Syndication Attorneys Podcast
My name is Tilden Moschetti, a securities attorney with the Moschetti Syndication Law Group. Today we’re going to do a deep dive into Regulation D Rule 506c and go line by line through the actual regulation itself to explain everything that’s going on there.
When I was in law school, one of my professors told me a little secret about when there was anything that you were confused about what was going on, was go to the rule itself and understand that, and that will explain everything, which is why today I wanted to go through Rule 506c and another video, I already went through rule 506b, but it’s useful to go through 506c in case that’s one of the options that you are considering for your own syndication or fun. So let’s go ahead and open up the case of the law itself. So this is the text of Regulation D rule 506c you can see it’s in book 17 of the Code of Federal Regulations, Rule 230.506 exemption with that exemption for limited offers and sales without regard to dollar amount or offering. So I’ve cut out a and b here. And so really, here’s the law as of 506c. So first, we talk a little bit about the conditions that must be met in order for it to be a to fall under here. And there are some specific or there are some general considerations. First, it must satisfy all the terms and conditions of two 30.5 of one and two, A and D. So those are here to 3501 is the where all the definitions and terms are described. Most importantly, probably for 506c people is that accredited investor definition under 501. A, we also have a video about that. And if you’re more interested in finding out what an accredited investor is. Rule 502 is the general other general conditions that must be met. Now it says and 506c, that is A and D. So here we’re talking about integration under a what that means is if let’s say a fund, put together multiple offers, right? So it put together an offer this offer and then this offer and this offer, maybe they’d have one under 506 B and then one under 506c, it says that well, this is how we need to first determine whether those offers should be integrated. By integrated, of course we mean, should they be considered one and the same. That’s always a consideration of ours. And it’s also important, especially if you’re thinking, Well, I’m going to do a 506c, but I’d like to do a 506b. Because if it becomes integrated, suddenly you’ve got a problem. You’ve got those people who came in on a 506b, because you did it later. Maybe if it’s integrated, then those people came in incorrectly because they saw your advertising. So integration is a big deal. 502d is limitations on resale. I also did a video on the limitations of resale. Basically, you should not be buying this security in order to with the intent of selling it. It is not a speculative purchase, where you’re looking to sell it into a market the SEC is not interested in you putting out offers where investors are going to create their own markets. So that is certainly true. So that is 506c one. There are specific conditions as well that need to be addressed. But really, we’re talking about one specific condition, the status of the investors must be accredited investors, we know that. So all investors must be accredited investors. Now how what further are they talking about? It’s this. It’s this verification of the accredited investor status. So that’s what the SEC ultimately wants to do. It’s saying that yes, you can advertise or make a general solicitation of your offer it to the public out to the world, except that it must, you must have verification Should that this accredited investor is a, in fact an accredited investor. It is almost certain that the best way to do this is to rely on third parties to verify we in order to verify that they’re an accredited investor, you the issuer must take reasonable steps to verify that they are. Right the best way and the simplest way to prove that you’ve taken reasonable steps is to rely on third parties. So that means in this case, a written confirmation. This and this under see is just an example, a written confirmation from somebody such as a registered broker-dealer who has a knowledge about whether or not they are a an accredited investor, or an investment advisor registered with the Securities and Exchange Commission. This could be somebody who’s their registered investment advisor, there are IA, who has knowledge of what their account status is, and whether or not they are a accredited investor, a licensed attorney can say whether or not they are now the attorney needs to know that person and needs that be knowledgeable about the fact that they are, for example, I have written a letter to like this for not for clients and not for investors, but for investors that I knew. And I looked over their accounts, and I verified that they were in fact, accredited investors under the rule of 501. A, that they qualified for that. And so I felt comfortable writing a letter that confirm that, in my opinion, this person is an accredited investor under Rule 506. A and would therefore invest in a an an offering that was under Rule 506c. Lastly, is a certified public accountant who’s duly registered as well, they may have those same, that same kind of knowledge, they should have that from the investor or from their workings with that investor of their financial position to be able to determine that they are in fact a credited investor. Those are just some of the ideas on what that the SEC gives in terms of what it is, there are companies that also give up certification of that person being an accredited investor are not. Now in order to be compliant with that almost all of them will have an attorney on staff or a accountant on staff, who also supervises the work to verify in their opinion that they are an accredited investor. And then they issue that certificate, which can be sent to you as the sponsor of the security. This is the deep dive into Rule 506c you can see there’s actually not a lot going into it a under Rule 506c, you can raise an unlimited amount of money, you can raise over you can raise up to a year or longer if you extend it. But what you have to do is make sure that you qualify that we’re talking about accredited investors, that you obtain this verification of their accredited investor status, and that they know also that they that there are these limitations on resale, and that there is a possibility that offers could be integrated with each other. And so you need to consider what that what effect would have on yours. My name is Tilden Moschetti. I am a securities attorney with the Moschetti Syndication Law Group. I put together a lot of Reg D 506c offerings for syndicators for funds for businesses, all sorts of things in order for them to be able to raise capital legally without registering with the SEC. They only are making a filing under Regulation D if I can help you please feel free to get in contact with me and we can have a conversation and see if I can help you.
ll right. Thanks for joining us today. It is one o’clock in Raleigh where I am right now. And thanks for joining us, the syndication attorneys with the Moschetti Syndication Law Group. I’ve got a bunch of people in which is terrific. So we’re going to go through some questions that that you have, we’re going to feel free to use the Q&A portion that you’ll see in zoom, and we will answer what is coming in as we go. And just let me know, I’ve scheduled about 45 minutes for this call.
First question that we have, is there any support? Such as legal review of the acquired property, legal entity maintenance after finished drafting of the document? That’s good question. The answer is no. So what we do at Moschetti Law Group is we’re primarily concerned with your security itself. So we’re concerned with how you deal with investors, how you present yourself, making sure you’re protected by the SEC. My license covers national things such as securities licenses, like securities, but it doesn’t necessarily go to different states. So I’m licensed in California, I’m licensed in Washington, DC, if you are outside of there, I can’t offer you specific legal advice as it relates to whatever state it is, if there was a legal issue about that acquired property, for example, title, I’m not going to be able to give you the legal advice to it many times for my clients, I can give them kind of my opinion as a, as a real estate professional or as a syndicator. But it’s not legal advice, and I will probably still refer you to an attorney. If you have a specific legal issue. I hope that answers that question there.
Another question, what LLCs? Do I need to start my syndication? It’s probably one of the top three most common questions I get so happy to answer that for you. Let’s go to I have a whiteboard here that makes that a little bit easier to explain.
So there’s two different LLC typically that we form, it’s a service that we also offer, when you sign up for a package, we, we generally do the formations it’s fine if you already have them set up, but we’ll also do them for you if you don’t. So there’s two entities here. This is building so I’d say it’s a property So, generally, there are is two entities we form oops, I made that totally ugly. Those are little like seals on a thing. So this is what I call the sponsor entity. And this is what I call the boss My sheep this is what I call the investment entity and so, the title is owned by that investment entity, it is this investment entity is managed by the by the sponsor entity. And then your investors. They all invest into that investment entity. So there’s typically two two different entities. Now in cases where there is a several different properties will normally set up SPVs or special purpose entities for each of those, which is then managed by the investment entity. So that answers that question. Another question is how do I handle timing differences for different investors in a given fund when calculating returns? Great question. Also same issue with timing different projects. Investments in the same fund. Okay, George, good question. So, this is God talking about two different I think so there’s two different kinds of funds in the world or two different kinds of syndications. There’s open ended funds, and there’s closed ended funds. So about maybe 60 70% of our clients do closed ended funds. And that’s you’ve got a single asset, or a single group of assets, you have investors come over a limited time period. So you’re raising money for three months, six months, whatever it is, they all go in together, and they all come out together, that’s called a closed ended fund. The difference is an open ended funding George, you probably know this, but I’m giving background just for the other people as well. So in a closed ended fund, that what that does is it is open in time. So you may have investors coming in in month one, you may have them coming in, in month nine, you may even have them coming in like the year later. So what Giorgio is asking about is this challenge here, where you’ve got erase everything. Where if we look at it on a timeline and this, let’s say q1, q2, q3, q4, et cetera, where you have an investor coming in here, and you’ve got for, say, 100k. And you’ve got an investor coming in here, for 100k. So the challenge comes up, because this 100k Here is more valuable to you, at this point, than it is at this point, right? It’s time value of money, they’re coming in at different points. And if you’re saying at the end, we’re going to be paying you a return of 40%, or 30%, or whatever it is, this guy here, this, this guy who came in before the end of a for q1 happen, he’s getting disadvantaged, so he is being he’s not getting the full benefit, because he would much rather wait till q4 In order to put his money in. So there’s really one main way to deal with it. And then there’s a couple kind of variations to deal with it. The main way is by calculating the net asset value at these different points in time. So you count the net asset value here, you calculate the net asset value here. And you go, and what that essentially does is you’d say, okay, the whole value of the entire portfolio, let’s say is 5 million here. And then in q2, now, maybe it’s five whoops, 5.2 million. And now maybe in q3, maybe something slightly happened, where it’s now 5.1. But then it jumps up to 5.5 million. And then you divide out this amount by the total amount of membership units that there are. And so basically, what you’re coming up is the cost per membership unit. So you’re selling those membership units to this investor, for 100k, for 100k. And then each quarter, you’re doing a reassessment of what that net asset value is. Now in the example of what what you don’t want to have happen is basically to be saying that this person is getting diluted at the same time. And that’s how, why we do it this way. Because we also don’t want to be just adding shares, or membership units here in here in order to make up the difference, because that just dilutes that, that person. So that’s kind of the main way we deal with it. The second way to deal with it, is by doing an accounting. So what we can do, where we get basically can get rid of the idea of net asset value. And come up with accounts for each one of your investors and build a ledger for each one of them. So let’s say I have investor one who comes in here. And let’s say this is investor 17. Just for sake of argument, I’m doing deals and this is really for a portfolio not for a single, single asset. So I know that here I’ve got these properties here. And I allocate as evenly as I can at the time of the person Investing, or at the time of acquisition, I’m allocating percentage of ownership of each one of those. Each one of those assets, almost like its own little mini fund, it’s a little account that you’re keeping track of. And then as those get disposed of, it gets the roll off. This is probably the harder way to keep track of it in a lot of senses, especially if there’s a lot of transactions coming in, or if there’s, but it’s probably the only way to do it if you’ve got large gaps of time of when between acquisitions and dispositions and when your investors are trickling in. So kind of a complicated question. That’s how it’s dealt with, most almost always is one of those two ways. But you know, like I said, we can go through and come up with some other ideas about whatever meets your particular need as well. Sure, Tom, we can talk about, we can talk about fees, my fees and finance, we charge flat fees, we’re very competitive about what we charge. So we charge for a closed ended fund, we charged $15,000 as a flat fee. And for a open ended fund, we charge $25,000 as a flat feet. Now, that’s only for the first deal. Once you become one of my clients, we give a guarantee that for the next three years, it’s going to be discounted by 50%. So that if you’re doing closed ended funds, which most people are, those get discounted to $7,500. That’s just the fees. So everybody’s paying those fees. The I do not finance or do monthly payment plans. It’s it’s a one time upfront charge. Because our time to produce these is really, you know, is really quick, I devote a lot of time to it. And then we get we get you the paperwork out. So you’re generally getting getting the paperwork in two weeks. So financing, it just generally doesn’t work. Is there software that I use to keep track of individual accounts or Ledger’s? Yes. I personally use that folio. App folio is a good is a good solution. I recommend it, I get a I have a discount code with them. When they pay that affiliate fee. I pass that directly on to my whoever, whoever got it. So I don’t keep any of that affiliate money myself. And they winds up being about 10% of the cost. I think the costs and I know I do not keep track of what their costs are. I think it winds up being about $600 a month though, because it is a very kind of industrial grade solution. There are other projects out there. I know that some people are using a product called groundbreaker. I haven’t used them myself, and but you could check them out. And so maybe they’re they’re very good. I have no idea. Right? All right, can I get my friends to invest in my reg D if I am advertising? Let’s start kind of at the from a bigger picture, it might make a little more sense. Just you to do oops, what to delete? There we go. And go back to the whiteboard. All right. So can I read the question? Okay. So two types of syndicate syndication generally under 506 under reg D 506, B and 506 seed, there is also 504 But it is it is hardly ever used now it’s overly complicated, and so nearly no one is using it. So 506 B is C and we’ll go through we’ll answer the question minute but I just want to outline what those those differences are. There so 506 B is yes, you can have non accredited investors there’s up to 35 per 90 days 506 C, you can have you can advertise you can make a general solicitation. And so with 506 B though no advertising and with 506 C no non accredited investors. So to answer your question, what were the problem is, is if you’re doing a 506 B, you’re not allowed to advertise it really at all. And you said that you needed to advertise? So the short answer is probably not as long as those friends and family are non accredited investors, if they, so how do you do a 506 B, and, and basically be able to get people into your fund and find investors, there’s a few ways what the SEC is main concern is between 506 B and 506. C, and why they have this rule setup is they don’t want people just going out and making general solicitations to the entire world of hey, come into this fund, and basically taking is of people taking advantage of it. So people coming up with some very large mechanisms to, you know, make, you’re gonna make a billion dollars, if you invest $5 into this fun, and we’re gonna make all this money and basically, the syndicator walking away with it, none of you are obviously going to be doing that. But that’s what the SEC is concern is. And so they use this toggle point between accredited investors versus advertising as their mechanism to regulate that. So non accredited investors are not necessarily less sophisticated, but they have less means to be able to adapt a very bad thing happening where somebody walks away with all the invested money. So the turning point, really, and it’s just read it, this is my interpretation, reading between the lines of what the code says is that it comes down to trust. They want the investor to be able to have some relationship, some sort of, like trust that’s based in something real with the syndicator. And so what what needs to happen is dialogue and communication that is outside of what the investment is needs to take place first. So what used to happen in the very early days, as syndicators would put together a seminar, they’d get everybody packed into a room, they talk about the investment, and they get a list of things and they’d start talking about what their investment was immediately and saying, Okay, come invest, come invest, come invest in this. It’s great, it’s great, it’s great. And there was a lot of the the there was concerned that there was a lot of pressure that was being put on to investors by syndicators in order to invest. And so what they have done by doing this is they’ve actually specifically said in the code, you can’t do that. What you can do, and what this code does, does not prohibit is putting together the same seminar, he put together a seminar of how to invest in real estate, you never talk about your investment at all. And then you basically invite people to say, hey, if you’d like to talk some more about real estate and talk with me one on one, love to do it, let’s set up a coffee or, or whatever to do that. So that’s really kind of the main mechanism that people are doing in order to build their investor base is by still setting up seminars or webinars or things like that, inviting people into those communications in those dialogues, and then going from there to build that trust and then doing a 506 B. I hope that answers that question. Next question. What services do I provide in setting up a closed end fund? Good question. So we are basically your back office, your your support team to get that fund set up. So what we do is we put together the PPM the operating agreement, subscription agreement, investor questionnaires, and then put a package those all together so that it meets what investors would be expecting to see from them. We can do reviews of your marketing material. We don’t do the marketing material ourselves, but we do do reviews. And then you can put it out there into the marketplace. Once you’ve put that all together. We look at what the offering is. And then we put together the form d which is what gets filed with the SEC And then we get put together with the blue sky filings. Now, a lot of my competitors do exactly that same thing in terms of the actual, like, we put this documents together, what I think sets us apart and my firm is I’m an active syndicator. Myself, I’m putting together my own deals. And so what, what we try and do to the the difference that we make is, I take that expertise, and I’m available to you in order to make sure that ultimately you’re successful. I mean, the reason that we cut our rate once you’re a client of ours is because our whole goal here is to have you be successful. So you keep hiring me over and over and over. That’s my goal. So generally, once you’re one of my clients, I’m available to you, we set up meetings, I see some of my clients are on this call. And so they can probably attest to it as well, that I really do try to make myself as available as possible. Probably the easiest way is to set up a meeting with me, I try and make it so that I can meet with people as quickly as possible. And then we can we can discuss whatever it is, if it’s about your syndication specifically, we can talk about that. Or if it’s a question about, you know, an issue that you’re having, I’m happy to have those conversations as well. So that that’s what we provide, in order to set up a closed end. Another question, is that okay to have both a 506 b and a 506. C for the LLC. Great question. I do get that a lot, too. The answer is no. So you choose one and then the and then sometimes you can go to the other. So generally, you could if you need to do raise, do a raise from friends and family. And to advertise, what you can do is you can put together a 506 b offering, offer that to friends and family. And then once that’s closed, then you can put together a 506 C, and then advertise that specifically, they need to be two separate different offerings, though. So we have we have a fair number of people that do that, probably not nowhere near a majority, but some people definitely do that. And, and it works, it works fine, what you cannot do is do a 506 C offering, where you’re advertising it to the world and then do a 506 b offering just to pull in those people because at that point, they’ve pretty much seen the offer that’s there. And that may be out there in the marketplace that you’ve advertised. So what we don’t want to ever have happen would be a complaint gets filed. The SEC is called in to investigate, the investor says, Well, I had no idea who these people were, I saw an ad on TV, I gave them money, and I’m definitely not an accredited investor. That’s what we’re trying to prevent. By making sure that it doesn’t go C then B. But if it goes B then C, you know, that’s fine. You’ve brought in all the friends and family that you know, and then close that off and then do the do a 506 C offer. Right? So how do I let friends and family know if I’m doing a 506? B and can’t advertise? Great question. The the you can’t advertise in terms of a general solicitation under 506 B. But you can’t let certainly let friends and family know I think you probably could even post on Facebook or on whatever your social media is, hey, here’s what I’m working on. And you could bring people in that way. But you’d have if you decide to do that, you just wouldn’t be very diligent that the only people that you’re letting into that investment are people you actually know. So I wouldn’t go like trying to test the gray area when you’re putting together seminars and getting to know them for a week and then talking to them about the investment and do that mechanism. But otherwise, you could certainly say put it out there to the world, hey, I’m doing this. You know, if you’re one of my buddies, give me a call. And that should be okay because it’s not then a general solicitation where anybody can come in. Who is an accredited investor, an accredited investor as defined in rule 501. What it basically says is there’s two tests, there’s an income test or there is a a net net wealth test. You do not need to pass both of them in order to be considered an accredited investor you only need to be I passed one of them. For the net income test it needs to be if it’s a person applying on their own. So without their spouse that they need to have $200,000 a year in income for the past two years and expectation of get that for the third year. And for the net wealth test, it needs to be net wealth of, Oh, I’m sorry. And for the income test, if it’s with a spouse, it’s $300,000. Or, plus $300,000. A year for the last two years with the expectation of the current year being $300,000 a year, the wealth test is for a net wealth of $1 million. And that’s not counting any positive equity for fant primary residence. So if a house is underwater, that does bring down that personal net worth. But if your house is worth worth a million, and you owe, you know, $5 on it, you don’t get to count that additional income as that primary that that big spread that $995,000. So you don’t need to get to count that as your as your wealth that needs to be separate from that primary. Key. Can we do a 1031? Exchange? Common question the answers? The simple answer is no. The we’ll have a backup this simple. If you mean to, can we do a can people 1031 Exchange into a property into your property and give you the the money from there? The answer is probably no, that money itself would be counted as boot and they’re going to be paying their taxes on it. Outside of that 1031 Exchange. If they want to pay taxes on it, then absolutely they can. But it is counted as boot. And he can’t come in. The only exception to that. And I’m hesitant to say it is in the case of a Delaware statutory Trust, which is a very competent, complicated mechanism. And it’s so technically they you can set up a fund in order to raise money with 1031 money. But it can only be in the in the specific shell of a Delaware statutory Trust, which are very, very complicated, expensive and very challenging to put together. In You 1031 out probably now here it gets kind of state specific, because a lot of times what happens is the IRS under the IRS rules. It’s 98% Not a problem. Under local state rules, it depends. So in California, for example, if you were to try and do a 1031 exchange out of a property that’s being syndicated, and one of your investors doesn’t want to go along, but everybody else does. The Franchise Tax Board and California will come after you and disallow it and they don’t have any problems filing a lawsuit against you, no matter what, despite whatever the IRS rulings are, they want their money immediately. So they will disallow it. I’ve heard New York is also equally challenging. I’m not keeping track of which states like it and which don’t. Now, if everybody wants to 1031 Exchange, that’s not going to be a problem. So you certainly can turn 31 out, as long as every investor doesn’t have a problem with it. Or if your fund is just set up automatically to do that, then it will be okay. But everybody has to come along, you can’t spread out split out fractional shares in some states. So I’d be very careful about that. We have some clients who are doing it very successfully. But they’re also not letting in people from New York or California in order to be able to do it without a problem. Which is easier an open ended fund or a closed ended fund. So and well, it depends what you mean by easier, so easier in terms of raising capital. I think most of the time, it is much easier to raise money for a closed ended fund. In my experience, most investors like to have concrete start dates. An expectation of this money is going to be held and doing whatever it’s doing for five years, seven years, three years, whatever that time period is and they kind of know what that is going in. So raising money My experience is closed ended as much easier open ended is more vague. And the more vague it is, the more challenging it is. The what’s easier about open ended funds is open ended funds are easier in terms of strategic decisions. If you’ve got a pool of money and you’re able to place it an open ended fund, you’re able to do that. You just need to make sure you’re complying with whatever rules are in your operating agreement that are set up. So the specific plan of an open ended fund can be easier. But a closed ended fund is much easier to get investors for and much easier to maintain. Because we’re not dealing with like what we answered before about funds where we’re have to having to keep track of either separate Ledger’s or keep track of of net asset value along the way that gets gets overly complicated. How, what’s up above? does? Does documentation for five accepting investments from self directed IRAs? Yeah, basically, almost every syndicator does allow accepting funds from self directed IRAs, to backup just so everybody knows a self directed IRA is basically it’s an IRA, where the administrator of that IRA allows the LAOs the person with that account the account holder to basically dictate where their funds are going to go. And that can be into a syndication. So there’s quite a few companies that are self directed IRA companies, probably the biggest is and trust en TR ust, but they’re by far not the only ones, I’ve dealt with probably about six different ones. And they’re generally pretty easy. So it I haven’t had a situation where I’ve had a, an administrator of a self directed IRA, ask for any changes to a, to a ppm or to an operating agreement, their main concern in order because they want to stay compliant for the benefit of the IRA holder, is that the IRA holder doesn’t have access to touch the money themselves. So it’s, it’s nearly impossible to set up a self directed IRA, where the syndicator themselves gets to go into the investment. But it’s almost always the case that, that you can generally have investors who have self directed IRAs. And you should and that’s a great talking point to, to finding investors to having those conversations, because now they can put their IRA money as to use in your syndications as well, it’s a good thing to talk about. And the only administrative thing that that burden that it adds to you is two things is first, you have to submit it to the administrator for their review before you can get the money. And the second thing is every year, the administrator is going to ask what really they’re going to ask the IRA holder, who then will ask you is they want to get a general assessment of what the current value of that IRA is, or what that acid is in their IRA, for reporting purposes, they need it. So they will ask for it. But it’s really it’s not that big of a deal. You know, I basically have a template for it. If ever you’re working on one and you’re a client of mine, you just tell me that, you know, how does this work? And I’ll send you over what my template is, and you can fill it out and it’s it’s pretty simple. Let’s get a quick drink. All right. Another question. We have some situations where after signing the ppm or wanting to provide a discount on our fee and commissions, what tax formality or documentation do we need to have? Okay, yeah, you you absolutely can do that. This is where most of the time we’ll talk about side letters. So, and we’ll talk we talked about side letters and our PPM and I think we talked about a little bit in the operating agreement, just that these things exist. What a side letter basically is, is it’s an agreement outside of what your normal investors get. So it’s, let’s do a diagram. Easier. Oops. Same thing. So you’ve got your agreement with your investors, right? So investor, investor. And then you’ve got this guy here, who’s also an investor. And you want to give him a little bit better deal, say, you’ve got it on that, that this investment is paying, and I’m making stuff up here, it’s paying an 8% preferred return, and then a 7030 split. So 70%, to the investor and a 30%, to the manager, this guy is coming in with a lot of money, this guy here. And you really want him as an investor, and you want to incent him in order to finish off your investment and bring him in. So what you want to offer him is an 8%. Breath and an 8020 split. So that is no problem at all. What you’d basically do is have him sign the fee agreement, and then do this separate side letter just for him, that says, okay, and for you, we’re going to do an ad 20. So that’s one way to do it. What the caution is that, that we’re looking at whenever we’re doing side letters, is I don’t want there to be a situation where, where instead of this 8% pref, you are suddenly doing a 12% prep, and you’ve told your investors that word that this is an 8% Prep. Now why is that the case, because all these are getting the 8%, the 8%. And then after that are getting that 7030 split. So after all that money’s paid out, then they’re getting a 7030 split well, that 8% is driving down the amount of available cash for distribution. Right, because they’re getting that right off the top. So now if I’m giving somebody this 12% right off the top, that striping them more than the investors are expecting, and so you’re diluting them without telling them and so that’s that’s a big nono. So I don’t want whenever we’re talking about, about those, that’s what I’m on the lookout for is dilutions that are unintended. In terms of fees, what you can do is, because I think that was your question is Can you can you give them some fees? The answer is, yeah, you can give them some fees. And sometimes we’ll do those, especially in the case of like a kicker for a guarantor on a loan. Like if somebody is investing a large amount on there, you’ll give them maybe 1% of the of the amount financed just for the act of signing on the loan. That’s okay to do. In terms of, of what there is now, in terms of tax formality, but so though, the documentation is simple, it’s a side letter, it’s the agreement between the fund and the investor. That’s the documentation you need. For a as it relates to taxes, what will happen is you’ll need to just basically explain what it is what the situation is to your tax preparer, your CPA, when they’re preparing the K ones to make sure that they get notified. Now, if they’re getting paid a portion of fees. That’s basically BS coming from the manager is how you would want to structure it, not from the fund itself. So it’s the manager paying the fees. So a fee gets paid to the investor to the manager, and the manager then kicks that back to the fee. So let’s just just make sure it’s real clear because could be a problem otherwise. So here’s your inbox. stir. So it’s paying regular distributions. And this is the investment. Hopefully you all can see my handwriting, I think it makes it helpful to see it this way though. So you have the sponsor LLC, getting paid fees, and then the sponsor LLC paying some subset of fees. So it’s going to reduce the amount of taxes that the sponsor LLC pays. And then the what this investor is going to basically get a k one. They’ll get a k one on that distribution, and they’ll get a 1099 on the subset of B’s. So from a tax perspective, that’s the that’s what would happen. In a real estate fund, could an investor invest funds into a property’s equity through a no between the fund LLC and the sponsor? Sorry, let me switch. Could an investor invest funds into this property’s equity? Through a no? Yes, you could. Yeah, you could do that. You just would want to, again, make sure that the investors are still getting what, what they’re expecting, who are not a party to that specific investor? And then document that that investment through the note. So you would document the No, don’t? Yes, is the short answer. There is no difference in the document preparation, if the syndication invest in residential or commercial property. Not a substantial difference in me know, in your private placement memorandum, there’s there’s documentation about different risk levels, there’s documentation about what your overall strategy is. So those things are going to be different. In what those docket what all of those syndication documents look like, but the state of those documents or you know, there’s, there’s not anything that’s substantially different, like, oh, well, if it’s residential property, you need to put all of this stuff, except for risks or whatever is going on with that particular investment. Is there any minimum or maximum amount of money that can be raised? No. So under Regulation D, you could raise $1, you could raise $20 trillion? You’ll, you know, if you can, if you can raise $20 trillion, I’ve got a job for you. If you but there is there are no maximums, under Regulation D and no minimums, either. It’s probably not economically viable to to do a minimum raise to do a raise, typically. I mean, when I was coaching people, when people would ask what the minimum would be, that I would look at, I probably would say a minimum of a million dollars of equity raised, it’s the amount of money that you’re making at less than a million dollars is probably lower than would make it make sense for the amount of work that you do as a syndicator. Alright, so we got just one question left, how does form D work? Form D is basically the notification to the SEC. So Regulation D has, is basically an exception to the general security rule that all securities must be registered. That’s the key word is registered with the SEC. As an exception to it, it doesn’t need to be registered, but it does need to be some documentation needs to be filed. And that’s through the form d. What the rule is, is generally the the SEC once the once that form D filed within 15 days of the first sale of of the security, but it further defines that the sale the first day of the sale of the security is the date, basically at which point the investor isn’t going to get their money back. So if you get it up You know, you’ve raised all this money, you get it to the finish line, it’s just not going to happen, that property is not going to transact, you give them their money back, no form deeds owed. It’s just not a relevant piece of paper anymore to being filed. You still could file it if you want. But you know, they you’ve already given the money back. So you don’t have a filing date, really until, until there’s no time to get it back. Now, if you miss that time period, it’s very far from the end of the world. The SEC does not have a penalty. There’s no fee and filing the form d, there’s no penalty associated with the SEC on late files. Occasionally, some of the blue sky states have a late fee filing. But they also don’t have I don’t know of any state that has a a, you know, a prohibition of, you know, you won’t get this protection under form D because are under reg D because that would be outside of their jurisdiction anyway. Because as a matter, the federal rule wins. Regulation D says, Well, yeah, you need to file it within 15 days. Probably you need to have it filed to be protected by Regulation D in case of a lawsuit. But there’s never been an opinion. There’s been one opinion letter that opined that it was possible. But in that one particular opinion letter, it said in this case, it doesn’t. It doesn’t change the standing that Regulation D still applies, even though the form d wasn’t filed. So that is the answer to that question. Okay. So we hit the amount of time that we’ve got allocated for this. So I hope that was helpful. Again, if you’re ready to move forward on putting a syndication together, if you’ve identified properties, or you’re ready to get started right away, give us a call and we will get you going we’ll get set up a time to talk. But otherwise, feel free to you know, we’ll be putting these webinars together fairly regularly or I’m sure you’re getting our email blasts, and I hope you find those useful. Feel free to check in as if you’re not a client. I will try to make time to answer answer the questions. If you are a client. I will definitely find time to answer any questions. So I hope you found that helpful. Thanks and have a great day.
If you’re doing a Regulation D Rule 506b offering, where you’re not allowed to make a solicitation, how are your friends and family and all your contacts boasts to know that you’re doing this indication so that they can invest in it?
My name is Tilden Moschetti. I am an attorney for the Moschetti Syndication Law Group. Our practice focuses exclusively on Regulation D Rule 506c, and Rule 506b offerings. So this question comes up under the context of rule 506b. And the question is, is just how are the syndicators supposed to let their friends and families know about their investment opportunity if they’re not allowed to advertise? Well, there actually is a very simple answer for this, the rule prohibits the advertisement of the offering as a general solicitation or a general advertisement. That’s the rule in Rule 502. See, Rule 502c limits that it says there cannot be a general solicitation or general advertising of that offer. So what that means practically is you can let your friends and family know absolutely about it. You can even let the world kind of know that you’re doing this thing. But you need to make it clear that they’re not allowed to invest in it. So they can know about it. But there’s no in there’s no way that they can join in. That way, you’re not making a solicitation of an offer, because there’s no offer there that the general public can’t invest it. But all of your friends and family certainly can. Now if somebody in the general public work to see something like that, for example, you put it on your website, and we’re some investor were to see that and give you a call, you would simply let them know that I’m sorry, this is closed. Right now it is not available to the general public. But I do make put together syndications from time to time, and I’m an expert at this industry. And maybe we should have a conversation and we can talk about what your background is and what my background is. And maybe we can work together sometime in the future. Without an expectation of any future investment, you’re starting to build that relationship with each other, that will just allow them in the next deal to probably come in under a rule 506b offering. And so that’s always good advice to be having those conversations, even if all you’re doing is rule 506 B. One strategy that is oftentimes used is seminars are put on by the syndicator. Now it’s not a seminar for the purposes of getting them into any investment that they have today. But it’s an idea to build that reputation and build that relationship and that trust with your investors or your potential investors down the road. So that once that relationship is there, that then they can become a part of your Rule 506b offerings. My name is Tilden Moschetti. I am the syndication attorney for Moschetti Syndication Law Group. Our whole job is helping you stay in compliance with the SEC and the states under Regulation D Rules 506b and Rule 506c.
Can a syndicator do both a 506 b offering in order to get non-accredited investors and a 506c offering in order to advertise at the same time?
My name is Tilden Moschetti. I’m an attorney for the Moschetti Syndication Law Group. Our practice focuses exclusively on Regulation D Rule 506b and 506c offerings. So it’s only natural that one question that we oftentimes hear is can the syndicator do a Rule 506b offering in order to get investors who are not accredited in and a Rule 506c offering in order to advertise and get investors who they don’t know in into the same syndication? Well, the answer is, there’s one kind of way that sort of works. And there are two ways that don’t work. But let’s talk about the rules in general. And then we’ll go through the specifics of the different strategies that we get asked about. So in general rule 506 B is a rule that is an exemption to your registration with the SEC, it allows up to 35 non-accredited investors into your syndication over a 90-day period. So you can stack those, so it can be 35, and then 35 More and then 35 More as long as there’s no more than 35 in that 90-day period. But how do you get them in and the general public as well. So the big problem with Rule 506b is a prohibitionist meaning you can’t do it of doing a general solicitation, which means you can’t put a billboard on Main Street to advertising your offer during that time. Rule 506c On the other hand, you can make a general solicitation, you could put in skywriting across the sky all about your syndication, and looking for investors, doesn’t matter if you know them or not. So the problem with that syndicators have sometimes is raising money and getting enough capital. So the idea is okay, if I can pull from the general public and get as much as I can from there, but the most easiest way to raise money is from the people I already know, because I Are they already trust me. And if I can put those two together, I would have no problem ever and raising funds. The challenge, of course, is that you can’t really do this and the way most people think so the first strategy that we get asked about, and probably the way I’m asked most often is can I do a Rule 506b and Rule 506c at the exact same time in order to get the investors in? The answer is clearly no. If you were to do that, it would basically be akin to having a end run around this prohibition of general solicitation. It just negates the whole point of the rule. So there’s no way you’d actually be able to do it, you would have people who were non-accredited investors, seeing the advertising and still coming into your investment. The other strategy that we get asked about that does not work either, is doing a Rule 506c offering, closing it, and then doing a Rule 506b offering. Now here’s what would happen if you did it that way. You would an unscrupulous syndicator not to you and not my clients may come up with the idea of doing it this way, simply because they could advertise it out to the world saying we’re doing a 506c offering. Now when non-accredited investors call, they would just say, well, let’s build that relationship. Because you know what I’m going to do, I’m going to close that rule 506c offering and then I’m already going to have that relationship with you, where you can come in under Rule 506b, and I will get all the investors that I want. So that way is simply not going to work because it’s clear that it’s an end run again, around the rules.
The third way to do it, which probably would work it would look old. little funny, but it doesn’t pass the boy that would never work test. So I wouldn’t necessarily say this is what you should do. But it is an option out there, that probably is going to be okay, as long as it’s really documented very, very well. And that strategy would be to do a Rule 506b offering first, talk to all of your friends and family, don’t do any advertisement whatsoever, nothing and bring them into your syndication. And make it clear that Okay, in this 506b offering, it’s closed, you have to know me, we’re going to talk about how you know me and what that relationship looks like. And make sure that’s very well documented. Let those investors know, look, once this closes, we’re going to have another round, that’s going to be 506c. Now it’s a completely different round. It’s in the same syndication, but it might even be a different class of membership units altogether. And then once that’s closed, you would then do a 506c, offering a little while later. And then at that point, you could advertise now do not make the mistake of your friend Joe calling you and saying, Okay, I know that you’re in the 506c period right now, and we close the 506b and that you want it in, but you didn’t make it in. You’re a non-accredited investor. But since I know you so well, I’ll pull you in anyway, do not make that mistake. Because once you’ve done that the whole house of cards falls apart completely. Because now you’ve brought in a non-accredited investor into your 506c offering. So I hope that helps. My name is Tilden Moschetti. I am the syndication attorney for the Moschetti Syndication Law Group. If you need anything as it relates to Regulation D offerings under Rule 506b or Rule 506c, please don’t hesitate to give us a call or visit our webpage.
Hi, this is Tilden Moschetti of Moschetti Syndication Law Group. Today we have a question about 1031 exchanges and syndication. Can the two go together both going into a syndication and coming out of the syndication using a 1031? Exchange?
The question I occasionally hear about putting together a syndication as a syndication lawyer is, Can I do a 1031 exchange as a syndicator? Now, there’s obviously two different questions going on at the same time first, can I get investors who wanted 1031 Exchange into my syndication? The answer is yes, but it is a little complicated. Now, it’s complicated because a 1031 exchange really exists in a tax world. And it exists in a title world title to the property world. And a syndication exists more in the syndication world or a business entity in a securities world. So putting the two together is a little bit more challenging. So the answer is, yes, you can do it, but here’s how it has to happen. So the the investor that you want to come into your syndication, would basically be doing a 1031 exchange into a subset of that property as a 1031 exchange. So they would come into it as a tenant in common. And then what would exist is on title is that tenant in common structure, and then also your, your syndication, also as a tenant in common. So, the challenge with tenant and Commons is that each tenant in common structure gets to vote on what happens with the property, not necessarily in a complete marketing sense, like exists in that they actually have that control. But practically, they do, for example, a 1031, person of 1031 investor, who comes into your property and has that that tenant in common. While you may want to sell the property at a at any specific point, like the exit is time, that other person who came in and has that tenant in common structure may not want to sell. And it’s going to be very challenging to force that tenant in common to sell their interest, because it’s up to the each tenant in common to make the determination on when they’re going to sell. So there is an inherent challenge and a risk to the entire syndication structure. Because from a practical point of view, while you could sell your tenant and common interest and leave that other guy in existence, it’s not very practical that you’ll be able to sell that little swatch. It also was challenging on getting financing on a property, because that tenant in common the with with the investor will need to come along and sign all the loan docs along with you as well. So that’s the real challenge of them coming in? The answer is yes, you can have investors come in as tenant in common through a 1031 exchange, but it is pretty challenging. So our recommendation is make sure that thresholds pretty high, you don’t want them to just be using a 1031 exchange in order to place $1,000 The amount of headache that you’re going to have is not worth it. If they’re investing a million dollars worth of value, it might be worthwhile to have that discussion. So the second question really is can the Can my syndication itself, we’re putting the the issue of the 1031 exchange into it aside, and we’re assuming that you just have the syndication itself as the is the LLC that has titled to the property? Can that syndication, do a 1031 exchange out of the property? The answer there too is yes. But so if everybody wants to come along for the ride, and they want to and you want to do a 1031 exchange from one property to another property, both of them are investment and it meets All of the other criteria of 1031 exchanges, because it’s a single entity doing it, it’s pretty straightforward how to do it, and that your regular Accommodator can take care of it and make sure that it happens correctly. The time where we say, but maybe not, is in the case of you don’t want how you want to make that 1031 Exchange, but some of your investors one out, and the rest of them want to go along with that exchange. Now, here’s the challenge. From an IRS point of view, there isn’t really a challenge. But if this if the property happens to be located in a state, where the Franchise Tax Board or whatever the taxing authority is, is not as willing to go along with the program, you’re going to have problems. For example, if you were to try and do this in California, the Franchise Tax Board there is very, very aggressive when it comes to collecting taxes on 1031 exchanges, they want their money back as quickly as possible. So the Franchise Tax Board in California is likely to file a claim and file a lawsuit against your syndication saying that was not a valid 1031 exchange because you had investors who got paid out earlier. And even if the taxes for them have gotten paid, the new ones will not be able to go along, the new ones will not go along and you’ll have a lawsuit taking place underneath the syndication.
If all of your investors are from a state that is more accepting of this and are and there are some that wish to stay outside of don’t want to participate in the 1031 exchange, then you’re not going to have that issue, because the IRS is position has generally been that it is okay to 1031 Exchange out because that’s what the rule that would make sense is because it’s a single entity still doing it. It doesn’t matter if it’s a partnership interest from tax point of view, or anything like that. So I hope that helps. My name is Tilden Moschetti. I am the founder of Moschetti Syndication Law Group. We do private placement, memorandums, operating agreements, really everything you need in order to be in compliance with the SEC under Regulation D. If you need any help, feel free to give us a call and we can help you with your syndication project.