of our transaction, and now we’re going to raise money to make the transaction happen. And, uh, all syndications have what are called sponsors. The sponsors are the people in charge. So the active participants, they’re the ones identifying the opportunities, making all the connections and making everything work. Uh, and everybody else that comes into the deal is a passive investor. A passive investor is pretty much just put in their money and they sit there, uh, as houseplants. So the good side of that is passive investors have limited liability. Uh, the bad side of that is they have limited authority. So if you’re investing in one of these deals, you don’t get to dictate a whole lot about it. You don’t get to tell the sponsors when they’re going to sell or at what price you’re just investing with them and trusting them to make good decisions with regards to the transaction.
Uh, so, uh, just to, I’ll give you a structural idea. I want to start first, just kind of lining up basic real estate transaction. Now these don’t have to be real estate. It could be really any kind of investment is real estate is kind of my, my playground for the most part. So a basic real estate transaction would go like this. We have, uh, an apartment or self storage or house or something we want to buy. I form an LLC to hold that asset. Uh, and then I, or me and my partners, uh, become managing members of that LLC. And so we’re gonna put our money and we’re going to exercise control over that LLC. The LLC in turn is going to buy the apartment or whatever it is super simple. Okay. Now, if we want to send a Cate, because maybe my, my partners don’t have enough money to take down this huge department, what we’re going to do is we’re going to split up the roles a little bit.
So instead of a managing member, that’s going to control the LLC. And we’re going to put a manager on one side, we’re going to put members on the other. The members are going to put their money into the LLC. The manager is going to exercise the controls. We’ve split our roles a little bit. And then the LLC like before is going to invest its money in the property. Now, in reality, this manager is really going to be an LLC. So then we have our sponsor. Who’s going to control the management LLC, which is going to control the single purpose LLC. That’s going to buy by the apartment, uh, and like four members put in their money, sit there like house plants and hope to make money. Okay. Keep that in your mind for just a minute. And let’s switch gears and talk about securities. What is a security Congress?
Uh, did a really good job. They made this abundantly clear. It’s so simple. Uh, this is, um, yeah, I have no idea what this is. This is what, what the securities act says is a security. It looks like a bunch of gobbledygook, uh, plaintiffs and defendants and regulators throughout the years have had very, very difficult time with this definition. Uh, so fast forward a few years after the securities act, uh, in 1946, the Supreme court heard a case called, uh, sec versus WJ, how we company and the big issue in that case was what actually is a security. And the Supreme court came with, uh, came up with a four factor test. Uh, they said, uh, security is an investment of money into a common enterprise with an expectation of profits. From the efforts of others. That’s made money, common enterprise expectation of profits efforts of others.
One, two, three, four, if you don’t hit all four of those, you are not a security. So for instance, uh, Kickstarter, uh, Kickstarter’s crowdfunding, it’s not crowdfunding in the sense that we talk about crowdfunding. It’s not raising equity for a kind of Kickstarter. There’s no expectation of profits. So in putting money in, Kickstarter’s not a security, uh, trading, sweat equity for a stake in a company is not a security because it’s not an investment of money, uh, buying maybe a nice watch, hoping that it will appreciate and be more valuable in the future. Not a security because the money’s not made off the efforts of others. So if you don’t hit all four of these, of these criteria, then you’re not dealing with the security. Uh, now I think there’s an even easier way to, to identify security than the Howey test. And I’ve come up with just two criteria you can look at, and that is, it’s a security.
If it’s an intangible, passive investment, that’s all we need to know. So, uh, let’s look at things that are security stocks and bonds, annuities, notes, oil, and gas, LLC, membership interest. Those are, those are intangible, passive investments. You put your money in. There’s nothing else to do. You can’t touch them. Uh, this is as opposed to things that aren’t securities like, how is it this apartments cars, fine art, gold bars. Uh, now tricky one is cryptocurrency. Uh, and I think the jury’s still out on cryptocurrency, whether cryptocurrencies constitute a security on the one hand, they’re a medium of exchange. There are currency. Uh, on the other hand, people are tending to treat them more like stocks or futures, and they’re just buying a as speculation, trading them like futures or whatever. Uh, and I think the jury is really out long-term as far as whether cryptocurrencies are going to squarely fall into securities or non securities camp that we’ll see anyway.
Uh, but that should give you an idea. The things on the right, other than cryptocurrencies are things at least that you can touch, uh, that the, the value in them comes from their existence. Not from someone doing something the way that say annuities are or oil and gas royalties are. Okay. So let’s go back to our syndication structure and just take a couple seconds and look at this diagram and see if you can figure out where exactly is the security in this transaction. You got it. Okay. It’s right here. Why? Because this is an intangible passive investment. Or if you want to look at it as the Howey test, it’s an investment of money into a common enterprise with an expectation of profits off the efforts of others squarely a secure, okay. Now why do we care? Uh, well, because selling securities as a league, except when it’s not.
So what we’ve got here is a just classic government came in with the securities act and said, all securities offered in the U S must be registered with the sec and ethical state regulators. So classic licensing scheme, where the government takes away your right to do something and then sells it back to you. Uh, now securities regulation is very, very expensive, uh, hundreds of thousands of dollars. It’s probably a six to 12 month timeline for most deals, the expense and the time is going to be a complete deal breaker, um, registration. It just, most of the time is not, not even on the table. Uh, fortunately they did build in, uh, some exemptions. So you either have to register with the sec or you have to qualify for an exemption. And the big exemption that is in the securities act is transactions by an issue or not involving any public offering.
Okay, well, at least the question, well, what’s a public offering. And I remember being a little kid and learning words and asking my mother what’s the public or this word public what’s the pub. And she said, well, the public is all of us, it’s people. So we don’t have to register our securities as long as we don’t offer it to people. Well, okay. That’s not very tenable. Right? So, uh, spring court came back again in the 1950s in a case called Ralston Purina, uh, where the company had been selling its stock to its employees. And the sec said, wait a minute, you’re making a public offering. They like this isn’t the public. This is just our employees. It’s private. Right. Uh, and from court looked at it and just basically to turn on what’s the public in public offering. And what they came up with was the public is people who need the protection of the securities act.
And that specific case, they decided that the employees actually were the public because they didn’t have the information that they would have gotten, had. The security has been registered. Um, and so selling even to their own employees was considered a public offering. All right, this is still kind of wishy-washy and still kind of hard to tell why am I doing a public offering and my private enough, have I narrowed my scope of investors enough? So we fast forward a few more decades, and we’ve got a sec regulations. We’ve got the jobs act, uh, and recent changes to the jobs act. And now we have the sec and they’ve given us among other things. They’ve given us four kind of principle regulations that we can shelter under, uh, to avoid being considered making a public offering. Uh, even though we’re not technically registering with the sec.
So we’ve got regulations to CF and regulation, CF, uh, it was a $1.07 million maximum offering limit. They just raised it March 15th of this year to $5 million. You can raise $5 million from any investor, uh, with certain limits based on the investor’s income or net worth. Uh, you are however restricted to, uh, selling your securities only within an online portal. That’s been registered with FINRA. Uh, so there, there are some complications with it. There’s some hoops you gotta jump through, but that is one regulation that’s available, uh, to, uh, CF crowdfund to crowdfund your securities. Uh, another one is called regulation a and regulation a is kind of a, was I public offering or IPO light. I hear people say, um, it actually has, it’s not registered with the sec, but it is qualified by the sec. And there is some back and forth interaction with the sec before you’re allowed to, to sell your securities to regulation a, uh, but if you get through that process, you can raise up to $75 million.
Again, just last week, just March 15th of this year was raised to 75 million from 50 million and raise up the 75 million again from any investor. Um, it’s, it’s a long process, not as long as registration, but it’s still going to be three to six months. It’s very expensive, uh, not for everybody. Um, but it’s, it is an option that’s out there. Uh, regulation D in my opinion, is the creme de LA creme. It is, it is the best of all of these. Um, and that’s the one I’m going to focus on in the next several slides. Um, and then regulation S uh, also a very good one that, that is for raising money from non U S individuals. So non U S individuals in a sense are not considered part of the public that the securities act is trying to protect, uh, regulation.
Great option. If you’re raising money overseas, sorry,
Notifications. I did turn them off, but they’re still making noise. All right. Let’s talk about regulation D because 90% of the matters that I deal with regulation D is the most appropriate vehicle for raising their money and regulation D has several rules you can operate under. There’s two main ones that are the most popular. They’re called five Oh six B and five Oh six C, uh, and very similar rules. And it’s five or six B what it does. It allows you as the, as the, as the sponsor of the syndication to raise an unlimited amount of money from an unlimited number of accredited investors. I’ll talk about the definitions here in a minute, but for the time being accredited basically means well to do rich, um, or what a lot of us would consider rich. You can have up to 35 unaccredited, but sophisticated investors, uh, and that the catches are, you must provide certain investment disclosures.
Those come in the, in the form of what’s called a private placement memorandum, which is kind of like a prospectus, uh, and general solicitation is not allowed. You can’t go on your Facebook or your Instagram, and talk about your deal. You can’t put up billboards and say, come invest with me. Uh, so generally what you need is a pre-existing substantive relationship. Again, definitions I’ll get to in a minute, uh, with all the people that you offer the opportunity to, because that’s five 65 or succe, uh, also allows you to raise an unlimited amount of money from an unlimited number of accredited investors. Now, your credit investors in five or six C have to be verified by third-party. So typically you’d have them take a form to their CPA or their tax advisor to sign off. It says, yes, they are accredited. Um, there’s also services out there that will do it for a fee, usually $150 per investor, um, to, uh, to verify that an investor is credited.
Um, you’re not allowed to have on a credit investors accredited only. Uh, but the trade-off for that is general. Solicitation is allowed. You can go on Instagram and Facebook and all those places. Uh, if any of you follow grant Cardone, who’s got a huge social media presence. He has been regularly running, uh, ads, putting up posts that say, you got two 50 cash. Come invest with me, contact me, getting my deals by apartments with me. What he’s doing King is a five Oh six C offering he’s offering he’s generally soliciting, but only accepting accredited investors. Okay. So, um, the next question is, well, what does it mean to be accredited? Well, as far as it goes for an individual, if your income is $200,000 a year, it has been for the last two years, expect it to be for the current year. Then you’re credited.
You can also combine your income with your spouse. And if that’s greater than $300,000, you’ll be accredited. And just, uh, at the end of last year, in December last year, uh, they added spousal equivalent. So you no longer even have to be legally married to combine your income. If you have a domestic partner, uh, someone that you live with that kind of takes the place of a, uh, of a spouse, even though you don’t have the marriage license, uh, you can still combine your income with them to qualify as an accredited investor. Alternatively, uh, if your combined net worth with your spouse or spousal equivalent is more than a million dollars, uh, you’re accredited. Uh, now this does not include positive equity in your home. So you could have a $10 million, you know, $10 million equity in your house. But if you don’t have any other assets, you are not going to qualify as a credited.
Your, your positive equity in your house does not count negative equity in your, in your house does count. So if you’re upside down in your house, that’s going to count against your net worth, but any positive equity in your home does not count towards it. We keep that in mind. Uh, and then again, with the changes they just made in December, uh, you can also become accredited if you have certain professional credentials and the specific ones they’ve identified are, are financial related credential series seven series 65 and series 82. Uh, ironically being an active securities attorney is not sufficient to be considered accredited or to be deemed smart enough to invest in these deals. So, you know, we can advise on these deals, but we can’t qualify by the fact that we can advise these deals. Um, okay. So those are the ones for individuals.
Certain entities can also qualify as accredited if they have $5 million in assets or more, and they weren’t formed for the purpose of investing in this opportunity. Uh, they just added family offices, uh, certain trusts, uh, lots of institutional type investors can qualify as accredited. I’m not going to get into all the details there, but there are alternatives. If you’re not accredited as an individual, perhaps through a particular entity, you can be accredited. Okay. If you’re not accredited, uh, you can’t do a five or six B, or you can’t invest in a five or six B off five, six C offering. You might be able to invest in five is going to be offering. However, because if I was Expedia allows the unaccredited investors, as long as they’re sophisticated. So what does it mean to be sophisticated? Uh, well, the regulation says you have to have the knowledge and experience in financial and business matters such that you’re capable of evaluating the merits and risks of the investment.
In other words, you’re smart enough or educated enough or experienced enough to know what you’re getting into and to know the risks. If you don’t have that don’t fear because you can also borrow that from someone, you can have a purchaser representative quote unquote, uh, that can, uh, basically qualify for you. So if you have a purchaser representative that has knowledge and experience, and they’re capable of evaluating the risks, you can rely on them for your own sophistication. Now, personal representative can be anybody that meets that criteria as long as they are not, uh, basically not a major player in the deal, if they’re unrelated to the deal, or if they only have a small stake and they’re not related to the sponsor, they can be your purchase or representative. Okay. Now being sophisticated is only part of the, of the equation in five or six feet.
Cause you also, because you can’t solicit publicly, you have to have a pre-existing substantive relationship with your investors. Uh, so what does it mean to have a pre-existing substantive relationship? Preexisting? It’s fairly simple. It means the relationship existed prior to the commencement of the offering and commencing of the offering is not really defined, but the safest bet is to say, as soon as you start talking about your offering with anybody, that’s not part of the sponsorship team or your professional advisors, that’s probably when you’ve deemed, you’re going to be deemed to be, to have commenced. Um, maybe that’s a bit conservative, but I’d much rather be conservative than, than risky as far as, as treading on, on securities violations. So err on the side of a little bit early, but prior to that, now there, there is no waiting period prior to coming to the, or you could meet them the day before you can meet them an hour before the sec has said, and there’s a address to this website on the sec website where they’ve answered a lot of these questions.
There is no waiting minimum waiting period. You don’t have to have a 30 day waiting period before you can show someone an offering, but you do have to establish it before you commence the offer. Okay. The more important part of that in my opinion is the substantive part. What does it mean to have a substantive relationship with somebody? And that is substantive relationship is not, you know, they come over to your house or barbecue. It’s not your, your, your kids are in ballet together or anything like that. Substantive has to do with a financial relationship, a financial understanding. And what the sec said is an issue. Uh, your, your relationship is substantive when the issuer has sufficient information to evaluate and does in fact evaluate a prospective offers, financial circumstances and sophistication. So, uh, my brother for instance, uh, is a roofer, a rehabber, uh, he’s around real estate circles a lot.
Um, I have no idea how much he makes he drives a nice truck. I’m guessing, you know, does pretty well. Um, but frankly I don’t know his financial circumstances and I don’t know how well he would understand, for instance, a multifamily syndication. I don’t know if he knows what cap rates are or whatever. Do I have a substantive relationship with my brother, Jerry might be out on that? I probably do. Um, but I couldn’t tell you for sure what his financial circumstances are. I might know enough to meet the bar here, but it’s a little bit gray. Okay. Um, so what if I’m skirting the line a little bit and what if I’m not totally sure I have the substantive relationship with them? Well, we’ve got kind of a safety valve here and I’m getting into a little bit of gray area, so don’t go overboard relying on this.
But, uh, the sec said, and this is on the same web. This website down at the bottom of the screen is a, uh, kind of a question and answer thing that they’ve published. Uh, and they said a preexisting substitute relationship is one means, but not the exclusive means of demonstrating the absence of a general solicitation. Uh, for instance, they say that, uh, an informal personal network of individuals with experience investing private owners might be sufficient. If you’re involved in say an investing club, you might be able to rely on introductions through that club to establish a relationship such that offering someone in that club security wouldn’t be considered public solicitation. Be careful with that, the language there, the little wishy washy, um, but it at least offers somewhat of a safety net. If we can’t definitively establish that we have a preexisting substantive relationship with our investor.
Okay. Bottom line here is, and this is again quoting from the sec in general, the greater number of persons without financial experience sophistication or any prior business relationship with the issue or that are contacted by an issuer through impersonal nonselective means of communication. The more likely the communications are part of a general solicitation, if you’re posting on Facebook, if you’re spamming using Instagram cold calling, uh, you’re probably crossing the line. Um, you’re doing a five or six be offering me very, very, very careful that you are not indiscriminately showing people your offering. Okay, let me roll on, uh, when you do a securities offering, you’re going to have to come up or have an attorney come up with offering documents. Uh, you may have seen these, they’re just enormous stacks of paper with tons of legal use in all kinds of disclaimers and doom and gloom, um, and, uh, very important things to have as an issuer, very important things to have as an investor, uh, to make sure that everybody’s on the same page about what’s going on.
So real briefly, let’s just talk about what’s what constitutes our offering documents. Uh, primary piece is going to be the PPM, the private placement memorandum. If you’re using regulation, a it’s called an offering circular. If you’re using regulation, crowd funding, it’s called an offering memorandum, basically the same thing. This is the document that’s going to tell you about the deal who are the sponsors, who’s responsible for? What, what are the fees? How do distributions work, uh, and probably most important? What are the risks involved in getting into this investment? If it’s real estate, they’re going to talk all about possible changes in the real estate market, interest rates, supply, and demand, all those kinds of things. Eviction moratoriums are a hot thing right now because of the COVID-19 pandemic. Uh, all those things are going to be disclaimed and disclosed in the PPM. Uh, and if you read the PPM, you take it too seriously.
You probably never invest in anything, but this is where we’re just telling you here’s everything that could possibly go wrong ever. Okay. Then we’ll have an operating agreement. The operating agreement governs or explains how the company is going to be governed. How does voting work? Can I remove the manager if they’re doing a bad job, uh, how do distributions work? What percentage of the profits can I expect to get as an investor? Do I have a preferred return? Uh, is it, are there a bunch of fees? Does the manager have a salary, things of that nature, those are all going to be in the operating agreement and really the operating agreements, probably more important than the PPM, because the PPM is really just about the offering of the securities upfront. Whereas the operating agreement is going to govern the entire deal for the entire five or 10 years, or however long your investment’s going to be tied up.
Uh, then we’ll have a business plan and a pro forma. Uh, this is where the unicorns and rainbows and all the, the fluff is no, here’s our projection of how much money we’re going to raise and how great this is going to be and all that stuff. Um, so all the things that we disclaimed and said way, way too, don’t, you know, pay no attention to this stuff. And PPM is what we’re putting in the business plan. So the business plan is all the bright, sunny stuff. Um, there’ll be an investor questionnaire. This is for investors to represent that they’re suitable either demonstrating that they’re accredited or that they’re sophisticated, that they’re not investing a significant portion of their net worth, um, that they understand the risks, things of that nature. And then finally a subscription agreement where you’re going to sign and say, yes, I’ve read all the documents. Yes. I understand. Here’s how much money I’d like to invest, sign my name. Uh, and that’s really all there is to it.
I hope you learned a little bit more after hearing Richard talk about private equity, syndications and funds and see who’s eligible for it. And as you can see, it’s not as exclusive as you think. Like I mentioned, airline captains most likely are accredited investors. Now in the couple of weeks, I’m going to introduce you with further videos, just like that, getting you more educated on how to invest in the private market. As a matter of fact, I’m teaming up with the host of a cashflow guys, podcast, Tyler chef down in key West Florida. He’s decided to share his experience and insight or knowledge of key West to help airline pilots grow in their fund. Now, Tyler and I have created this fund exclusively for airline captains who need to take their money perhaps out of that roller coaster ride of the stock market and put it into tangible assets.
If you’re interested to hear more details about this fund for airline captains, that Tyler and I are putting together, feel free to get on my calendar, layovermoney.com/chatwithmike/.