Ep #353 – Mauricio Rauld – SEC Syndication Lawyer
Here is some of what you will learn:
Syndication ABCs
Type of Offerings
Advertising dos and don’ts
SEC Registration exemptions
Active vs passive partners
Understanding 506(b) Exemption
Defining preexisting substantive relationship
506(c) Exemption – advertising allowed
Limited to accredited investors only
Verify Invest – Independent verifier
Nuances of Reg A+
Importance of identifying client acquisitions
Can I raise funds for someone else’s deal?
To find out more about our guest: click here
Full Transcript Below:
Mauricio – SEC Syndication Laws – What you need to know to stay out of JAIL (Ep353)
Intro: Hi! I’m Rod Khleif. Each and every week I record an interview with a thought leader that I know you’re gonna get a ton of value from. Now here on YouTube are the video versions of my podcast, Lifetime Cash Flow through Real Estate Investing. Now to make sure you get the latest information please subscribe and hit the notification bell. Let’s get started.
Rod: Welcome to another edition of “How to Build Lifetime Cash Flow through Real Estate Investing”. I’m Rod Khleif and I’m thrilled you’re here. I know you’re gonna get tremendous value from the attorney that we’re interviewing today. His name is Mauricio Rauld and I think I actually met Mauricio at a syndication bootcamp a lifetime ago. I brought Tiffy so you know probably about eight or nine years ago but Mauricio is a– he’s an expert in asset protection. He’s an expert in SEC syndication and we’ll just describe what that means and he does business nationally. And so we’re really lucky to have him on the show. Mauricio welcome brother
Mauricio: Thanks so much for having me really appreciate it
Rod: Yeah absolutely so I know that before we started recording that you you know your focus is real estate syndication yes?
Mauricio: Yeah 100% of my practice is real estate syndications and 100% of my clients are real estate investors yeah
Rod: Okay and you do it nationwide as I said correct? it doesn’t matter where the deal is
Mauricio: I actually do it nationwide and internationally. I’ve got a few international clients who are raising capital here in the US for offshore projects and so I’ve got deals in Nicaragua and Panama, Belize, and some Asian countries. So yeah international or and certainly all 50 states
Rod: yeah cuz it’s federal law so you can try it. So let’s do you know for the new listeners that have not heard about you know don’t really know the nuances between you know why a syndication should be, why that path should be taken versus a joint venture. Let’s take a few minutes on that and then guys if you’re thinking I don’t need to hear that trust me you want to stay on because we’re also going to talk about syndication as it relates to social media and we’re going to talk about syndication as it relates to raising money or equity for deals and commissions paid on that. So don’t leave just because we’re going to talk about the basics for you a few minutes first. So let’s talk about you know just kind of give people a brief education of how syndication or why you know these SEC exemptions came to be and
Mauricio: Yeah it’s a great question is actually one of the I think the biggest mistakes most syndicators make is they don’t realize that the securities or the SEC is involved right you’re buying real estate you know I’m just buying a piece of property why the hell is the SEC involved in my business and the reason is anytime you take money from an investor where the profits or the returns are generated by your efforts, you are dealing with the security. It’s a very broad definition. I don’t care if it’s an LLC, partnership, a corporation, a profit sharing agreement, a high five, a handshake, the structure itself is completely irrelevant even joint venture agreements the structure doesn’t matter it’s a security. And anytime you are dealing with the security there’s really only three things you’ve got to think about. Number one you’ve got to register that syndication with the SEC or number two you must find an exemption to that registration or it’s illegal. It’s that simple. Obviously we don’t want to do illegal offerings but keep in mind illegal offerings are not you know Bernie Madoff it’s not just fraud and swindling your investors which obviously nobody wants to do. It can be things like and we’ll talk about a little bit today you know advertising on social media that’s an illegal activity. That’s something you can’t do. It could be just getting a little too excited about describing your returns and kind of like really blowing a little bit out of proportion or really promising the sky and not really giving proper disclosure. So there’s a lot of things that go along with the illegal other than just swindling. Registration, I wanna say never be, you almost never want to do a full blown registration with the SEC because it takes you a year to two years to do and it can take six to seven figures. And so if you’re one of the syndicated and you’re in contract to take down a building and how many of you have 18 months to wait for the SEC and their lawyers to approve your deal. It just doesn’t happen so we never registered the security and so we’re always looking for an exemption and that’s really the world that I live in. There’s several exemption that we can look at and that’s what I do day in and day out and luckily for us as you know Rod there’s a couple of exemptions that are pretty hot you know
Rod: There’s some incredible opportunities now that weren’t around when I started in this business and maybe not even when you started in this business. Let’s go back for one minute to the definition of a security. So let me, if I go buy a building with someone and they are actively involved, do I need an exemption to the SEC rules?
Mauricio: No, if you’re doing a deal with somebody else and that person is active that means that the returns are generated by both of your efforts, it’s not just generated by your effort so one person or maybe two and actually SEC said up to about five, like four or five you can argue that you’re all active. If you have ten, twenty, thirty people, there’s no way you can argue that we’re all active right. There’s something maybe passive. But if your investors are active you’re not dealing with the security you’re basically started a business, you’re doing a joint venture it’s just like starting up a business
Rod: Yeah I see, back when I was really young I did a lot of property with partners 50/50 and I did most of the heavy lifting but they were involved in a decision-making when we sold, how much money, you know if I spent more in a certain amount, I had to get their approval. Things of that nature. So they were absolutely active and I didn’t have to syndicate I just want to make that clear to people you know and sometimes these joint ventures could be very large. I mean multi-million dollar deals if you hear a high worth partner. But okay so back to syndication. So the initial exemption that I grew up on was the 506 B program and so why don’t we talk about that first and we’ll go into the other two real quickly and then we’ll get into some of these other nuances
Mauricio: Yeah so the 506 and this is probably as technical because we’re gonna get 506 falls under the Reg D you probably heard that the Reg D exemptions and the reason this is such a popular exemption that 95% of the people use is really twofold. Number one it’s a safe harbor which means if we comply with all these enumerated things we are assured we’re guaranteed that we’re compliant with the exemption. We don’t have to do any guesswork it’s not reasonableness you know all those nasty legal to enjoin
Rod: When you said 95%, are you talking about reg D are you talking about 506 B?
Mauricio: I’m talking about 95% of people use Reg D, yep until and so as you know it with 506 and back in the day you’re talking about before I was in at 13 they’re only used to be one which was 506 period. Now that’s called 506 B because now they added a 506 C which we’ll talk about in a second but 506 B is a safe harbor. So we’re guaranteed or assured and the exemption. The other reason it’s very popular is it preempts state law which is just a fancy way of saying we don’t generally have to worry about the states. We still have and it’s like fraud provisions. We still can’t be Bernie Madoff but we don’t have to go hire an attorney in every single state we don’t have to pay that money where you can rely on one attorney like myself who’s approved obviously to work in the federal level. So that is very attractive and a lot of the other exemptions may be somewhat attractive and then you realize, man I gotta go to three, four, ten, fifteen different states which is the nightmare right. That’s why it’s popular. Now to give you kind of the highlights of what are the elements in the 506 B and why most people use it. Number one, you can raise an unlimited amount of money right so this is the reason why even the big boys at JP Morgan’s in the world the Goldman Sachs in the world they still rely on 506 B because they had this huge database and they can raise you know 1.2 billion which is the last JP Morgan fund that I saw. They can do that under 506 B unlimited amount of money. You can take a limited amount of you can take as many accredited investors but you can take a limited amount of non-accredited investors and it’s just so we don’t leave anybody behind an accredited investor is anybody who has a net worth of a million dollars excluding their primary residence or has earned $200,000 the last couple of years with a reasonable expectation of earning that amount this year and of course if you’re married that number goes up to 300. So under 506 B it’s very attractive for especially for newbies because you can bring in your friends and your family because inevitably one of those people is non accredited and so you’re allowed to bring 35 non-accredited investors so long as there’s some level of sophistication. The main drawback of 506 B as you are not allowed to advertise or generally solicit, meaning you cannot go on Facebook for example and go post about your deal and tell the world hey I’m raising a million bucks to do this that the other and
Rod: And this is getting abused okay pay attention guys this a big deal because there are, I’m seeing people doing this you know I cautioned my students about this all the time 506 B you can advertise in any way shape or form period.
Mauricio: That’s correct
Rod: Please continue so what can a person do?
Mauricio: You can talk in terms of when you’re advertising in general you have to have what’s called a pre-existing substantive relationship. That’s kind of not the only way a lot of people think that’s the only way that’s like 95% of the time that’s what happens because obviously obviously the SEC takes a position that if you have an existing relationship with some of them by definition you have an advertiser
Rod: Before you move on, are there any parameters to define that substantive, pre-existing substantive relationship. Any parameters around that?
Mauricio: There is, let me just backtrack a bit, there is SEC guidance on what it takes to create that substantive relationship meaning one of the steps that you need to take from taking a complete stranger that you’ve never met before that somehow you obtained legally putting them through the process so that you get to a point where you’ve established the subjects and relationship
Rod: Can you drill down on that?
Mauricio: Yeah so for example there’s this comes out of it what’s called a no action letter, a citizen VC no action letter and they go through six steps it was and so if we mirror those there’s a good kind of best practices. So number one for example you want to provide them with a really solid questionnaire that’s probably step number one not just any generic questionnaire. I would analogize it for those of you guys that are in the stock market and you know want to open an options account or some you know all those questions you get if you wanted an options account or a margin account. It’s like you know what’s your level experience have you traded options before you know what’s your net worth, how much income you have, how much experience, you’re just trying to get information. So you can figure out whether this person sophisticated not so that’s step number one step number two would be certainly some kind of a phone call I would recommend at least a 15-20 minute phone call with and again doesn’t have to be you it could be somebody on your team but a 15-20 minute phone call, a meeting would be great, a lunch or coffee, whatever but some kind of a personal interaction. Number 3, you’d want to encourage them to take a look at your website dig around and get information you want to encourage them to ask questions you want to do everything that just in generally false is that interaction with that person so you and me Rod we’re talking and I get to know you the SEC is very clear that there’s no magic timeline. It’s not like hey I do this for 30 days or for seven days or 24 hours it’s really the quality of the interactions. I was joking, I was bringing the example that you know we do a lot of real estate field trips for example and so if I scold you Rod you and I go down to Belize and spend three days together doing you know some tour down there that’s gonna be much different than if you’re just on my email list and I’m emailing you for two years. So it’s the quality of the interactions that the SEC really wants to focus to you and so at some point through that process, and this is just kind of a self-certification part you say, all right Mauricio as of today I believe I had a substantive relationship with you. I’ve gone through this process. I’ve gone through these steps. I’ve got great interactions. I kind of know you well enough today. I have a substantive relationship you somehow capture that in your CRM your Excel spreadsheet however you’re keeping track of all this stuff. And then you can offer them a future deal you cannot offer them a current deal because again you have to have a pre-existing substance of relationship and that means pre-existing to your offering. So once you give them the green, once they turn from a red light to a green light or however you want to say it. You’ve got to wait now until your next offering and that’s when you can start you know
Rod: That’s the place I think a lot of people are circumventing is that time line piece regarding if it’s a now deal or a future deal. So I remember back in the day I mean you know we it used to call it the 3-touch rule you know that’s how they defined it you know talk to somebody at least three times but now it’s defined as a substantive relationship okay. So that’s a great program if you’ve got a big network or you start developing one. Now let’s talk about what I love which is the 506, the new one that came around after the Dodd-frank Act
Mauricio: Yep so this came out officially in September of 2013. So I used to say it’s a new law but it’s been now five, six years or whatever the math is. And what this law did which was a result as you mentioned the Dodd-frank the JOBS Act of 2012 is it lifted the prohibition against advertising. So for the first time you’re now able to advertise and solicit everything we just talked about goes out the window you want to take an ad out in the Superbowl you want to do Facebook Ad you want to do a webinar, radio show, whatever not yourself
Rod: In a podcast, one of my live events you know its part of it and its incredible
Mauricio: Put it on your web, put the offering on your website whatever you want. So that became this new exemption called the 506 C as in Charlie, a lot of people call it crowdfunding which technically isn’t correct but fine let’s call it crowdfunding. Now you’re allowed you to do that. Now the main limitation or really the only limitation is that you are now limited under that exemption to accredited investors only. So you are not allowed to take any non-accredited investors they all have to be accredited and you must take what’s called reasonable steps to verify that that investor is accredited. Under 506 B and a lot of the other exemptions you can rely on the check the box, you send them a questionnaire they present to you, I AM accredited or whatever and you can rely on that under this exemption you can now you’ve got to take those additional steps now
Rod: Can you drill down on those a little bit?
Mauricio: Sure sure the easiest way to do it which I recommend to my clients is get a CPA verification letter get that from your CPA just make sure the attorney is looking at it. I’ve got templates or what have you because you got to make sure that certain things are in there according to the rule but just send them that template have them put it on their on their letterhead sign it because obviously that CPA is familiar with your financials or whatever. So that’s the easiest way to do it that can also be an attorney that can also be a broker but the CPA is probably the most common way viewing it
Rod: Okay
Mauricio: For those who either some of them don’t have CPA there’s a little scare or some CPAs don’t want to do it. So you’re left with another group I would then I’ll drill down in a second I would recommend outsourcing that to somebody else and there’s a lot of third-party verification companies that’ll do this work for you because now you’ve got to drill and really request financial records and documentation which if you’ve never met this person I just met I might be a little uncomfortable but essentially if you’re relying on the safe harbor you’re looking at you know tax returns you’re looking at W-2s, 1099s, if they’re all relying on income if it’s net worth you’re looking at bank statements, property appraisals, a credit report is important because you want to make sure that you know it’s all about assets right net worth is assets minus liabilities. So you want to know what their liabilities are
Rod: Do you know a couple of these companies off the top of your head you could we could throw them out there?
Mauricio: I recommend and I have no affiliation with them. I use a company called Verify Investor, gentlemen they’re called I think he’s got an interesting JL Law, the leaders name is, and I’ve been sending people there and everyone, I’ve got great feedback. So you don’t actually get, you don’t see any of those financials. They actually do the verification, do a letter and so it because you know again if you haven’t met anybody it’s like
Rod: Sure it’s hard to ask somebody, hey show me your tax returns. We use this independent verifier that does it for us. We don’t need to know, I believe to know that level of detail. So you get with them and then they’ll send us a letter we need and you can invest with us love it. So that’s the 506 C you can scream it from the rooftops they just have to be accredited. Is there a limit on the number of investors number one and then there’s there a limit on the amount you can raise?
Mauricio: There’s no limit on the amount of you can raise. There’s no real limit under the exemption although once you hit two thousand investors as a general rule, once you have two thousand investors you’re probably required to actually do a full-blown IPO. So there’s a limitation of that but God forbid you want two thousand
Rod: Guys, managing your investors is much harder than managing the real estate. I couldn’t even imagine having two thousand
Mauricio: Oh my God yeah
Rod: So that’s the 506 C anything that you want to elaborate on that? or can we move on I’d like to ask you
Mauricio: It also preempts a law which is why it’s very popular. Now I’m with you Rod when this first came out I was excited I’m like the world’s gonna open up the world your oyster but for whatever reason I have a hunch but for whatever reason it hasn’t really
Rod: Yeah it’s not as big, and as most people don’t have you know a huge reach either and that’s part of the piece I mean I’m blessed I’ve got this podcast I just told you we hit six million downloads right which is cool as hell I showed you which is a big milestone for us I got I need to go throw that out there on social media
Mauricio: Congratulations
Rod: Yeah thank you and you know I’ve got a Facebook group that’s got you know pushing 30,000 people and by the way guys if you’re not in that Facebook group good guy get in there it’s a direct link as multifamilycommunity.com direct link to the group and again you know you are the five people you hang around with you want to be around people that want what you want, want more and know what it is that you’re interested in and it’s just for education purposes. We don’t allow any promotion in there at all even indirect, but going there learn and it’s very very active which I mean we’re adding literally a couple, hundreds hundreds of people a week. So we should hit 30,000 here within probably two months but anyway. So that’s the 506 C. Now let’s talk about kind of the new bellwether which is the Reg A or the Reg A+ and I know you haven’t done a ton of that but you know that I think Grant Cardone is doing one of those now with a fund and let’s talk about the nuances of that and by the way, let’s go circle back. Do you mind talking about the average costs to prepare all the syndication documents for a 506 B or a C. What’s the average?
Mauricio: Fifteen grand I would say the average fifteen. One thing I do want to say cuz it’s a little pet peeve of mine Rod it’s so much more than just preparing docs I mean
Rod: No no okay forgive me I wasn’t trying to minimize it by anything actually a great price
Mauricio: The reason I bring that up is there’s a lot of other people that do it cheaper but all they do is the legally docs and it’s like you know anyway there’s a pet peeve of mine but it’s such a lot of work but yeah
Rod: I’m glad you said that and I’ve paid as little as eight grand and regretted it and I’ve paid as much as twenty five grand and so you know the other pieces of this guys is you need help on the real estate side as well you need help you know with the contract negotiation the contract review the financing piece of it and in putting that all together and a knowledgeable SEC attorney you know is just a huge resource in that regard. Now some attorneys, do you do the real estate piece as well or just the SEC piece?
Mauricio: I just do the SEC piece but I am actually bringing somebody in to do the real estate because a lot of people like to have the real estate pieces on the same boat so that’s what I’m doing right now
Rod: Sometimes that works well. I’m actually at a situation where that didn’t work well either but you know specialization is important but okay, so let’s talk about the Reg A+ because this is fairly new and it’s kind of cool
Mauricio: Yeah so Reg A+ , Reg A has been around for a while nobody used to use it and one of the reasons they didn’t used to use it it’s because it did not preempts state law. We just talked about this so you if you did a Reg A and back in the day before it came out I think I forgot now how long how long it’s been three or four years you would have to go to every state and make sure here’s all. So when Reg A plus came out number one originally was not going to preempt law and then at the last minute they changed it so now it does preempt law so it becomes a lot more popular they increase the raise limit from five million to 50. So it’s not an unlimited raised like 506 B and 500 C but you’re limited to fifty million dollars which is a pretty significant amount anyways
Rod: Let me interject one thing. Guys this state law preemption is huge because most states have some securities laws. In fact I think they all do in some fashion and if you do a regular SEC filing like he was describing, you literally have to go to just about every state and get approval from them as well. It’s a pain, total pain in the ass
Mauricio: Yes and it’s also expensive because you’ve got a hire in each state near to pay those attorneys 15 grand apiece and so you can have 100 grand in the attorney fees right. Fifty million bucks which is nice it does it does require, well let me give you the positives then I’ll give you sort of the nice. So then the next positive is you can advertise obviously no not obviously but you can advertise just like a 506 C. So again you want to go on Facebook and you know knock yourself out that’s a positive. You are allowed to not only advertise but you’re also allowed to take non-accredited investors right. So that’s like at the best of both worlds you get to advertise and you get to accept non-accredited investors if they start to be sophisticated. There is some limitation so I want to be clear the limitations on the non accredited as you are limited to ten percent of their net worth or their income whichever is look biggest or highest. So there is that limitation so I want to make make sure you guys aware of that
Rod: Net worth or income whatever is higher
Mauricio: Whichever is highest so if I’m a doctor making 250 grand and I’ve got six hundred thousand dollars and net worth, you can take sixty grand from that person
Rod: okay
Mauricio: And that’s why you see anytime you see somebody else, Grant Cardone is a great example. Anytime you see somebody advertising and they’re taking five thousand, ten thousands, little chunks of money, it’s a Reg A filing for sure because these people are you know they don’t have huge net worths and they want to get all their
Rod: Is there a verification process with that or is it just a question you know questionnaire?
Mauricio: No there’s no verification but there is a mini registration which is the really downfall right there or the negative it’s not a full-blown registration so it’s not going to take you a year two years to do. They say it takes about six months to get this through the process I would say sometimes Grants a great example it took him a little bit longer they put him through the wringer a little bit but you know it can take less but let’s just say six months. So again if you’re buying a piece of property probably doesn’t make sense you don’t have six months in your contract but if you’re putting together you know maybe some kind of a fund or something in portfolio or something where maybe you’re not in a rush then that’s something you can look at but that’s the negative and of course the cost is also because you’re doing a mini registration what happens is you first gotta get it approved by the SEC and so you’re filing with the SEC and then you go through this negotiation process back and forth with government lawyers. So it’s very much interactive as you know rod the government is very efficient and they do everything super fast and they’re really good. So obviously they don’t and so it just takes them a long time to review get back to you and then you’ve got to revise it get it back, so there’s a lot of interaction
Rod: On it you know audit a bank account that has no money and it’s stupid
Mauricio: That’s correct that’s the only thing and then once you get it approved, there are some compliance components to it as well so you’ve got to do annual reports including audited. You’ve got to do an SMI annual report, a current report, an X report, there’s a bunch of compliance. So the cost really adds up and when I said it’s about 15 grand you know for a reg D you’re probably looking at more 50 to 75 grand for a Reg A plus so you really you know you don’t want to be doing a million dollar Reg A, you want to get you know 50 million to do it
Rod: Put a bunch of properties in it okay. Yeah thank you for sharing that. So now let’s circle back to what I promised you guys when we started this thing which is what we’re seeing on social media and so let’s talk about what you can and can’t do on social media for a minute Mauricio
Mauricio: So let’s assume you cannot advertise right because this is only in situations where you can advertise. So you cannot, I think this one’s obvious so that some people blow this one too you cannot offer your deal on social media right. You can’t be placing your business plan or saying hey I’m raising a million bucks call me call this number directly with that deal that’s an absolute no-no. And I do see some of that still but I think that’s the minority but that’s indefinitely no no. And it’s also no-no on your website. People forget the websites are public. So this applies both to your website and your social media
Rod: We’re talking 506 B
Mauricio: We’re talking 506 B correct or any other exemption that we come up with that you would prohibit it from advertising or solicit.
Rod: Correct so 506 C you can advertise guys but we’re talking about right is the 506 B friends family people you have a substantive relationship with
Mauricio: Correct
Rod: All right okay so you put it on social media you can’t do it on Facebook
Mauricio: Right. What people forget and don’t understand because again it’s kind of a legal thing is that an offer is again just like a security, very broadly defined and it not only includes a direct offer about your deal, but it also includes what’s called conditioning the market. And conditioning the market essentially means you’re drumming up interest anything that drums up interest about your property or your project is going to be considered conditioning the market which is going to be considered an offer. So when you post something like, hey I’m super excited about you know this we’re doing due diligence on this property and super excited our investors are really going to kill it with a 20% ROI or whatever and you start talking about just you know that kind of stuff, even though you’re not directly talking about your fund and you’re not saying I’m gonna raise a million bucks, you’re drumming up interest, you’re conditioning the market and think about it why are you posting that? The only reason you’re posting that is to drum up interest the people would then hopefully contact you and get in to your next deal or if you’re currently crazy
Rod: So you can’t do that even if you’re not going to present your current deal. You can’t do that even for a future deal
Mauricio: You can’t do that at all
Rod: Conditioning the market or drumming up interest which is what just about everybody in this business is doing on Facebook is blatantly illegal.
Mauricio: That is correct. They are doing, people aren’t realizing that the social media counts as a marketing. I don’t know what the thought is or they’re not talking they’re lawyers but the only thing you really can talk about if you’ve got a deal going is really information about your company right, hey you know this is what I do for a living I’ve got a private equity firm or whatever and we invest in real estate and just that the other. The way I would recommend you guys capture people’s email in contact legally is you and I are both proponents of this Rod, is add tremendous amount of value put a report together. Hey why real estate is a great asset class, why Florida is a great market, why mobile home park whatever and then just say for a free report email me and now you’ve got their contact and then remember you go through that process to get to take them from a complete stranger to a substantive relationships
Rod: Just to circle back because this is a really big deal because this is definitely being abused. So if someone is out there on Facebook bragging about their deal the SEC looks at that is conditioning the market
Mauricio: Correct. I don’t like you know, so even things like a lot of people say hey we’re sending out you know we just closed, we’re sending out checks again, why are you posting that? like if something, well I’m communicating with my investors, well why would you communicate with you, why would you take an ad out in The New York Times to communicate with your investors right. You would obviously the only reason you do that is to drum up interest in order for somebody to contact you for your next deal and say, oh wow Rod’s doing Wow Rod gets 15% returns for his investors. Wow I should give him a call that’s the only reason you’re doing it so
Rod: When somebody says like I raised a bunch of money in a short amount of time, that would also qualify
Mauricio: Why would you say that? The only reason you’re saying that is to get people to come and call you. So if you want to be really careful about all that stuff. If you want to be really black and white and stay safe
Rod: If you’re ever gonna do a 506 B?
Mauricio: Yeah
Rod: Okay so it’s not like us we do 506 C’s. If we stick with that there never an issue but if we do a 506 B I suppose you know I suppose some of these things that I’m guilty of, no question I’m guilty of it would be a problem if I did a 506 B
Mauricio: Well you walking through that process so you definitely want to make sure that your CRM you’re identifying how you obtain these people. So you’re doing 506 C, if you’re doing both or you’re doing 506 B you want to make sure that you tag them or whatever your CRM does or highlight them if you use an Excel spreadsheet, make sure you know where they came from hey I got this person from a Facebook ad, I got this person because he saw me speak, I got it from the podcast, whatever that way you’ve
Rod: Actually drill down one by one before you accept them in your 506 B to see where they came. They came from your Facebook bragging, that’s an issue
Mauricio: Right unless you’ve gone through that process and a lot of my clients actually even go to the extent with their permission to actually record again because it’s going to be your burden right the burdens on you to prove if it ever gets challenged. It’s your burden that you went through this exercise. So you’ve got to keep really good records, keep a copy of the emails, that’s why email is great and on phone calls because obviously nobody knows what the conversations were, either you put together a little you know summary of your meeting or some people just hit record with their permission and they have that stored so if it ever gets challenged you know
Rod: That’s smart
Mauricio: That’s this day, on that day, and this is the recording and I did so they can prove all that stuff and so once they say this day I got to know Rod really well. I have a substantial relationship, then you can send in the next deal
Rod: Yeah guys, now I know some of your toes are curling and I’m going to tell you this will never be an issue until the market goes south and deals go south. That’s when everybody goes back and says hey you didn’t do this this this. And the SEC you know raises it’s like it’s like kicking poking a bear, you poke the bear with a couple of complaints you were in big trouble. Would you agree with me on that Mauricio?
Mauricio: I share that concern not only in this part but just on so many different things that we don’t have time to go into every single detail but a lot of things I think are gonna get unraveled or unveiled once, I don’t even think the market has to go down I think if the market just kind of flattened out a little bit a lot of these things like I’m not gonna detail but the performers I’m seeing in terms of these elaborate assumptions people are making on rent growth a lot. So if you don’t get that rent growth and it just stays flat,
Rod: Which we are hearing is already happening on deals. I just read about you know one of my competitors in the thought leadership space, people were telling me in his deals that’s happening it’s flatlined and people are upset because the returns aren’t there. Yeah I don’t disagree in and again I’m we’re not trying to scare you here and Mauricio, I’ll probably have you back on and maybe we’ll do that scare the shit out of you episode. Yes totally on that I’d be my highest listened to episode anyway. We’re gonna plan that one. I want to do that
Mauricio: Let’s do it
Rod: Alright so the other thing we were gonna chat about was the was the commissions cuz I have you know I want to raise money for other people’s deals. Can we speak to that?
Mauricio: Yeah it was joke you know it’s like how do you raise money for the people and the answer is you can’t. Well you can’t, I mean I always jokes, I’m a big believer and you know you always want to ask better questions right you know you don’t say you can’t do this, can you, you want to say how can I do this? how can I do that? So but let me just back to us so in general the only way really you can get compensated for raising other people’s money is if you’re an SEC licensed broker dealer right which nobody obviously is. It’s really, it’s not difficult but it’s time-consuming it’s about take exams as compliance it’s the cost and that’s not what you’re gonna be doing unless you want to do living. So that’s not an option. People trying you probably know this Rod people try and get around the rules by coming up with the these nonsense things like oh it’s a marketing agreement right or it’s a consulting agreements and they’re not really pay me to raise money they’re paying me for these marketing. First of all, most the time they don’t have any, they don’t do any marketing obviously. They don’t even have a marketing contract but even if you did have a marketing contract and you did a lay out everything that you are claiming you’re doing it same thing with the, it doesn’t matter what you call it marketing agreement, consulting agreement whatever, the SEC is going to look through then say well what did you actually do and again it’s gonna be your burden to show, hey I did these 10 things as for marketing services and I got paid commensurate with that I mean if I’m getting paid two million, a million dollars for two things I’m doing, that doesn’t make sense. So people try and get around that that’s another issue which is also illegal. One of the ways you can do it and this is kind of a it’s legit but it’s all about, it’s got some hair on it is what I call fund to funds right where you so Rod you can legally put together your own fund raise the money your own fund do a PPM comply with the securities laws and then turn around and invest on money into my deal right. You turn around and now you your LLC is my investor and you put in a 5 million bucks or a million bucks or whatever and you can then get compensated for doing whatever you did at that level
Rod: Two PPM’s going here?
Mauricio: That’s right. Two PPM’s going and you can get compensated at that level from legitimately raising the money for your account right and acquisition fees and all the times clients negotiate better turns because hey you’re coming in with a huge amount 5 million bucks maybe you’re getting a couple of more points as a preferred. And so there’s ways for you to get compensated. The challenge that I’ve been really coming up against is that even though that portion of it is legal, think about this rod typically you’re investing in real estate lease in my world you’re investing in real estate right and you don’t need a license to invest in real estate right but when you’re doing a fund of funds what are you doing now you’re investing in a security. You’re investing in somebody else’s stock in this case LLC. So it’s another LLC unit or a partnership so you’re actually investing in a security as opposed to real estate okay. It’s a very subtle difference and so the question comes up do you need to be a registered investment advisor now because you’re my recommendation to go invest into somebody else’s shares in a company versus
Rod: I get it yeah I get it I get it
Mauricio: And the challenge with that is that you know it’s not really a federal issue you because you don’t really worry about the feds until you’re over a hundred million. I’ve heard now 25 million there might be some requirements but essentially it’s a state-by-state issue so now I got like great I gotta go and talk to a state attorney, a securities attorney that specializes in the Advisory Act. Long story short there’s a lot of exemptions within each state but there’s still a lot of compliance audited financial reporting, or what have you so it’s just really if you’re thinking about doing a fund of funds just understand that you may be required to be the register or there’s some compliance stuff in your state. So remind me Rod you’re in Florida right?
Rod: Yeah in Florida but are there a lot of people doing this? cuz I didn’t even know
Mauricio: There were actually, yeah it’s easy for them to raise money and so they don’t they partner with an operator and the way they get comments is I’ll raise the money and then I’ll give you the money and then you won’t you run you know I don’t know much about
Rod: So they do this, so I’m the equity raiser so I do a fund, can I use that fun for multiple deals and just keep it every going? okay
Mauricio: Sure
Rod: They don’t have to do it one time but I see the nuances if that gets litigated I could totally see the argument that security not real property. So what about these guys that are bringing half a million to a million dollars to a deal and joining in on the GP?
Mauricio: Right. So that’s really the way that’s really the way you do it. So but again you got to be very careful. So bringing somebody in is a legitimate and I want to stress the word legitimate co-sponsor a co-GP whatever you want to call it, then you can obviously that opens up the world you can now access their investors but they’re not getting compensated to raise the money because the rule is you cannot pay someone unless they’re a broker dealer and that payment can be cash, shares in a company, it doesn’t matter what type of conversation if you give a GP you know 1/3 or 20% of your share it’s still compensating them in the form of shares or membership units as opposed to cash. But it’s still compensation. So they have to come in and legitimately do work later they have to be a co-sponsor. Whatever you guys are doing, underwriting, due diligence, walking the property, talking to the attorney, the CPA, you know the investor relation, whatever you’re kind of responsible
Rod: Sure as you know deals get carved up a lot of different ways okay there’s you know when you get a bunch of guys together they’re gonna take down a 20 million dollar deal you know it’s carved up based on who brought the deal, who raised the equity, who’s gonna do the asset management, who puts up the at risk capital, who puts their resume to qualify the deal, and it can be very very complex and there can be multiple people in each one of those categories but what you’re saying is, let’s say somebody comes in and they’re bringing a million dollars by God they better be in some of those other categories to them is what you’re saying
Mauricio: Yeah all those categories you mentioned there was one that I didn’t like what you said, oh if somebody brings in the equity or somebody brings in the money, that’s the problem. You not give them any percentage for that they have to be, just for that. That can be a byproduct of obviously obviously if you’re a co-sponsor you’re raising money and you’re getting compensated but you’re not getting compensated for the active great think about it you’re a syndicator, you’re not getting paid to raise your money you’re getting paid for finding the deal and doing the value-add
Rod: And what I described it even gave you discomfort yeah
Mauricio: Yeah because the easiest one, the one I liked the most is the last one he did you know when people get brought in as KPs and they have to no guarantee the loan or whatever that’s a huge responsibility, so if you give him a third of the GPE just for signing on the loan, absolutely that’s totally reasonable because it’s a huge thing. And obviously if they’re doing work but you cannot give them and certainly you cannot, this is what drives me nuts is negotiate that ahead of time hey for every hundred grand you bring in I’ll give you one percent or if you can bring in a million I’ll give you this I mean that’s transaction based that’s an absolute no-no. And here’s the challenge is Rod. There’s challenges on the side of the person receiving the money which I honestly don’t care too much about but you know they’re in violation of the law. They’re practicing basically just like practicing medicine without a license or law without a license they’re being a broker-dealer without a license. So they probably won’t be able to get paid if they get nailed because you’re receiving a legal compensation. But on the syndicator side which in who I represent the concern is number one you are obviously not disclosing that right why would you be disclosing an illegal act. So now you you’re not disclosing that you’re paying this person a commission or whatever based on money raises and not to scare about anybody or maybe we should scare people is that you are likely going to be required to offer what’s called rescission right which is eventually essentially return investors money with interest. So essentially become a guarantor of the investors money like as a syndicator how many of you want
Rod: I’m sorry you lost me, and if you lost me, you lost other people. So explain the situation and what’s the possible ramifications just so I’m clear
Mauricio: Yes so the issue is you are not you’re failing to disclose the fact that you are providing you are giving somebody Commission’s or you’re paying somebody to raise money right. You wouldn’t close that, you’re not going to disclose that right because that’s an illegal act. So you don’t disclose that and so now you’re engaged in an illegal offering because you failed to disclose that and one of the remedies the most likely remedy the minimum remedy most of the most likely is your responsibility to return the investor’s money if they want out. So you have to return investor’s money so even if the deal goes south, no fault of your own, and the market turned, you did a good job, you acted reasonably, because you failed to disclose that, you are going to be required to return all of the investors money assuming you have it obviously you probably you may even file for bankruptcy or whatever but the consequences are you are now responsible not only to return their money all of their money but also whatever interest rate they’ve been accumulating over those years. So it is a pretty hefty penalty in addition to I mean obviously potentially you know when you have an illegal offering there are penalties but most likely it’s a, say just rescission but you are most likely going to be required to return the investors money which again in my mind you’re guaranteeing the investment right because if the investment goes well, great they make money, if the investments go south, you’ve got to return all their money. So essentially
Rod: That’s essentially because of a failure to disclose
Mauricio: And then the other issue that has come up recently, I’m actually dealing with it right now it’s not one of my clients but they’re coming to me now is because you can’t put this in writing right it’s not like, Hey Rod, let’s get into a contract where you raise a million bucks I give you five percent. So what if there’s a dispute? you know what happens something happens even before the close and now the person backs out and whatever and now it’s like well I promise to pay you twenty percent and you’re in the documents but now you’re not helping me. So I want to reduce that amount and you obviously don’t have anything in writing all you have is an operating agreement or the PPM or whatever that shows that I’m a twenty percent owner. So you’re responsible to give me that twenty percent there’s nothing in writing because there’s nothing that you can’t put in writing in terms of you know the arrangement that we had, hey you bring in the money and I’ll give you twenty percent of the company. So it just opens up a ton of a can of worms
Rod: Interesting interesting well I see some real hurdles as an operator just personally with what you just said and so you know it’s something we really I really want to take a look at because you know certainly when you put five to ten people together and they’re all raising money how do you carve it up? you know if the equity is not a piece of it. So that’s an interesting comment
Mauricio: Well again you’re bringing them in because they’re adding some type of value either knowledge or whatever they’re whatever their expertise but you can’t you’re not bringing them in because they can legally you can’t bring them in because they’re raising the money. So whatever else… you have ten people, you don’t have to each be doing you know twenty percent work I can be doing five because I’m not doing as much I’ve got a day job and all the time to do I’m just gonna handle the underwriting. And so I’m only at 5% oh well I had more time so I’m gonna be boots on the ground I’m gonna travel, I’m gonna get on a plane, and travel and walk all the units well you’re gonna get a little bit more and you’re gonna be your Investor Relations guy you’re gonna handle the investors and okay you’re another 10%. All this that’s how you dig it up you do not end up as, hey I raised a million bucks
Rod: Right no you know that makes sense okay. Wow so this is, yeah we’re out of time but what an awesome what an awesome interview brother I really appreciate you being on the show and really looking forward to getting to know you better. It’s been a lot of fun for me so thank you and we will talk soon
Mauricio: Thanks for having me really really appreciate it
Rod: You bet
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