Syndication Attorneys Podcast
Can non-US people invest in your syndication or fund offering? Today we’re going to talk about that my name is Tilden Moschetti. I’m a syndication attorney with the Moschetti Syndication Law Group specializing in Regulation D Rule 506b and 506c offerings.
Let’s face it, we live in a very international interconnected world, with investors located throughout the globe in every region. If it was the case that the United States said “no, we don’t want any foreign money coming in in order to make our investor or our sponsors of syndications and funds more wealthy.” Well, that would be a darn shame because there sure are a lot of investors out there in other parts other than the US and a lot of capital to invest and grow wealth here within this country. But fortunately for us, investors from non-US places can invest into your syndications and offerings. So if you’ve put together a Regulation D offering us investors from non-US places are actually coming in through a different rule, a rule called Regulation S, which allows investors to invest if they’re not located in the United States. Now, the rules are very similar to those within Regulation D, except for two minor points. So under Regulation S, we are not as concerned whether or not they are an accredited investor or not. So if you have a Rule 506b offering, it’s not that we do not count the people who would are non-accredited investors if they’re not in the United States. Likewise, if we have a Rule 506c offering, we don’t need to get a verification of accredited status of that investor. Now, we do need to make sure when we’re doing a 506b offering, however, that advertisements for people not within the US is possible. But it cannot be something where the advertisement came into the US, we need to take a lot of measures to make sure that the advertisements made are very specifically to non-US people. Because if a non-US, if a US person were to see an advertisement, and it’s a 506b offering, then it’s suddenly a big problem, because they’ve already broken the rules, you’ve now had a general solicitation inside of a Rule 506b offering, which isn’t supposed to happen. So we do need to make sure of that. The second thing is on the resalability of the security itself, under Regulation S, they are limited to not be able to resell their security for one year. So we need to make sure that that is known to the investor as well, that non-US investor, you cover those two things, and you make sure that those are in your private placement memorandum. And the good news is yes, you can take investor money from those non-US people. It’s something that I talk with my clients about very regularly, it comes up in nearly every context with sometimes just one investor and sometimes a whole bunch of investors. Now, we can’t guarantee that raising money from those non-US investors won’t violate the rule in the other country. I don’t practice in any other country other than the United States, and I don’t know the securities laws of any other country. So there is that caveat, and it’s a good idea if you’re targeting a specific other country to speak with an attorney about those rules as well to make sure that you’re not going to run afoul of their rules, but under the US rules, you will be fine. So my name is Tilden Moschetti. I am a Regulation D securities attorney specializing in rules 506b and 506c.
A great opportunity for syndicators and fund sponsors is through self-directed individual retirement accounts. In this video, we’re going to go through what those are, and why it’s a great opportunity. My name is Tilden Moschetti. I’m a syndication attorney with the Moschetti Syndication Law Group, we specialize in Regulation D Rule 506b and 506c offerings.
So what is a self-directed individual retirement account, a self-directed individual retirement account or self-directed IRA is an account much like a traditional IRA. It is same with a an institution that holds the money and makes decisions and basically protects the investor from touching their money during that period when it needs to be in the account so that they have a tax consequence that’s very negative to them. So they protect that it’s in that shield, I think everybody really understands that piece of it. But a self-directed goes one step further, instead of the administrator making the decisions and acting on trades to buy into a public security or into something that is well known and most of the time still a public security, a self-directed IRA, lets the investor make the decision on where exactly that money goes. And that could be into something like a private offering, that is being done under Regulation D Rule 506b and Rule 506c, so they can choose to invest in there. So the setup looks like this, you as are the sponsor, and your investor is also a beneficiary of the self-directed IRA. Now, the self-directed IRA is run by a administrator and that administrators job is to make sure that the rules of the IRS and the states are complied with to make sure that there’s no consequences that happened to their beneficiary in the the the money hitting their hands or something not proper happening within the IRA rules that will cause a tax consequence. So when that is set up properly, what happens when you put this offering in front of your investor, the investor goes and opens up a self directed IRA account with the administrator. And it’s helpful to kind of direct them to a bunch of different places. So typically, I will refer to for three or four different self directed IRA companies, let them know that they exist, have them choose, you know what, and talk to them and make a decision on if one of these would be a good fit for them. When they do, they’ve then entered into an agreement, where they become that beneficiary of that account, and the administrator takes control, they then direct the administrator to invest in your account. At that point, then you provide the private placement memorandum the operating agreement, not only to the investor, but also to the administrator, the administrator reads those documents to make sure that all of the that it is set up in such a way that it protects the investor slash beneficiary from any of those tax consequences, which would be disaster. Assuming that everything is fine, they will then sign the subscription agreement. Typically, it is that administrator that signs the subscription agreement, but a lot of times they will also ask the investor slash beneficiary to sign it as well. And that gives them that gives the administrator the authority to then send the money and buy the security from you. So that’s all done. They’ve now invested in the the in there and in your accounts, you have the investor listed not as investor name, but you have that investor listed as as self directed IRA name for the benefit of investor name. When it comes time to do taxes, you will be issuing the k one to the self directed IRA with a copy to the investor. So that way the taxes flow, that obligation flows to the administrator to make sure it’s dealt with in a way that’s proper and conforms to the rules of having an IRA. Then when you’re making distributions, you need to make sure along with the administrator that all the money that’s sent goes to the administrator for the benefit of your investor, and never to the investor themselves. If the investor has control of the money, that’s when everything goes kaboom. That’s when there’s major major consequences, including imputed income, or penalties of possibly even their entire Ira world. We want to make sure that the money doesn’t go into the hands there, that it stays within the administration of that self-directed IRA. So that’s the the way that the that it’s all set up. Now, the reason I say that it’s a great opportunity for syndicators and for fund sponsors, is because now not only do you have a lot more capital to work with all this capital that’s available in these individual retirement accounts. But it’s also a great opportunity to talk to investors about the fact that these even exist, and that they may have an opportunity to invest in your offering, which would, which may, and hopefully will give much better returns than whatever they would choose in a traditional IRA. So I hope that helps open your eyes to the self-directed IRA world. It is a powerful tool that is readily available for syndicators to use and to help their investors make good decisions and possibly make more money and a much more tax-sheltered way. So if I can help you as a syndication attorney with your offering, don’t hesitate to give us a call and we can talk through your offering under Regulation D Rule 506b and 506c.
One piece of lingo you oftentimes hear in the syndication world is the phrase GP or LP, or general partner or limited partner. What are these mean and how do they apply to you? Well, my name is Tilden Moschetti. I am a syndication attorney with the Moschetti Syndication Law Group specializing in Regulation D Rule 506b and 506c offerings. We are going to go through what that phrase what those phrases mean the definitions and how they apply.
Use of the term GP or LP, which stands for GP general partner, or LP limited partner, are actually an anachronism I say it’s an anachronism because it refers to a structure under a LP, which is a form of which is a organization that set up as a limited partnership. Limited Partnerships still exist, and they’re still very useful under very specific circumstances. However, most people who are doing syndications and private offerings have moved away from doing LPs. And I’ve moved to putting their projects, their assets and the opportunities in LLC is limited liability companies. The reason is, is that over time, investor sentiment itself has shifted that need to so that investors could feel more secure about what their own rights were in an LLC, rather than an LP. So a GP or the general partner is you, you are the sponsor of it. So it’s you who have some liability as it relates to the fund itself, you know, how it works and how it functions. So when I say GP, sometimes I’m talking most of the time I’m talking about the manager are the sponsor, they’re all the same person. So the GP is that person who’s kind of in charge of it, they have some liability, but they’re the ones who also are profiting from some of the all the work that they’re doing. They’re actively engaged in the syndication, or in the fund itself. LP are the investors, so the LP limited partners. So they’re the people who have basically no liability at all, except to the extent of the cash that they’ve invested in the Fund, or into the syndication. So that’s the limit of their liability. And then they are then completely passive in the role in the way that most limited partnerships are set up, or nearly all of them is so that LPS have no voting rights and no control whatsoever. An LLC may have some voting rights for their investor members, but not always. So there always needs to be some voting rights available, but it will be very, very curtailed to much less. So that’s what a GP is, and an LP is and how they fit into syndication. So yes, we use those terms. They’re not actual constructs within an LLC itself, but we do create the scaffolding around it to create basically the same type of thing. And for short, most of the time you will hear a syndicator sponsor or an attorney talking about a GP or an LP role. My name is Tilden Moschetti. I’m a syndication attorney with the Moschetti Syndication Law Group. Let me know if I can help you.
One question, every sponsor of a syndication or sponsor of a fund should think about for themselves is what are the consequences? If the fund or syndication does not make money or loses a considerable amount of money? What are those consequences? My name is Tilden Moschetti. I am a syndication attorney with the Moschetti Syndication Law Group specializing in Regulation D Rule 506b and 506c offerings. And today, we’re going to go through that question.
Now, obviously, it’s a worst-case scenario, you’ve raised all this money, you’ve gotten that trust of your investors, who’ve given you quite a substantial amount of money, to put it into this investment, be it a real estate investment, or a business. It can happen though, that though that business or that real estate deal, loses money or loses a considerable amount of money, or perhaps it just doesn’t meet expectations, maybe you thought it would have a great return, and it just didn’t meet the mark, that investors and you had hoped for? Well, it’s unfortunate that that does happen. But it is a investment and investments have risks. And hopefully it doesn’t ever happen to you, for it just is a possibility that it could. So if that were to happen, what are the consequences to you? Well, if you’ve structured your deal correctly, and in a way where you’ve conveyed all of the risks properly to your investors, and you’ve set up a structure, that’s fair, and I should definitely Asterix and as long as you have not committed fraud, because obviously, that would be a enormous problem. And if you are somebody who would do that, I hope you’re not watching this video. And please don’t do syndications or private equity funds at all. But if outside of fraud, it is within the realm of possibility that it will lose money, things do not always go up. We’ve seen deals in the recent past fall apart, and it has lost investors a lot of money, every now and then I do get calls from investors who have lost money. And most of the time I talked to them, I don’t there’s nothing I can do. Because it’s not part of my practice, to enforce, you know, to talk to be a plaintiff’s attorney, working with people who, who lost money in a syndication I don’t that’s just not part of my practice. But I do like to talk to them to kind of understand what happened and get a feel for what the layout is, and understand Well, where did things go wrong? Was the investment just bad from the beginning? Was there something shady going on? You know, and I’m always thinking in the back of my mind, is there somebody who I can send these people to most of the time there isn’t. But occasionally, there will be somebody who I’m like, I know a good attorney to refer to that aside. So when I hear these deals, most of the time, it’s something that was foreseeable, that fell apart. And that did fall apart, unfortunately. So in today’s market, there’s obviously a mortgage interest rate risk, right? If there is a spike, if the interest rate itself is variable, then a lot of people started losing money when interest rates started naturally climbing, that would have caught made the deal less and less viable, until till the point where some of these deals have clearly completely collapsed. Now, if the if all that risk was discussed to investors, there’s probably not very much chance that they’re going to recover from the syndicator, or the fund sponsor themselves. But if there were, if those risks weren’t properly discussed in a private placement memorandum, and the rules set up of how that what to do in that situation, in the operating agreement, then there’s a very real possibility that those investors, those investors who were injured, would have some recourse in order to collect money back themselves. So the bottom line is this, if you are a sponsor, your risk is very low, as long as you’ve talked about all those risks, all those consequences that may happen by your investors investing in this project, all the conflicts of interest that naturally occur, and that’s why you need somebody who was really thorough and as a very competency syndication attorney, who can walk you through and setting up what is as close to bulletproof of a private play. So memorandum as you can make, now sure that you can still have it fall apart, because things can. But the whole goal is to make it such a document, that your investors just very much know what they’re getting into. And they know that there’s these risks out there. And as long as they’ve been described adequately in a way that they can understand, then you’ll be protected. I hope that explains the answer to this question, and we’ll talk again soon.
In this video, we’re going to talk about raising capital for your business. A lot of people when they think of Regulation D, they think about real estate syndication. But here we’re going to talk in detail about what it means how you go about it, to raise that capital, that money that you need for your business. My name is Tilden, Moschetti, I am a syndication attorney specializing in Reg D Rule 506b and Rule 506c offerings for businesses as well as real estate syndication.
Using Regulation D for your business is not only possible, it’s actually the main start of why Regulation D was started in the first place to create capital to influx, the smaller companies to save them from the expense of having to do a raise registering with the SEC. So not only is it possible, it actually is normal. There is also on top of this, of course, re using Regulation D for real estate syndication. But really the main idea has always been to raise money for your business. So what kind of things would you raise capital for for your business? Well, it may be to just acquire a business, right? So you may have identified a business that you think would be a really good fit, or you’re adding on I’m merging with this other business, and you need the capital to do that. Or maybe it’s some very large project that requires a large amount of capital for maybe it’s capital improvements in your real estate. Or maybe it’s a piece of equipment that’s very large and expensive. Or maybe it’s just hiring, doing a new marketing campaign or hiring additional staff. So Regulation D can raise money for all of those things, it can also raise money for you just starting out at the very initial stages of your business. So it could act as seed money. Now, sometimes they that money can come in through angel investors. But sometimes those angels that we think about can be the friends and family that you already know, want you to get a good start, and also will take a passive role in your business. Because remember, if somebody if you’re taking money from somebody, and they are have a passive role, that is a security and it needs to either be registered with the SEC or fall under an exemption like Regulation D. So how do you go about doing this? How do you raise money for your business using Regulation D? Well, first, you have to identify the need, right? So you have to make a business case for it. You can’t just go to a bunch of investors and say, I’d like some money for my business. And they don’t know what they’re getting in return, right? Nobody’s going to fund that it’s just doesn’t sound worthy. So you need a business plan, you need a plan of what you’re going to do with that money. Second, you really need to establish a timeline. So you’re going to be raising amount of money. Now either you’re you’re selling the security of equity in your business, which may be ongoing for the life of the business, but you may be selling debt, which would have a much shorter timeline, or maybe you’re selling equity, and then at some point, in the future, you would buy back that equity from the investors. So you need to plan out well, what’s the timeline look like for how you’re going to use the money, pay those returns and and finish the syndication or the capital raise? And then you need to also figure out, well, what exactly are you going to give the investors for their money? If they’re going to give you $100,000 or $200,000? Or a million dollars? Well, what are they getting in return? Now maybe you’re selling 20% of your the equity in your business or 50% of the equity in your business? But what does that really mean? And it doesn’t mean that they’re getting regular payments, like dividends? Or does it? Are you reinvesting all that money that you’ll need to figure out as part of it as well? If you’re selling dead on what sort of terms? Are you selling it? Are you selling it so that they it is a fixed rate of interest? Or maybe you’re not making any payments for a period of time, but it’s accruing for a period of time. And then you make one lump sum payment at the end? Well, what happens if you can’t make that target? And then you need to change accordingly? Are there consequences for that? Does that change how the money is structured? These are all the things that you need to be thinking about when you’re coming up with what it is that your investors are getting for that money. And then lastly, you need to ask yourself, does taking this money in this form? Make sense? Because it may or may not. Maybe it makes more sense to use the SBA and getting a small business loan. Or maybe it makes more sense to get a line of credit with a bank. Or maybe it makes more sense to just use a credit card, or all sorts of different mechanisms in order to get money in, is selling a security the best way forward for you? It may be and it may not be. So those are the things that you’re all juggling in your head-on? Should you even do it in the first place? And what would it kind of look like? Once you’ve decided that it is the path forward, most people hire a Regulation D syndication attorney, that’s my specialty. And that’s what I do for a lot of businesses. Now, I’ve helped businesses that are very small, raising less than a million dollars. And I’ve helped businesses that are very, very big, with over a billion dollars worth of capitalization. So I’ve, I’ve helped those businesses raise money for all sorts of different things. And that’s exactly what the purpose of Regulation D is to do. So we start out by identifying how that money structure all works. And then we go through how that money is going to be returned to investors. The question I often ask the businesses themselves is, okay, so I’m an investor, I’m $100,000, what do I get for it? I’m expecting to hear a pretty good answer to that, because that’s one of the fundamental questions that any investor is going to ask from the very get go. Then we start talking about the business itself and how it functions. And is it ruled by a manager? Is it ruled by an owner? Is it overseen by a board of directors? Maybe there’s an advisory board whose advice comes in? How does all that work? How is growth work? And what are the long term profit goals of the company? Is that ultimately to do an initial public offering? Well, I may have one trajectory for how we craft this offering of the security, maybe it’s just they want to take on a small amount of debt in order to finance a project and pay it off, that creates another trajectory that’s different than than going the IPO route. And so it all crafts itself into this offering picture. How do the risks of the company differ from just general business risks? What’s different about the company? How is the management structure? And what’s coming down the pipe for them? How dedicated are they within the business? Or do they have a lot of other projects going, those are all the things we look at. And so when we put that all together, we get a private placement memorandum. So I write the private placement memorandum for my clients. And then we review it in great detail just to make sure that really, not only is the investment offering presented accurately, but also are the financial picture and the risk picture. And any conflicts are those all conveyed in a way that really makes sense. Lastly, we do anything that needs to be done on the operating memorandum or the bylaws to structure those to make it compatible with the money raise itself. Now, this is a new business, a lot of times we’ll be the first people to write the operating agreement. And those things are very short and time line of when we’re looking because if the company is looking at doing an initial public offering down the road, perhaps after this offering, all of that work that we did in crafting, the operating memorandum will ultimately get changed again, as as we start putting together what the Initial Public Offering needs in order to be successful. Lastly, then we do the subscription documents, those documents that bind the investor to the agreement, and you to them as well, in exchange for that money. And so we put those together. And then I most of the time, well, if my clients want it, I’ll help them craft their, their marketing materials. I don’t do the marketing materials myself. But I’m normally involved heavily in designing the message that goes to investors so that it’s fair and accurate as what’s being portrayed so that investors really know and have a good sense of what they’re investing into. That’s truthful, because at the end of the day, we’re here to make money. But we also need to have investors that believe in us in order to begin with, right, if they didn’t believe in what we were doing, they’re not going to invest with us. If this project isn’t something that is economically viable, they shouldn’t invest with us and it shouldn’t have been put together in the first place. And they should know that when they see it, they probably will know that it wasn’t a good investment to begin with. So we make sure that we convey that message that this is the offering and the whole picture and put that out into the marketplace. So I hope that helps. This is how we craft that. That message This is how we build up that offering for Are businesses to raise capital with Regulation D Rule 506b and Rule 506c. If I and my firm can help you raise money for your business, we’d be happy to do so we can talk about how we work with you to put together all those necessary documents can file them with the SEC, and then help you craft your message so that when you take it to investors, that everything is conveyed in a way that’s not only proper, but also very ethical and understood, so that you make money, they make money and everybody wins.
Newer Episodes:
Episode 69 – What Happens When an Investor Wants to Exit Early in Your Reg D Syndication Or Fund?
Episode 66 – How to Start a Real Estate Fund: A Step-by-Step Guide Using Reg D, 506b, and 506c
Episode 65 – Mastering Financial Analysis: A Key Skill for Reg D Syndicators and Fund Managers
Episode 64 – Raising Money From Friends And Family: Unlocking the Legalities of Raising Funds
Episode 63 – Are You Creating a Security? The Howey Test Knows: A Look At SEC vs. Howey
Episode 62 – Deconstructing a Reg D Real Estate Syndication Deal A-to-Z: Part 2
Episode 61 – Regulation D Waterfalls 101: Understanding Investment Distribution
Episode 60 – Choosing Between Regulation D Rule 506b and 506c for Your Syndication
Episode 59 – Deconstructing a Reg D Real Estate Syndication Deal A-to-Z: Part 1
Episode 58 – 10 Essential Tips to Secure Investment from Family Offices for Your Reg D Offering
Episode 57 – The ‘Syndication LLC’ Disaster: Consequences of Bad Advice
Episode 56 – What Is Equity Dilution In A Regulation D Syndication Or Fund Offering?
Episode 54 – Demystifying Open-Ended and Closed-Ended Funds In Reg D Private Equity
Episode 53 – An Innovative Example Of A Syndication Investment Strategy: F.I.T. In Action
Episode 51 – Cash Flow vs. Appreciation: Understanding Reg D Syndication Investor Types
Episode 50 – Choosing Between Regulation D and Regulation CF: An Attorney’s / Syndicator’s Analysis
Episode 49 – How To Find Investors For A Regulation D Offering Without Using A Broker-Dealer
Episode 48 – The Difference Between REITs and Real Estate Funds & Syndications
Episode 47 – Securities vs Joint Ventures: Know the Critical Differences or Risk the Consequences
Episode 46 – Eight Steps to a Successful Real Estate Syndication
Episode 45 – How Long Does It Take to Raise Money for a Reg D Syndication?
Episode 44 – How to Ensure Your Reg D Syndication Offering is Marketable and Legal
Episode 43 – 5 Mistakes Rookie Regulation D Syndicators Make
Episode 41 – How Capital Accounts Work in Syndications
Episode 40 – Why You Need a Private Placement Memorandum (PPM)
Episode 38 – Strategies for Managing Multiple Reg D Offerings: A Guide to Fundraising
Episode 37 – Understanding Real Estate Syndication Through a Practical Example
Episode 36 – The Art of Getting Investors’ Commitment: A Six-Step Guide
Episode 35 – Unlocking The Secrets To Establishing A Pre-Existing Relationship for Reg D Rule 506b
Episode 34 – Unveiling The Essential Fiduciary Duties For Syndications & Funds
Episode 33 – Navigating Securities Laws And Social Media: A Guide For Syndicators
Episode 32 – Assembling Your Real Estate Syndication Team: Who’s In?
Episode 31 – Understanding Waterfalls in Real Estate Syndication
Episode 30 – Choosing the Right SEC Exemption for Your Investment: Alphabet Soup
Episode 29 – Understanding Reg A, Reg CF, and Reg D in Syndication: The Alphabet Soup Explained
Episode 28 – LLC vs. LP vs. Corporation: Which to Choose for Syndications?
Episode 27 – Can You Get a Bank Loan?: Leveraging Traditional Financing in Syndication
Episode 26 – Securities Licenses and Real Estate Licenses for Reg D Syndications
Previous Episodes:
Episode 20 – Behind the ‘Bad Actor’ Rule: Rule 506d Demystified
Episode 19 – The Myth Of The Friends And Family Securities Exemption For Syndications
Episode 18 – Demystifying Form D Filings with the SEC: In-Depth Walkthrough and Tips
Episode 17 – Can An LLC Invest Into A Regulation D Rule 506b Or 506c Syndication Offering?
Episode 15 – How Does Regulation D Rule 506c Work For Syndication?
Episode 14 – Syndication Attorney Webinar – ‘Ask Me Anything’
Episode 12 – ‘Can I do both a Regulation D 506b and Reg D 506c in one LLC?’
Episode 11 – ‘Can I do a 1031 exchange in a Regulation D syndication?’
Episode 10 – Regulation D Limitations on Resale: What You & Your Investors Should Know
Episode 9 – How does Regulation D Rule 506b work for syndication?
Episode 8 – How do I pay people to market my Regulation D syndication?
Episode 7 – What information must be disclosed in a syndication private placement memorandum?
Episode 6 – What are ‘Blue Sky’ laws when it comes to syndication?
Episode 5 – How can you structure sponsor fees for a Regulation D Rule 506 syndication?
Episode 3 – Should I do a Regulation D 506(b) syndication or a 506(c) syndication?
Episode 2 – How do I market my Regulation D Rule 506 offering?
Episode 1 – How Should I Structure My Regulation D Syndication?
