This is the first of seven videos as part of a series on how you as a syndicator, or a fund manager can stay out of trouble and be in compliance with both the states and the SEC. So that you can do what you do best: run your syndication or run your fund. My name is Tilden Moschetti. I’m a syndication attorney with the Moschetti Syndication Law Group.
This first video is going to go through regulators – those big scary things, or are they scary? What’s their purpose? How is it all set up? So that way you can understand who you’re up against, or not up against as the case may be. Now, why am I being cagey? And toying with “who you’re up against” and things like that? Because regulators themselves are not the bad guy. Regulators are actually the good guy here.
Regulators’ job is to protect people like your family members who may not know better and fall prey to unscrupulous fraudsters. We don’t want that happening. That’s not a good thing. And there are a lot of them out there. There’s a lot of fraudsters, and so the SEC’s job, the state regulators’ job is to keep those people away. These rules, the rules that we operate under when we’re doing Regulation D syndication are to protect the public from those fraudsters.
So it’s allowing you to be able to do what you need to do to raise money so that you can deploy that capital, make money for your investors and make an income for yourself as well. But it’s to keep those people who are committing fraud away. And that’s what the whole point of it is.
So who are regulators? Well, regulators either come from or are part of the SEC, or another regulatory body within the federal government, or state regulators. Both of them have these people who regulate securities. Who are the people exactly? Well, the people are actually very, very intelligent, quality people who care, they are mission-driven to protect the investing public. That’s a good thing, right? We want these people protecting your family.
Think of it like police officers, a lot of police officers do their job, probably the vast, vast, vast majority, because they want to protect the public, they want to help people, right. And same with security regulators. Their whole mission is just to protect the investing public, and protect the markets as a system as a whole. We need that as a capitalist society, we need to protect those people. So that way, capitalism can actually do what it does best. And it keeps the people who want to cheat and lie and steal away.
So regulators, we love you, great job, keep doing what you’re doing. These videos are how to stay out of trouble with them. It’s not about how to be sneaky and get around them because they’re doing the right thing, right? These regulators are trying to help the system. So these videos are how we can actually help them by making sure our stuff is in compliance with the rules. It’s in compliance with the rules. SEC loves it. FINRA loves it. The state regulators love it, everybody’s happy. There’s rainbows and unicorns everywhere. That’s what we’re looking for is that kind of compliance, where everybody gets to be happy at the end of the day.
So how does this system actually work and in its nuances? Let’s break it down by looking at a whiteboard. So you are looking at offering a security and you are in the state of Florida. For example, forgive my drawings because I’m not the best artist in the world. But let’s say you’re in Florida. You’re right here. You’re in Florida. You’ve identified a – let’s use real estate syndication as an example. So you’re in Florida, you’ve identified that you want to develop this beautiful apartment building in Florida. You’ve identified three investors all in Florida who all want to invest with you and they want to contribute, they want to grow this property. Everything is great.
Now you have a choice. As a resident of Florida yourself, you can file this under what we call the State Blue Sky laws. The State Blue Sky laws are the laws about securities that each state has. We call them blue sky laws because we’re talking about, you know, that they’re, you know, there’s a land of the free and you know, blue skies everywhere. Not important why. The State Blue Sky laws are to protect the investors in the state of Florida. So the state of Florida, if you have investors in there, they’re set out to protect the investors from Florida.
So you have this offering, you put it together, everything is good, you do the necessary filings under Florida rules. So then we’re talking about in Florida, everything is in Florida, everything transacts from Florida, everybody’s happy. It all takes place under Florida’s rules. If you choose, because you don’t have to, you can also choose to go under Regulation D, for example, which would allow you to market to other people. But in this particular instance, you’re marketing to Florida.
So we’re a big country, and again, forgive my very poor drawing. And then Texas kind of goes there. It looks something vaguely like that. And we’ve got Alaska. Now we’ve got Hawaii. Right. So that’s the United States in a very ugly format. So you just you have a possible investor, oops. You have a possible investor, who is in Texas. And he’s heard about your deal, because he’s a good friend of yours. And he wants to now invest in this entity. Well, he can, but not under the State Blue Sky laws. What would happen? Why is that a problem? Because Texas is interested in protecting its people, right? It’s pretty interested in protecting its investors, its citizens. So Texas won’t be very happy if you decide to file in, if you file just under the State Blue Sky laws of Florida.
So you still have kind of two choices. This has now become a federal issue. It’s now a federal matter, because we’ve got two states. So we call that interstate transaction is taking place, right between multiple states. You could decide to lodge this all under 4(a)(2) of the securities regulation. So what 4(a)(2) lets you do is it lets you enter, it lets you put together offerings for interstate transactions. But it needs to comply exactly with both Texas and Florida law. So now you need a lawyer from both Florida and you need a lawyer from Texas to help you figure out how to stay compliant with both of those.
So you’ve got this project almost up and running. And now you’ve got somebody in California who wants to invest. California and Texas are also both states that are very, very, very protective of their citizens when it comes to securities regulation. As is, and I can’t draw New York, as is New York. Very, very, very protective of their citizens. They also want to invest. So now if you decide to do this under regulation 4(a)(2), you need a lawyer from Florida, you need a lawyer from Texas, you need a lawyer from New York, you need a lawyer from California, all to put this deal together because 4(a)(2) requires if you’re going to do this right and comply. It doesn’t – it does – it’s basically says hey, we’re not in violation of federal law for doing this but ya gotta be in compliance with state laws. So now you’ve got four states that are all vying for supremacy really, really kind of a challenging situation for you.
What if instead of 4(a)(2) we say now I want to use Regulation D. And specifically, I want to use Regulation D rule 506(b), or it could be 506(c), but I’m just choosing one because you all know, you know, these people. So this guy here, he knows everybody in those states.
So why am I narrowing it down to 506(b) and 506(c)? Because Rule 504 of Regulation D actually doesn’t get us out of the struggle of all these different states having these interests. Under Rule 504, you still have to comply with every state rule. But why don’t we under Regulation D rule 506? Because Regulation D Rule 506 says, okay, states, listen up. We’re a federal country, the country is federal, you got rights, states rights are important. But come on, this is creating a nightmare for everybody. This guy just wants to develop his property. He just wants to take investors, these investors just want to make money. So we’re gonna make rule 506.
And Rule 506 says, okay, no matter what, where your people are from under Rule 506, the offering and sale of a security, this becomes important later, that’s why I’m making it clear, the offering and sale of the security is part of the federal system. If they want the Safe Harbor, of rule 506, Regulation D, they can, and we’re gonna just preempt all the states rights. We will, of course, you can require notice and things like that. So that, you know, these activities are going on because states rights are important. We want states to be able to know what’s happening. But we got to make this all work. So Rule D, Regulation D rule 506(b), states can get noticed. And that’s it. The rest of it is Regulation D rule 506. It’s under the nice auspices of the SEC. Okay, so that that’s all good. That all make sense.
All right. So let’s kind of clean up a little bit. So we got lots of arrows everywhere. All right. So we’ve got these, we still have these investors, right. So let’s get rid of that arrow. Oops. So we’ve decided we’re going under SEC rules, regulation D rule 506. So now we’ve got regulators from the SEC, who are helping to protect these people helping to protect everybody in the investing public within the United States. And to regulate this guy, make sure that this guy is doing what he’s supposed to do. Because there’s actually other rules for people outside of the United States. But we’re going to talk about that one in another video. So there are some nuances that cause compliance issues can happen for people outside of the United States. But we’ll deal with that when we talk about inadvertent advertising and inadvertent solicitation under Regulation S, which is compatible with Regulation D. So stay tuned for another episode.
So SEC interested in that. But what about this guy here? What about him? New York is very, very interested in protecting him still. It’s all well and good that they have to get that they can get notice of it. But then New York really wants a little bit more. Right. So New York actually has more of an interest of protecting its people than just notification. Now, there’s a lot they can’t do because of its Regulation D rule 506(b) encompasses everything. Right. But remember what I said it covers the offer and the sale of the security, right? So it covers the offer and the sale of the security. What it doesn’t cover is when this guy is talking to his friend in New York, and working on getting the sale. It doesn’t necessarily cover the actual sales process.
Now, most of the time it does but as we’ll see, again, in another video when we talk about improper structures, the problem with funds of funds. We look at this guy, New York’s looking at this guy and going okay, well, he is in the process of selling that security, which is fine for the transaction itself. But what about the actual making of the sale? What about the deal, the broker dealing kind of activities in that? Maybe we can regulate that? And the answer is they might be able to. And that’s what we’re going to talk about in the improper structures video that explains just what goes wrong when this happens.
So now we’ve got state regulators who definitely have an interest, they also have an interest because they require that notice. So if they, they require that notice of the Regulation D most states do almost every state requires notice. If they don’t get that notice, why weren’t they noticed, they want to be noticed there, they are expecting to be noticed. And if they don’t get it, that may or may not cause issues. So this is a game where states are continually trying to make sure that they’re upping their regulation, states want to have this heavily regulated as much as they possibly can.
Now Regulation D kind of keeps things down, it’s trying to keep it down, but the states keep trying to push it back up. Fortunately, for us, most of the time, because of federal preemption, it’s able to keep it all down, right, it’s able to keep that down. So we comply with the notice rules and things like that. And that mostly keeps things at bay. The times when it doesn’t is when the state regulators see something funny going on. So if you go outside of this boundary, if you try and walk outside of this boundary of Regulation D, that’s when the state regulators get hungry.
So that’s sort of the issue when it comes to the SEC. So we’ve got the Regulation D as this giant umbrella term that looks like a nice, even umbrella. And then we’ve got Regulation D. But there’s also the state here.
So you’re covered, as long as it’s dripping right here. Right? Then it’s all under nice federal rules. It’s very simple and straightforward. Problem is what happens when it drifts there. And accom – oops, you can’t see that. What happens when it drips there, and it’s falling on the state jurisdictional issues. That’s when states start regulating.
So hope that was interesting. Hope that puts the whole kind of regulatory context in place for you. Because we’ve got two systems going on, we’ve got this federal system, and we’ve got state system going on. We’ve got regulators from both each, his job is exactly the same. They want to protect the investing public and the overall market. So that’s their job, and they want to do a good job. And we want them to do a good job, because we do want to keep unscrupulous people out.
So that’s how the system works. This video, this video series is going to go through the biggest problems that I see as a syndication attorney, of people where they go awry. So where do the security regulators go? Excuse me, what you’re doing there? Let’s back up a minute, I think there might be something wrong. And when they say that they probably could be right. And if they’re right, you know, first we need to know, are you in trouble? Did a line get crossed? Because they could be wrong. And if they did, if you did cross the line, well, how much did you cross the line? And what’s the problem? And what’s the remedy? I mean, is there a way to fix this?
I mean, obviously, if you’re stealing money and you’re frauding, you probably should go to jail. But those are not my clients and those aren’t you I’m sure because why are you watching this about how to be compliant if you don’t want to be compliant, right? Thieves want to be thieves, they’re gonna steal that’s their thing. People watching these videos, you’re not those people. So this video series is going to go through just where those lines are because you want to do a good job. You really, really don’t want a regulator who’s looking closely at you trying to do the right thing for the investing public because you’re gonna be wrong. If they are right, you are going to be in the wrong and there’s going to be heavy penalties for it.
So I hope you’re looking forward to these videos as much as I am. They’ll be coming out on a weekly basis over the period of next several weeks. And I hope that you like and subscribe. My name is Tilden Moschetti. I am a syndication attorney with the Moschetti Syndication Law Group. We specialize in Regulation D, Regulation D, Regulation D, that’s all we do. We help our clients stay compliant with the rules of the SEC and the state regulators. Because we want to not only be compliant, but we want to make sure that you’re successful. We want to do everything that is in our power to help you be successful so that you can make much, much, much more money.
And then you can enjoy the wonderful benefits that we have under Regulation D. How amazing is it that you can put your own security together, you don’t have to be a giant company in order to raise money from investors, put it into the world, do good things, do big projects, make the world a better place and make lots of money for you, yourself and your investors at the same time. I love Regulation D. So that’s what we’re working on. Those are what the videos are. Thanks a lot.