There are five key documents as part of any syndication or fund. We’re going to go through what those five documents are, how they work, why you need them, and how they fit into the whole system.
My name is Tilden Moschetti. I am a syndication attorney with the Moschetti Syndication Law Group. Often, when I have people who are brand new and have never done a syndication or fund before, they are confused about the documents that go into what we’re putting together. How do we build that security, when we’re looking at it from a document point of view? There are five key documents that take place before the Form D and notification to the states in order to build that structure of what that security looks like.
The very first one is the Articles of Formation, sometimes called the Certificate of Formation. This is typically filed with the Secretary of State for the state where that entity is being formed. You can think of it as the birth certificate of the entity. For an LLC, it’s always the Articles of Formation or Certificate of Formation. If it’s a corporation, it’s often called the Articles of Incorporation. Almost all of them are LLCs, so we’ll just use the LLC terminology here for simplicity.
The Articles of Formation or Certificate of Formation filed with the Secretary of State does several things. First, it lets the state know we’re forming this entity. It has a filing fee attached to it and sets that up. It gives them the contact information as well. It’ll often have what kind of business it can be, though most of the time we can get away with just saying “any legal purpose.” This keeps it nice and vague, and flexible for you.
Another important piece is who is the registered agent or the agent for service of process. This means that if somebody needs to file a notice or serve notice upon somebody, say they’re starting a lawsuit, they need to be able to have who that person is to actually give it. The Articles of Formation or Certificate of Formation is visible and available for view by the public, so they can look at that entity, see who that registered agent is or the agent for service of process, and know who it is either as an individual or an entity.
Number two is the Operating Agreement. You can think of this as the rules of the road. It’s the rules that the entity you formed with that Certificate of Formation must comply with. The Operating Agreement is always extensive and in legal language because there’s a lot we’re trying to do. We’re trying to make sure that it’s very clear what happens in various scenarios. The Operating Agreement should be a document that, if there is ever a question about what to do when “blank” happens, you can go to it and find the actual answer about what is supposed to happen.
For a typical syndication or fund, these can be 50 to 70 pages long. It’s very extensive and covers a lot of stuff. Everything from who can be a member, what happens if a member wants to leave, allocations for taxes, who the manager is and how they can be paid, to distributions and compensation. All of those things, and if there are problems, what do we do – that’s the Operating Agreement.
The third document is the Subscription Agreement. This is the document that an investor signs that says, “Hey, I want to be part of this investment.” It’s that investor saying, “I’m going to give you this amount of money, and you’re going to give me this amount of interest in that LLC.” In exchange for all that, the investor gets to be a member of that company. There are other things that take place as part of that, such as warranties being made that the offering of the security itself was compliant with the rules.
The fourth document is the Investor Questionnaire. Now, the Investor Questionnaire technically isn’t required, but it is a very good idea. It serves two purposes. First, especially under Rule 506(b), when you have a non-accredited investor, the non-accredited investor must be sophisticated. This questionnaire helps us with that sophistication part. There are a couple of questions that establish that the investor is saying they’re a sophisticated investor, that they know what they’re doing when they make this investment.
The second role of the Investor Questionnaire is for compliance and ease of use. It lets us pay our taxes and make distributions because it has the investor’s information, like name, social security numbers, and information for Know Your Customer laws, like driver’s license numbers.
The fifth one is the Private Placement Memorandum. You can think of this as the big kahuna. This is the document that basically sets up all the reasons that this is a legitimate investment for somebody to invest in. It’s not the legal paperwork in terms of the Operating Agreement or the actual rules, but it is the required disclosures and declarations being made by the sponsor of the security to the investor.
Part of it is the terms of the offer: how distributions happen, what’s the membership price, what we’re investing into. It also makes mandatory disclosures, like informing investors that these are risky investments and they could lose all their money. It will also go through more specific instances of what other risks are inherent in the investment.
Another part of it is the disclosure of any conflicts of interest. There are always inherent conflicts of interest because you’ve got a sponsor who is making money off of having an investor come into the investment, but they’re also acting as a fiduciary at the same time. Conflicts of interest are okay, but they need to be disclosed repeatedly. We’re trying to make sure that all the risks, all the conflicts, everything gets told to the investor so ultimately, they can make a determination whether this investment is suitable for their own purposes.
That’s the five big documents that take place before the Form D and state notices. As you can see, there’s a lot of inner workings going on. My name is Tilden Moschetti, and I am a syndication attorney with the Moschetti Syndication Law Group. We help people put together these documents for syndicators and fund managers because it’s part of the compliance and how you structure it.
On top of all these documents, we also help our syndicators and fund managers do whatever is needed to help them be successful in their security offering. Sometimes that’s going through materials like marketing materials and helping them identify what sort of disclaimers need to be there. Whatever we can do to help make our syndicators and fund managers successful is in everybody’s best interest.
That’s why syndicators and fund managers hire us. We’re great at that. We can help them make decisions that are sound, rational, compliant with the rules, but also based on the best practices of somebody who’s actually done a lot of deals for themselves, which is me, and somebody who’s also overseen and given a lot of interaction and advice about the inner workings of the offerings that my clients are making.
If we can help you do the same thing, we’d love to talk with you. Give me a call, send me a message, and let’s do that.