Key Takeaways

Transcript

My name is Tilden Moschetti. I’m a securities attorney with Moschetti Syndication Law Group. We specialize in helping syndicators and funds put together offerings for Regulation D Rule 506b and 506c offerings. Today we’re going to talk about probably the greatest myth of all time when it comes to syndications. It’s something I hear at least once a week, most of the time two or three times a week.

The “Friends and Family” Syndication Myth

The myth goes something like this: I get the phone call, I answer it. And there they are. They say, “Hi, well, I’ve done some syndication in the past, well, it actually wasn’t syndication, because what I did was, I just got some friends and family together, took some money. And we bought a couple different things, we bought some buildings, or we invested in some businesses, but they were all friends and family, and it was under $1 million. It was $900,000 that we raised. And so it didn’t fall under the rules where we needed to do a filing with the SEC.” That’s the story that I oftentimes get.

The reason they’re calling me is because now they’re ready to go into what they consider the big leagues where they do need to make such a filing. The myth here is that they didn’t need to make the filing.

Why Dollar Amounts and Relationships Don’t Matter

There’s a general idea out there, and I have no idea where it came from, because I’m trying to find it on the Internet somewhere. Somewhere it must exist where people got into their minds that they can do a securities offering if it’s just friends and family, or just family, or if it’s under some certain dollar amount. But that’s just not the case.

There is no rule that relates to dollar amounts or to friends and family. We often refer to Regulation D Rule 506b as a friends and family offering because you need to have a relationship with your investors. But you’re still not considered a private security until you’ve registered the Form D with the SEC; you’re not in that safe harbor of Regulation D.

What Happens Without Regulation D Protection

In fact, you’re probably considered a public security, which means you need registration, but you don’t fall under any sort of protection whatsoever.

So what could happen is if one of your investors got mad—and where else do investors get mad but if they’re family of yours, right?—and they call their friend who is a plaintiff’s attorney. And they say, “Well, okay, why don’t you send me your private placement memorandum?” And they say, “Well, I never got a private placement memorandum.” And then suddenly, the plaintiff’s attorney knows he has a good case.

The Howey Test and Why Most “Informal” Deals Are Securities

The reason is because it didn’t go under that safe harbor to be a security. So anything is a security that meets this simple test. It’s called the Howey Test.

The Howey Test looks at four elements. Basically, it’s looking for an investment in a common purpose. They give money. They expect a profit. And that profit is based on—this is the big one—the reliance on a third party. That’s you, that’s the syndicator, that’s the sponsor.

That fourth step is almost always present in all these cases that I’ve talked about.

Joint Ventures vs. Securities Offerings

My next question when I ask somebody who’s telling me that this is part of how they did the syndication without filing a Form D is, “Okay. So was this a joint venture? Did they have decision-making power?” And it almost invariably is no.

Now, if everybody truly shared control—decision-making, management, operations—that could be a joint venture and not a security. But what always happens is, “They all put their money in, but I’m the one that made all the decisions.” At that point, it’s automatically a security.

Late Filings, Risks, and Practical Reality

So what do you do next? You can file a Form D late and notify the states late. Sometimes that makes sense, sometimes it doesn’t. If the deal is already over, there’s often no practical reason to go back.

If the deal is still alive, it might make sense to retroactively put together a PPM and file Form D. There may be state penalties, but typically not SEC penalties. The SEC generally wants people to file—it wants notice.

Final Thoughts on Compliance

These issues almost always come up when there’s a lawsuit. And at that point, it’s too late to fix what should have been done from the beginning.

So if I can help you with your syndication and being compliant with the SEC and the states and all the rules that are out there, and you’re putting together a syndication or fund, you just need to give me a call. I focus exclusively on Regulation D Rule 506b and 506c offerings, and I’d love to talk to you.