Syndication Attorneys Podcast
Hey Tilden, Moschetti syndication attorney with the Moschetti Syndication Law Group, I put together private placement memorandums under Regulation D Rule 506b, and Rule 506c for syndicators, or businesses trying to raise capital or crypto miners or really anybody who’s trying to raise money that actually is a security. That’s me, I’m the guy to help you. So today I want to do a deep dive into a question that I get quite a bit when people see private placement memorandum from me. And that is a section on the limitations on resale. It sounds scary, and in some respects, it might be scary. But let’s go take a deep dive and see exactly what we’re talking about.
Tilden, Moschetti syndication attorney with the Moschetti Law Group doing private placement memorandums for syndicators just like you, today, we’re going to take a deep dive into limitations on resale. And just like in some of our other videos, we’re going to actually look at the code section. But before we do that, I want to talk in general about why there are limitations on resale and what the SEC is thinking. So, in general, an offering is made with is required to be registered with the SEC. Now there are some exemptions to registration under the Securities Act, one of those is Regulation D, under Regulation D private offerings do not need to be registered, yes, you do need to file a Form D. But that’s all it really needs, from the SEC’s point of view is, is that you’ve done all the things that are required of it, and that you file a Form D, it does not need a formal registration. In order to do this, the SEC has made some Rules around to limit exactly how this takes place. Some of those are described in great detail and Rules in 506b are in 506c about what’s allowed and what’s not who’s allowed to invest and who’s not or how to do certain things. One of these things is it is necessary under the Rules to inform your investors that there are limitations placed on resale. Because what the SEC doesn’t want is for syndicators to basically put this all together, put it out into the marketplace and have a secondary market get born up out of this whole money pool that’s outside of their regulation. So this that, that created this limitation on resale to try and stem that secondary marketplace from arising. So to do that, let’s look at what the Rule is. Sue, let’s go to the whiteboard. There it is. And we’re talking about Rules 502 D, which talks about the limitations on resale.
(d) Limitations on resale. Except as provided in § 230.504(b)(1), securities acquired in a transaction under Regulation D shall have the status of securities acquired in a transaction under section 4(a)(2) of the Act and cannot be resold without registration under the Act or an exemption therefrom. The issuer shall exercise reasonable care to assure that the purchasers of the securities are not underwriters within the meaning of section 2(a)(11) of the Act, which reasonable care may be demonstrated by the following:
(1) Reasonable inquiry to determine if the purchaser is acquiring the securities for himself or for other persons;
(2) Written disclosure to each purchaser prior to sale that the securities have not been registered under the Act and, therefore, cannot be resold unless they are registered under the Act or unless an exemption from registration is available; and
(3) Placement of a legend on the certificate or other document that evidences the securities stating that the securities have not been registered under the Act and setting forth or referring to the restrictions on transferability and sale of the securities.
Now, and this says “except as provided in Rule 230.504 (B) (1)”. Do not be can be confused. This is 504, not 506b. 504 B is very different from 506b, actually 504 B isn’t used that commonly in my experience, it is certainly there and it can be used. But it often times is a little bit more complicated to put it together. And so most indicators use 506b or 506. C. With that digression aside. Let’s talk again about limitations on resale. So any security that’s “acquired in a transaction under Regulation D shall have the status of securities acquired in that transaction under section four, a two of the act by the act, we’re talking about the Securities Act of 1933. And it cannot be sold without registration under the act.” So registration, that’s what we’re trying to avoid and a private offering or an exemption therefrom so Regulation D for example, the issuer shall exercise reasonable care to assure that purchasers of the securities are not underwriter, so they’re not people who just go out and are public packaging up these bundle of securities in order to take them to that secondary marketplace. And reasonable care may be demonstrated by the following. So they give us some examples on how exactly you can demonstrate that reasonable care.
So first off, and I’m going to tell you in what documents we do all three of these. So because there’s three examples right there, so we’re going to tell you where we do them all, for you. So number one is a reasonable inquiry to determine if the purchase is acquiring the securities for himself or for other persons. This is one of the reasons that I believe that every package that contains a PPM and operating agreement and a subscription agreement should also include an investor questionnaire. One of the questions in our investment questionnaire that we prepare for clients. Is this question are you buying? Who are you buying these securities for? That establishes Rule number one, the This demonstrated act number one, you’re making that inquiry. Now, oftentimes, that inquiry also takes place in the negotiation of what exactly it is, or in the sales process of that security, where you’re talking to an IT potential investor, and you’re saying, Are you going to be buying this for yourself or for another person, that happens quite a bit. But another place that we actually document that happening is in that investor questionnaire. Number two is a written disclosure to each purchase or prior to the sale, that the securities have not been registered under the Act, and therefore cannot be resold unless they are registered under the act or unless an exemption from registration is available. So on our PPM itself, the very first page that we put up there, it says that these securities have not been registered under the Act and therefore cannot be resold unless they are registered under the act or unless an exemption for registration is available. So we’re making that written disclosure on page one, we’re also making it in various other sections where it would be applicable or May, we want to call it out, to make it very clear to investors that you can’t just buy these for the purpose of resale. So therefore, we have met number one, and number two on those on those. So here is the PPM. And a number one, again, was the investor questionnaire. In number three placement of a legend on the certificate or another document, that evidence is the securities that stating the securities have not been registered under the Act and setting forth or referring to the restrictions of transferability in the sale of securities. So again, most of most syndicators are do not issue membership certificates. But if they choose to that should be on the certificate. Where we put this on, when we put together the packages that we put together, is we put this in the the subscription agreement, the subscription agreement is that agreement between the syndicator and the investor themselves, that states amongst other things that they know, and they’ve been informed that the securities have not been registered under the Act, and that they should refer to the restrictions and transferability of the sale of securities, and that they will abide by those Rules. So we cover it in all three of the suggested ways where reasonable care may be demonstrated. So again, this is the Rule on limitations on resale. So what exactly do we mean by limitations? So when we’re saying limitations, we don’t mean that you can’t completely resell these. What we’re saying is, is that or the SEC, what it is saying is that you can’t have an investor go and purchase these securities, merely contemplating that the security itself will rise and then they will resell it. The purpose of these is not for resale of the security itself. It’s for the profits that will be gained within the security right so that that security is paying out cash dividends sometimes or it’s paying out a reversion or it’s paying out something in order to give the investor value. But it’s not its purpose is not for like you think of the stock market where Apple shell shares are selling at this, and we’re hoping it goes up by 5%, at which point I’m going to sell it. That’s not the point.
So the other limitations are and how we address that is, so if you can’t just have create a marketplace to sell this, what can you do? So say one of your investors gets into a situation where they really need the cash that they’ve contributed to your investment and you’d like to help them out? Well, typically, what we do is we create a first right of first refusal. So right of first refusal gives you the manager or your members, or both of you, or gives somebody the right to buy those securities from that initial member and, and put them in your own account. Now you guys can negotiate price of what that should be, what fair what a fair price would be. And, but we’d like to give you guys the initial shot, I want the manager to get it because you are the manager in this in this case. And I want you to have the ability to increase your own stake if you want it. Second, it’s great to have the the members also have a bite at the apple two, because those are members that you already like and are already part of your investment. And they’re obviously happy if they’re interested in buying more shares. And so you already know them, it’s already established. Now should those fail, then they can go and sell their securities to other people as well, you, they just need to come to you first typically. And they can find people as long as that whole purpose wasn’t to just resell them. Or they can transfer them to their family or children. That’s very common for something like that to happen. But the purpose was not in that that resale capacity. So I hope that explains those limitations on resale. So there are limitations. They’re not you can’t ever do this. But it is also very specific that don’t go and try and create a market and we make it very clear for the investors that they can’t just go and do that so that you’re complying under Rule 502 D. So again, my name is Tilden Moschetti. I am a securities attorney. I specialize in Regulation D offerings. We focus exclusively on syndication and I write private placement memorandums, operating agreements, subscription agreements, investor questionnaires for syndicators, businesses, anyone trying to raise capital and that raising of capital amounts to a security. Those are who I help exclusively under Regulation D. That’s my focus. That’s all we do. Now, if you’re interested in getting our help, we’d be happy to talk with you.
Hi Tilden Moschetti, its syndication attorney with the Moschetti Law Group. I focus exclusively on Regulation D filings. That’s your 506 B and your 506 C. I primarily produce private placement memorandums, operating agreements, subscription agreements, investor questionnaires, and make sure that syndicators are doing things and raising capital in the way that is legal and compliant with the SEC and local states jurisdictions. So today, we’re going to do a deep dive into one of the big sections and the rules of Regulation D, and that is rule 506b, I thought we’d take a deep look and really understand how it works.
Again, this is Tilden, Moschetti syndication attorney for the Moschetti Law Group. So today, we’re going to do a deep dive into rule 506b, how are we going to do that, we are going to look at the code section itself, so that we can understand how it all works in interplays. There, and we’ll talk about some of the nuances that are contained within that section. Most of our clients are either doing 506b, or 506c, probably 95% of my clients are, are on those two exceptions in under Regulation D. So let’s take a look at 506b’s. So this is the first part of 506b.
§ 230.506 Exemption for limited offers and sales without regard to dollar amount of offering.
(b) Conditions to be met in offerings subject to limitation on manner of offering
(1) General conditions. To qualify for an exemption under this section, offers and sales must satisfy all the terms and conditions of §§ 230.501 and 230.502.
506b and the subsection one is subsection one talks about the general conditions. But let’s talk about the beginning first. So very clearly, it says 506b, these are the conditions that must be met in offering subject to the limitations subject to the limitations. So let’s go through what those conditions are. First up general conditions subsection one. So to qualify for this exemption. So again, let’s back up just a little bit because this word exemption, what exactly do we mean by exemption. So in general, all securities must be registered either with the state or with the SEC. However, there are some regulations which allow an exemption from that registration. Regulation D is a set of rules that are exempt offerings. And so that is one of the exemptions is 506b. So that’s what we mean by that. So to qualify as an exemption under this section under 506b offers and sales must satisfy all of the terms and conditions of section 230.501, and two. So let’s talk about that. So automatically, we’re pointing to other rules, and it’s getting a little bit more complicated. So let’s try and ease it up when we’re talking about 501. For the most part, we’re talking about who can invest. Right, so we’re talking about in 501, the big topic is accredited investors.
§ 230.501 Definitions and terms used in Regulation D.
(a) Accredited investor. Accredited investor shall mean any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person:…
(5) Any natural person whose individual net worth, or joint net worth with that person’s spouse or spousal equivalent, exceeds $1,000,000;
(i) Except as provided in paragraph (a)(5)(ii) of this section, for purposes of calculating net worth under this paragraph (a)(5):
(A) The person’s primary residence shall not be included as an asset;
(B) Indebtedness that is secured by the person’s primary residence, up to the estimated fair market value of the primary residence at the time of the sale of securities, shall not be included as a liability (except that if the amount of such indebtedness outstanding at the time of sale of securities exceeds the amount outstanding 60 days before such time, other than as a result of the acquisition of the primary residence, the amount of such excess shall be included as a liability); and
(C) Indebtedness that is secured by the person’s primary residence in excess of the estimated fair market value of the primary residence at the time of the sale of securities shall be included as a liability;
And the other part of 501 is talks about also how advertising works. And what’s prohibited under Rule 501 for 506b offerings. So that’s what is in 501. We’ll take a deeper dive into those in just a minute. But let’s also talk about what is then rule 502.
(2) Type of information to be furnished.
(i) If the issuer is not subject to the reporting requirements of section 13 or 15(d) of the Exchange Act, at a reasonable time prior to the sale of securities the issuer shall furnish to the purchaser, to the extent material to an understanding of the issuer, its business and the securities being offered:
(A) Non-financial statement information. If the issuer is eligible to use Regulation A (§ 230.251-263), the same kind of information as would be required in Part II of Form 1-A (§ 239.90 of this chapter). If the issuer is not eligible to use Regulation A, the same kind of information as required in Part I of a registration statement filed under the Securities Act on the form that the issuer would be entitled to use.
(B) Financial statement information –
(1) Offerings up to $20,000,000. The financial statement information required by paragraph (b) of Part F/S of Form 1-A. Such financial statement information must be prepared in accordance with generally accepted accounting principles in the United States (US GAAP). If the issuer is a foreign private issuer, such financial statements must be prepared in accordance with either US GAAP or International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). If the financial statements comply with IFRS, such compliance must be explicitly and unreservedly stated in the notes to the financial statements and if the financial statements are audited, the auditor’s report must include an opinion on whether the financial statements comply with IFRS as issued by the IASB.
(2) Offerings over $20,000,000. The financial statement information required by paragraph (c) of Part F/S of Form 1-A (referenced in § 239.90 of this chapter). If the issuer is a foreign private issuer, such financial statements must be prepared in accordance with either US GAAP or IFRS as issued by the IASB. If the financial statements comply with IFRS, such compliance must be explicitly and unreservedly stated in the notes to the financial statements and the auditor’s report must include an opinion on whether the financial statements comply with IFRS as issued by the IASB.
(C) If the issuer is a foreign private issuer eligible to use Form 20-F (§ 249.220f of this chapter), the issuer shall disclose the same kind of information required to be included in a registration statement filed under the Act on the form that the issuer would be entitled to use. The financial statements need be certified only to the extent required by paragraph (b)(2)(i) (B) (1), (2) or (3) of this section, as appropriate.
(ii) If the issuer is subject to the reporting requirements of section 13 or 15(d) of the Exchange Act, at a reasonable time prior to the sale of securities the issuer shall furnish to the purchaser the information specified in paragraph (b)(2)(ii)(A) or (B) of this section, and in either event the information specified in paragraph (b)(2)(ii)(C) of this section:
(A) The issuer’s annual report to shareholders for the most recent fiscal year, if such annual report meets the requirements of Rules 14a-3 or 14c-3 under the Exchange Act (§ 240.14a-3 or § 240.14c-3 of this chapter), the definitive proxy statement filed in connection with that annual report, and if requested by the purchaser in writing, a copy of the issuer’s most recent Form 10-K (§ 249.310 of this chapter) under the Exchange Act.
(B) The information contained in an annual report on Form 10-K (§ 249.310 of this chapter) under the Exchange Act or in a registration statement on Form S-1 (§ 239.11 of this chapter) or S-11 (§ 239.18 of this chapter) under the Act or on Form 10 (§ 249.210 of this chapter) under the Exchange Act, whichever filing is the most recent required to be filed.
(C) The information contained in any reports or documents required to be filed by the issuer under sections 13(a), 14(a), 14(c), and 15(d) of the Exchange Act since the distribution or filing of the report or registration statement specified in paragraphs (b)(2)(ii) (A) or (B), and a brief description of the securities being offered, the use of the proceeds from the offering, and any material changes in the issuer’s affairs that are not disclosed in the documents furnished.
(D) If the issuer is a foreign private issuer, the issuer may provide in lieu of the information specified in paragraph (b)(2)(ii) (A) or (B) of this section, the information contained in its most recent filing on Form 20-F or Form F-1 (§ 239.31 of the chapter).
(iii) Exhibits required to be filed with the Commission as part of a registration statement or report, other than an annual report to shareholders or parts of that report incorporated by reference in a Form 10-K report, need not be furnished to each purchaser that is not an accredited investor if the contents of material exhibits are identified and such exhibits are made available to a purchaser, upon his or her written request, a reasonable time before his or her purchase.
(iv) At a reasonable time prior to the sale of securities to any purchaser that is not an accredited investor in a transaction under § 230.506(b), the issuer shall furnish to the purchaser a brief description in writing of any material written information concerning the offering that has been provided by the issuer to any accredited investor but not previously delivered to such unaccredited purchaser. The issuer shall furnish any portion or all of this information to the purchaser, upon his written request a reasonable time prior to his purchase.
(v) The issuer shall also make available to each purchaser at a reasonable time prior to his purchase of securities in a transaction under § 230.506(b) the opportunity to ask questions and receive answers concerning the terms and conditions of the offering and to obtain any additional information which the issuer possesses or can acquire without unreasonable effort or expense that is necessary to verify the accuracy of information furnished under paragraph (b)(2) (i) or (ii) of this section.
(vi) For business combinations or exchange offers, in addition to information required by Form S-4 (17 CFR 239.25), the issuer shall provide to each purchaser at the time the plan is submitted to security holders, or, with an exchange, during the course of the transaction and prior to sale, written information about any terms or arrangements of the proposed transactions that are materially different from those for all other security holders. For purposes of this subsection, an issuer which is not subject to the reporting requirements of section 13 or 15(d) of the Exchange Act may satisfy the requirements of Part I.B. or C. of Form S-4 by compliance with paragraph (b)(2)(i) of this § 230.502.
(vii) At a reasonable time prior to the sale of securities to any purchaser that is not an accredited investor in a transaction under § 230.506(b), the issuer shall advise the purchaser of the limitations on resale in the manner contained in paragraph (d)(2) of this section. Such disclosure may be contained in other materials required to be provided by this paragraph.
(viii) At a reasonable time prior to the sale of securities to any purchaser that is not an accredited investor in a transaction under § 230.506(b), the issuer shall provide the purchaser with any written communication or broadcast script used under the authorization of § 230.241 within 30 days prior to such sale.
502 is more is more the what and it’s what you need to say in those in order to meet the satisfy all the terms and conditions. Here we’re really talking about ppm. Your private placement memorandum is there for a very specific purpose. It’s to convey information from you the sponsor over to your investors. So I’m going to use the word sponsor I’m going to say issuer, I’m may say syndicator, they’re all the same thing. So those are the people you are the person that I’m talking to. You’re the sponsor, the syndicator, the issuer. We’re all we’re all talking about you as that person. So the PPM what needs to be a part of that ppm? Well, first off, there is some non financial information. Some of that is obvious, right? You need to talk about what the investment kind of is out, you know, what, what are people giving their money for? And what are they getting out of it. But another major piece of the PPM that is a non financial information is your risks. So identification of those risks disclosure of those risks, disclosures of any conflicts of interest that may exist between you the issuer and the investor. Those are all non financial and must be disclosed in order to to meet the requirements of 502, which is in part part of 506b.
Number two, there must be some disclosure of but find name. It actually uses the word statements in the code section. But what are they really looking for? You may be asking yourself, but we just got started, we don’t have any financial statements. And that’s okay, they still need you to make this disclosure. So what they’re really looking for here is use of funds. How when there’s going to be all this money, what is that use of funds? What, how much money? Are we talking about? How is it going to be used by you as the sponsor? What is what is, you know, what is the investor likely to get from it? How is that going to work for businesses that are already on going and raising capital? So say you’re already an existing business, those companies can’t raise funds under 506b. And what they would need to disclose in that case is financial statements that support what just what the investors getting themselves into by investing with you. Number three, that needs to be disclosed is the opportunity to ask questions. So investors need to have an opportunity to ask you as a sponsor questions that may they may have. Otherwise, it hasn’t been really this kind of open Komono system of let me explain everything about the investment to you, we do not keep anything in the in our investments behind closed doors, and do not let the investors know if it’s something that’s materially affects them. And so they need that ability to ask those questions. And it’s required by 502, that they have that opportunity. So in our PPM, we make it very clear that that opportunity is here, here’s the contact information, etc. And number four on the on these is a biggie. And we’ll actually do another video on this later, but it is the limitations on resale.
The SEC doesn’t want people just buying up these, buying up these in order to create a secondary marketplace where they can be traded. So these are private offerings, hence the name private placement memorandum, or private placement. Because they’re not a public offering. It’s not being opened up to the public. And so we’re not trying to create a marketplace here. And the SEC is very concerned that people will try and do an end run around the system, basically do a reg D offering, which is really in disguise a public offering. That is not allowed. And that is why there is these limitations on resale. A discussion of that must be within that PPM to satisfy the conditions of two. So this is rule 506b, and specifically 501. Now, we have the this other rule under 501c, and these are this talks about the advertising. So this is this portion here that we’re talking about, about advertising.
§ 230.502 General conditions to be met…
(c) Limitation on manner of offering. Except as provided in § 230.504(b)(1) or § 230.506(c), neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following:
(1) Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and
(2) Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising; Provided, however, that publication by an issuer of a notice in accordance with § 230.135c or filing with the Commission by an issuer of a notice of sales on Form D (17 CFR 239.500) in which the issuer has made a good faith and reasonable attempt to comply with the requirements of such form, shall not be deemed to constitute general solicitation or general advertising for purposes of this section; Provided further, that, if the requirements of § 230.135e are satisfied, providing any journalist with access to press conferences held outside of the United States, to meetings with issuer or selling security holder representatives conducted outside of the United States, or to written press-related materials released outside the United States, at or in which a present or proposed offering of securities is discussed, will not be deemed to constitute general solicitation or general advertising for purposes of this section.
So, what you are not allowed to do except as provided by rule 504, which this is not I know it says be there. This is 504b not 506b that’s a completely different thing. 504 offerings exist, but they are actually much more complicated and most people opt not to do them. Most people opt to do 506b and 506c. So except as provided by 504b and of course 506c which we’re not really talking about here but as the other big exception under Reg D neither of The issuer nor any person acting on its behalf may make this as a general solicitation. This is the the key phrase that’s oftentimes used is this isn’t a general solicitation, meaning that we cannot advertise and put it out into the public for people that you don’t know. So when you’re on the phone doing a consultation with me, I will most often say, Do you have a significant relationship to all of your investors? Or do you have a significant business relationship with all of your investors? This is why I’m asking that question. Because if you don’t have a significant relationship with those investors, you cannot find those investors because you don’t have this relationship with them. You have to advertise, right. And if you have to advertise, then we’re under this rule 506c, not 506b. So the one we’re talking about advertising, they of course, give us a definition of what they mean by advertising. Any advertisement article, notice other communication published in a newspaper, magazine, similar media broadcast over television, radio, why they didn’t mention internet, I don’t know. But internet definitely applies. You cannot be putting this on social media and saying this is a great offering come invest with us. If you get caught with that you are not in compliance with rule 506b. And so that bad things will happen as a result of that. And then it uses the often use technique, it certainly was used a lot more code during COVID, pre COVID days, by putting together a seminar or a meeting to discuss investments. So you can’t put a seminar or some sort of live thing together in order to invite people in and then pitch them the offering. Now, you certainly can do a seminar or a meeting and have these people just generally invited and have people that you don’t know, but you cannot be pitching your specific offering to them. You should not be saying well in here’s an example, I would not discuss whatever that particular offering is, that’s a 506b offering, you should not discuss it at all at that meeting, if you choose to do that. So that’s rule, that’s rule 506. 501c. So let’s take a deep dive into rule 506b two, and then we’re going to circle back to to what the accredited investors portion of rule of that section 501 Again, so under 506b(2), there are is a specific conditions on there are specific conditions on what you must do.
§ 230.506 Exemption for limited offers and sales without regard to dollar amount of offering…
(b) Conditions to be met in offerings subject to limitation on manner of offering…
(2) Specific conditions –
(i) Limitation on number of purchasers. There are no more than, or the issuer reasonably believes that there are no more than, 35 purchasers of securities from the issuer in offerings under this section in any 90-calendar-day period.
So there is a limitation on the number of purchasers. Now, some of this is going to be surprising, so stay tuned. There is a limitation on the number of purchasers, there may be no more than 35 purchasers of securities from the issuer in the offering under this section in any 90 day period. Right, two interesting parts there, no more than 35 purchasers. And 90 day period. So let’s first talk about the 90 day period, because here’s an interesting opportunity. If you have more than 35 investors who meet this definition, then they can invest, they just cannot invest within the same 90 day period. So a regular Reg D offering is valid from that, that form D filing for a period of one year. So you could do four different offerings during that period of time. And pull in a lot more than 35. But it would have to be broken up so that you don’t have more than 35 purchasers within any 90 day period. So that’s interesting. Now let’s talk about this 35 purchasers and you’re thinking to yourself, Wait, I thought that I could only have 35 non accredited investors in my 506 B offering. I’ve got a lot more who are accredited investors, how on earth am I going to make this happen? Hold on not to worry.
This is rule 501 E.
(e) Calculation of number of purchasers. For purposes of calculating the number of purchasers under § § 230.506(b) and 230.506(b) only, the following shall apply:
(1) The following purchasers shall be excluded:
(i) Any relative, spouse or relative of the spouse of a purchaser who has the same primary residence as the purchaser;
(ii) Any trust or estate in which a purchaser and any of the persons related to him as specified in paragraph (e)(1)(i) or (e)(1)(iii) of this section collectively have more than 50 percent of the beneficial interest (excluding contingent interests);
(iii) Any corporation or other organization of which a purchaser and any of the persons related to him as specified in paragraph (e)(1)(i) or (e)(1)(ii) of this section collectively are beneficial owners of more than 50 percent of the equity securities (excluding directors’ qualifying shares) or equity interests; and
(iv) Any accredited investor.
So 501 E and we’re going to skip right to the punch line is here. Subsection four of rule 501 He says that well first 501 says a 501 He says subsection one, it says the following purchasers shall be excluded. And the punch line is one of those people, those people who are accredited investors are excluded, they do not count for that 35. So, not to worry, there’s actually a footnote in rule 506 (B) (2) that points directly to this rule for 501 e so that there’s not any confusion. So under 501 E. So you’ve, you do not need to count as part of your 35 Any accredited investors, it’s actually some other interesting people who are not included as well. So you have a husband and husband and wife who are where the husband is a non accredited investor, and he wants to invest in the property, no problem, he can come in, he’s friend of yours, they can come in no problem. But the spouse would also like to invest again, no problem under 501 e one, I or one because any relative of the spouse as long as they share the same primary residence as the purchaser shall not be counted. So you only need to count the one person rather than the two. Also interesting is a trust in a state where there is collectively where one person has as collectively more than 50% of the beneficial interest. They they do not need to count any of those other people that are have a beneficiary beneficial interest in the trust. And you can leave it to your children because that’s excluding contingent interest. So if you’re still living the trust can leave that there too. Also interesting is any corporation can can also be an invest. Egg can also be investor and so long as the beneficial owner owns more than 50%. Even if that person is a non accredited investor, that person won’t count that one person but the remainder of the people as long as they own less than 50%. They aren’t going to count. Interesting. And of course, in the accredited investor is there so this is rule 506 B.
So rule 506 B probably represents maybe half of the people that we do private placement memorandums for if you need some help with your syndication, be it for real estate, you’re an entrepreneur, you’re raising some capital for your business, or you’re putting together that new cryptocurrency hedge fund. Give us a call. My name is Tilden Moschetti. I am a syndication attorney or visit us online on at www.moschettilaw.com or if you need help with your private placement memorandums, we’ve got you covered there too.
There are times when raising capital, and it’s coming close to the deadline that that you have as a syndicator, when suddenly you find you need lots more cash than you have. And it becomes tempting to find use other people in order to raise capital.
So the question is, how do you compensate others for finding those investments? Well, the basic answer is you can’t. So there is an allowance in the ‘no action’ letters of the SEC for finders. But the the rules that I find that are put on for Finders are so onerous, I would not advise a syndicator to take advantage of paying finder fees at all, I think that they are the punishment is much too great. And the danger is much too great in order to get into that line of things. So my encouragement would be to not use finders for raising capital for your especially your Reg D offerings. Now for your, what you can do is you can pay licensed broker-dealers, they have a license in order to be able to do that they are able to raise money for your syndication. One way that I have found does work and is completely legal, is to use people in a manner of helping find investors, but pay them according to a just on a straight hourly basis. What the SEC doesn’t want you doing is they don’t want you saying hey, I’m gonna pay you 5% of any money that you raise. So they don’t want that money tied in any way in order to the fundraising business itself. But what you can do is you can say I am going to pay you $20 An hour in order to make phone calls, and then bring me a list of people that I can talk to, there is no problem whatsoever in doing that. They are basically acting as contractors for your business, it’s a safe thing to do. You can also have people bring in investors to you, but you just can’t pay them. So your friend can refer an accredited investor to you. You just can’t give them money in exchange for Hey, they invested here some cash, what happens if you do get caught doing that, if there ever is a problem in the syndication itself, and let’s say a lawsuit is filed, the the tarnished moment that takes place from having used a finder is it basically puts the whole investment at risk. Now if the entire syndication comes crumbling down, that means you are responsible for every penny going back to those investors immediately. And so to me, that risk just is too great in order to do it, it is illegal, and I would not recommend it by any means. So you don’t really compensate others in order to find your investment except if they are a licensed broker-dealer, then have at it. Now, inside your own company, you may if your partners are a part of the syndication and are raising money, you’re free to kind of negotiate the change how the how the ownership or the pay structure works among print among officers themselves. So you could say you’ve got three partners, if whoever brings in the most is going to get an additional 10% of the earnings that you could do, but you can’t have underlings do it either. So I shouldn’t say underlings. You can’t have nonofficers take on that role and tie the tie them in order to make any sort of bonus, it’s only for officers of the sponsor, that you can do that. So that is the way the only ways that I can think of in order to compensate others for marketing your offering in a way that’s legal broker-dealer executives, if your organization of the sponsor or you just pay people hourly and do not tie compensation with performance. If you need some help with your syndication, be it for real estate you’re an entrepreneur, you’re raising some capital for your business or you’re putting together that new cryptocurrency hedge fund. Give us a call. My name is Tilden Moschetti. I am a syndication attorney, if you need help with your private placement memorandums, we’ve got you covered there too.
As a syndication attorney, sometimes client asks, What exactly must be disclosed? Well, the answer really is as much as possible. It’s always better to disclose, disclose, and then you’ll be safer in the end, rather than wondering if anybody’s ever going to find anything out. So if there is anything that you think may cause an investor to change their mind about investing in it be that a conflict of interest that exists, be that a risk, that’s inherent, be it something about the underlying investment, you’re way better off, making it very, very clear, crystal clear that that exists and to disclose it blatantly. So that it’s very clear than to try and not disclose. So I like to go through all of the different things that could happen in a transaction in an investment and really make sure that is there anything else that we can think of that should be disclosed so that we can make sure to disclose it? Because it can just bite you in the end? If you need some help with your syndication, be it for real estate, you’re an entrepreneur, you’re raising some capital for your business, or you’re putting together that new cryptocurrency hedge fund. Give us a call. My name is Tilden Moschetti. I am a syndication attorney, if you need help just with your private placement memorandums, we’ve got you covered there too.
My name is Tilden Moschetti. I am a syndication attorney with the Moschetti Syndication Law Group. One question I oftentimes get from syndicators because it’s so confusing is what exactly are blue sky laws? And how do they fit in with what I’m doing?
One question that often confounds syndicators is what are blue sky laws? And how does it fit in with securities and my syndication? So great question. And it starts with the understanding that the United States is a nation that is federal, right? We are a federal nation. So meaning that we are a bunch of states that has a federal system on top of it. So the states are allowed to, to legislate for themselves and are allowed to control themselves until it gets to something that rises to a federal level, something that the federal government is concerned about. So if you have a syndication going on, where everything takes place within the same state, most of the time, that means and it depends, I say most of the time, because each state has its own rules. Most of the time, the states say you only need to register that with us. So for example, if you’re in California, and you have the you’re doing a syndication of real estate, and that real estate is in California, and you’re in California, and every investor is domiciled in California, you can bypass the filing under the SEC and just file out under the local California Rules, same with taxes, etc. Where it becomes more complicated it let’s take that same example in California, where you’ve got the property here, you’ve got your here, you’ve got investors here, but you also have March, who’s an investor out of Florida, all of a sudden, now this is not all within California. So this is no longer applies under the blue sky laws. Exception to notifying the SEC, you now need to notify the SEC and take advantage of one of the exemptions. They’re probably Regulation D and then do your state specific filings as well, you’ll file with them in the state of California. And Florida actually doesn’t require a specific filing. But if it did, then you would file there as well. So that is how blue sky laws work. It’s that overlay of the federal government over these blue sky laws that let the states in order control themselves without the interference of the SEC. If you need some help with your syndication, be it for real estate, you’re an entrepreneur, you’re raising some capital for your business, or you’re putting together that new cryptocurrency hedge fund. Give us a call. My name is Tilden Moschetti. I am a syndication attorney, if you need help with your private placement memorandums, we’ve got you covered there too.