How do you deal with oversubscribed syndications or undersubscribed syndications? Can you do it? Is it possible? What do I do? How do I communicate it and what has to happen in order to be compliant? That is exactly what this video is about.
My name is Tilden Moschetti. I am a syndication attorney with the Moschetti Syndication Law Group. Sometimes some of my sponsors come to me with the great problem of, “Hey, I’ve raised $5 million, I’ve raised some certain amount of money. And I think we could raise a whole lot more and build a much bigger fund. It was so easy, we had no problem.” I love when I hear that. The answer to their question that underlies it all, of whether we can do that or not, is yes, you can do that. We can make it so that your fund raises more.
When I’m drafting a PPM and an operating agreement, I’m always leaving in the opportunity to ratchet up the amount of money that’s raised. The reason is because I want you to grow, so we need to build that in. What has to happen, though, is because the dynamics that the investors are getting, and what they’re thinking of, they may need to know what’s going on. This could be a material change, and it probably is somewhat material.
So if I put together a blind pool, and I say I’m raising $5 million, and suddenly, now I’m raising $7 million, $2 million more means there are a lot of other investors. There might be increased risk, because there are more investors, there might be a dilution over what assets there are going to be. The investors who have already subscribed, they gotta know. You gotta tell them and make sure that communication comes out.
We can help you craft that message to make sure that it’s communicated in a way that not only is compliant, so not only are you not gonna get in trouble for it, but make sure that it’s a way that your investors can see the bright side of what you’re doing. The bright side of being oversubscribed and turning it from 5 million to 7 million, is now you’ve got a more diverse portfolio. So you have a portfolio that has the opportunity to be able to lower the risk that one asset is going to cause trouble. Because now you’re more diverse, you have more things going on.
The other advantage is now you can buy new level of opportunities. There might be more assets that you’re able to buy, that could generate even greater returns. You can be a little bit more picky on the lower performing ones, and then go for just the super performing ones as well. So you can build in something higher. That’s part of the strategy that we come up with, with our clients to make sure that they’re communicating it in the positive way.
But what about the opposite? What about in the case where I’ve said I was raising 5 million, and now I’m only going to raise three? What about that situation? How do we deal with that? Well, that situation has a major bright side of it as well. Now the investors came into this thinking that they were going to get this certain level of ownership. They thought they were going to be pegged in at, you know, 10% ownership, and suddenly, now that you need $2 million less, their percentage of ownership has just shot up.
Think of it like a share of stock buyback. It’s not the same thing, because it’s not cash going into that necessarily. But it’s cash that the overall price has gone down. So their percentage of equity goes up higher. So it’s actually quite a good thing when that can happen. The challenge is, how do you deal with that communication so that they see the bright side?
And also then we need to make sure that the mechanisms are in place. As a syndication attorney, I’m always thinking about what the investors are going to think. Is this a problem? Is this going to be compliant? What are the mechanisms that are in place that allow me to lower that amount that I’m raising? And also, of course, how am I going to get any money that comes in?
Because sometimes, not very often, but sometimes the situation is I only raised 3 million, and I still need that additional 2 million. So you might use regular financing and you might use a bank loan or you might use a hard money lender. There are options out there in order to do it. Or maybe it’s an offering of a different kind of piece of the security. Maybe it’s just a pure fixed rate return that some investors can get in order to be satisfied. Whatever that is, there’s ways to bridge that gap.
But we need to make sure that investors know what’s going on, because investors at the end of the day are entitled to a full view of what your investment product looks like.
I hope that helps define what happens with the oversubscribed and undersubscribed situations, because it’s still a workable situation. It happens quite often that one of those two comes up and we need to move things around. That’s part of why you hire an experienced syndication attorney like myself, who’s been in that situation not only as a syndication attorney, but I’ve been in that situation as a syndicator myself because I do my own deals.
My name is Tilden Moschetti. I am a syndication attorney with the Moschetti Syndication Law Group. If you think we might be able to help you with your project, give us a call. Let’s talk about what you’re working on. See if there’s an opportunity for us to help you and we can go from there.