Now from a people perspective, how do you get the fundraising done for a Regulation D Rule 506b or 506c offer? I mean, you can do the work. But what about other people? How does that fit in? What about finders? All those questions you may have? Well, this video that I recorded in the past will go through all of that. This video was recorded about two years ago, but the information is still completely valid. The information was recorded for a training program I used to have for syndicators, and I hope you find it useful.
We are back, we’re talking about your flight crew. And specifically, I wanted to start off right away with a discussion of fundraising. Now fundraising seems like it should fall into another trap. It actually belongs in flight crew. Because the number one challenge I think most syndicators face is finding money or finding investors. So most of the time, as a lawyer, I have clients coming to me saying, “Can I raise money this way or that way?” So I thought it would be best that we first talk about how to use your flight crew in a way where you are raising funds, but you’re doing it complying with the law.
So let’s talk about that. We’ve got investors, and they all want to give you money, you found them all. And then this is you. You’re putting them into this great property. Where it comes down to here is, this is probably going to be okay, you are the sponsor of this LLC, you are getting paid not on a commission, like $1 per dollar of money that you’ve raised. You’re getting paid basically for your work as the sponsor. So here this money is for your labor. And specifically, we’ll put sponsor labor. That’s supposed to be an “L” – sponsor labor. So here you’re getting paid money for sponsor labor. This is fine. There is no conflict here as far as it relates to what you can do with fundraising.
Some syndicators, what they do is they go instead to a broker-dealer. This is somebody who has a stock broker’s license – series seven, series six, I believe – and they ask them to find investors, get money to bring to your property, and then they’ll be paid a commission. This is also okay. In this situation, it’s the broker-dealer’s job to make sure that the opportunity that they’re being paid for is suitable for these investors. That’s the main concern of this part. And it really falls on the broker-dealer’s point, not on the individual people.
As an aside, finding a broker-dealer that’s with a large outfit, say your Raymond James or your Goldman Sachs or whatnot, it’s difficult in order to get them to be able to bring you investor money and pay them a commission. Why is that? Because the broker-dealer itself is on the hook on whether this deal is actually considered suitable. If the broker-dealer brought a scam to their investors, the broker-dealer is in big, big trouble. So they’re the ones who are going to get sued, and they’re going to have to explain why they thought this deal was suitable.
So the bigger companies mostly prohibit their broker-dealers, the individual people themselves, from finding investors, unless they’ve had a thorough vetting process on their own. That process takes about six months, most of the time, sometimes nine months. And it just takes too long and it can be very expensive for any particular deal. Now, independent broker-dealers absolutely can bring these deals to you. And so there are broker-dealers out there that will work with you. But if you’re thinking you’re just gonna go to your buddy who’s with Raymond James, they’re not going to be able to help you on this and get paid a commission.
So then there’s the situation of okay, well, you have three people in your office, and you tell them all, “Look, find me some investors, do some cold calling for me. And set up these meetings. And I’m just paying you your regular salary.” Let’s call this person employee. No problem there either. You can pay employees in order to find new people.
But here is where things get different. Say you say, “Okay, well, I’m gonna pay you a salary. And I am gonna give you a 10% cash bonus for each dollar that you bring.” This you cannot do unless this employee is licensed as a broker-dealer.
What most people also try and do, and this is where people really get in trouble, is they’ve got a friend. And they’ve told their friend all about this investment and their friend says, “Yeah, this is a great deal.” Your friend really likes it, they want to go in themselves. And they start thinking and they say to themselves, “You know, this is not only a good investment for me, but this is a good investment for my buddies over here, too. Now, what if I bring those people all to you, and then you give me a small commission?” This happens a lot. And you absolutely 100% cannot pay them a commission. They are not licensed broker-dealers, they are not participants. They are not members of your sponsor organization. And they’re receiving money for the activity of bringing you deals, which is not an allowable expense.
And then you say, “Well, no, my friend, actually he’s my friend, but he’s also a real estate agent. Can’t I do that? You know, this really is just a real estate thing. I can pay him a real estate commission or something like that.” The answer again is no, most of the time. There is one exception, where it is okay. But please don’t think that this applies or will apply to your situation because more often than not, it won’t. So if it’s something that you think will apply, talk to somebody who knows – talk to an attorney or bring it up in a coaching call and we’ll go through it and we’ll see if it actually would apply in your situation.
So the exception would be this: the property is in the same state. For example, right now I am in California. Every single investor is coming in to invest in California. And I am not using one of the exceptions of Reg D, Reg A, Reg CF, or any other kind of exception. Instead, I’m using the blue sky laws of the state of California. And the state of California specifically says that if you’re raising money in one of these kinds of transactions, where every single thing is in California, and you are not relying on the laws of Reg D or Reg A or any of the federal laws, then you can pay a commission to the real estate agent. There are companies here in California that do this, and they advertise to real estate agents that they can do this. And they can, because they also are very, very careful that everything is within California.
There probably are similar laws in many other states. And so if that’s the case, you would be able to do that. But once anything lies outside of one of those states – one investor, just one, not even the one that you’re paying money for – if they’re outside, $1 comes from them, absolutely not. It goes under the SEC rules. And you cannot pay like that. So most of the time it is you cannot do this. And if you think you can, bring it up in a coaching call, and we’ll go through it.
So I hope that helps. The basic is that you can pay your regular salary to employees; you just cannot tie what would look like a commission or a bonus to finding investors for your investment. That’s where people get in trouble. And so I wanted to put this under the main topic of finding investors underneath your flight crew, because these are the people who are going to help you get the deal done. And so compensating them is oftentimes a thought and this is how that conversation typically is born.
So I’m sure that was useful for you about looking at it from the viewpoint of who does what in terms of getting the fundraising done, exactly how that is structured, what’s allowed, what’s not allowed. If we can help you with your Regulation D Rule 506b, or Rule 506c offer please don’t hesitate to give us a call. This is Tilden Moschetti of the Moschetti Syndication Law Group.