Hi, everybody. Mauricio here.
And today we're going to talk about the three biggest mistakes most syndicators
make, especially first time syndicators. So, uh, number one,
let's get right into it.
Number one is not realizing that you're actually selling
securities.
And we talked this a little bit about in one of our previous videos about what
is a syndication, what is a security,
but what most people fail to understand is that when you're in the business of
raising capital from passive investors,
you are in the business of issuing securities.
Even though you might just be buying a piece of property and you're like, well,
what are you talking about, Mauricio? Why am I buying a security?
I'm just buying a piece of property. And if you go back to that initial video,
we explained that the definition of a security is really broad.
Meaning any time you take money from investors where the returns are generated
by your efforts, meaning the investors passive and you're active,
that's going to be a security. And the structure itself is not going to matter.
Whether you try and get creative and try and do promissory notes or tenants in
common agreements or profit sharing agreements or high fiber or, or handshakes,
the structure itself doesn't matter. So, uh, many,
many times people just don't realize they're actually selling securities and
then think they're just buying properties. Another common one,
which we talked about was joint ventures. People think, Hey,
I'm doing a joint venture.
I'm not doing a securities offering when you don't get to make that decision.
You know, a lot of times, in fact,
most of the time I see people who think they're doing joint ventures,
they actually are doing securities offerings.
So number one is not realizing that you are issuing securities. Now,
number two is not having a pre existing
relationship with your investors. When you're doing a securities offering,
we are usually looking for an exemption to registration.
Cause we'd have to register the syndication, find an exemption or it's illegal.
We don't want to register it.
And obviously we don't want to do anything illegal.
So we're always looking for an exemption and hands down the most popular
exemption is this rule 506B. You know,
I encourage you to go back and look at the video we did on the differences
between a 506B and a 506C. But the vast, vast,
vast majority of people rely on an exemption called 5 0 6 B.
And one of the key components of that exemption is that you cannot advertise or
generally solicit your offering. Generally speaking,
you have to have what's called the pre-existing substantive relationship.
I didn't even put that in there pre-existing substantive relationship.
And if you don't have that preexisting relationship something, the relationship,
then you may be violating that ex that exemption because you'll be considered to
be advertising.
So not having that preexisting relationship is one of the biggest mistakes
people are having. What I, what I tend to see quite a bit.
Cause I go to a lot of conferences is I go to a conference.
I meet somebody that I've never met before we exchanged business cards.
And next thing I know I'm getting an email from this individual pitching me
their deal. I don't remember them. Remember them from Adam,
let alone have a really a substantive relationship with them.
So you have to have a preexisting relationship before you can offer me a deal.
Now, the best way I've figured out to illustrate this is with a timeline.
So let's say this is when you meet some meats,
your prospective investor at a conference or whatever. And then this is today.
At some point from the time you met them,
you need to establish a substantive
relationship. Now,
what do I need to do in order to establish a substantive relationship? Well,
the good news is this is one of the few times that the sec is actually giving us
guidance as to what it takes to take a complete stranger that you just met at a
conference, or maybe you were on social media, or however you met this person,
you don't know them at all and you need to establish a substantive relationship.
The sec has actually gone through and given us some steps that we need to take.
So I wanted to go through a few of those.
So you at least get a flavor for what it entails to get to that status. Again,
you can't just meet somebody and start pitching your deal immediately.
Cause you have to have that substantive relationship. Number one,
you want to find out whether they're sophisticated and I'm the easiest way to do
that is through some type of a questionnaire you want to send your prospective
investors that you just met a detailed questionnaire, not just, you know,
are you accredited and what's your favorite color,
but you want to ask them detailed questions. Like, you know,
what's your level of experience? You know, what are your goals?
Are you looking for cashflow? You look for appreciation. You know,
how old are you? Are you, you know, 90 years old?
Are you 18 a question as detailed enough for you to start understanding the
level of sophistication of that, of that interview?
Because what the sec is really looking for is they're trying to foster that
relationship between you and your prospect,
where you're trying to find out whether your prospect is sophisticated enough to
invest in new deals.
And they're trying to encourage the investor to ask you the sponsor,
all the questions they need to know to figure out whether this is an investment
or you respond to that kind of aligns with their ideals.
And so number one is sending them that detailed questionnaire.
Number two is get to meet them either through a phone call and most likely to be
a phone call. But if you want to have a cup of coffee or lunch with them,
that's fine as well. But again,
you want to have some one-on-one live interaction with your prospective
investors, probably to go over the questionnaire, ask them questions,
maybe even show them prior deals you've done. You know, obviously,
or even a current deal is okay to show them they're not going to be eligible for
the, for the current deal,
but just show them the type of deals that you've been doing. So that again,
they can ask questions from you and understand the types of deals,
what your philosophy is, what you invest in. And again,
it gives you that opportunity for you to ask questions, to figure out,
is this person sophisticated?
Does this person have the business and financial knowledge to be able to
evaluate the risks and the merits of my deal?
That's what you're really trying to figure out. Number three,
you want to send them emails, right? You want to communicate with them,
you know, offline as well. So you're sending them emails.
You're encouraging them to visit your website.
You're just generally encouraging them to ask questions of yourself.
And so this is just, there's no magic timeline.
This is not going to be a 30 day event, has no three touch rule.
I've heard that there's nothing magical like that. What, again,
the sec is looking for is this fostering of the relationships that at some point
you get to the point right here, where you said, you know what?
I've spent enough time with this person. And I've really gotten to know them.
I feel it they're sophisticated. And I'm going to say, as of today,
whatever this date is, I have a substantive relationship with this investor.
Now the burden is going to be on you.
So syndicators must keep records of all these things that they're doing,
whether it's the emails, make sure you keep track of that. The phone calls,
make sure you're taking detailed notes. Some clients record these conversations.
Just again, you want to have the, the, the, the proof,
because if something were to go wrong in the future,
and the sec is looking at you five years from now and they say, Hey,
how did you, how did you meet Johnny?
You should be able to go back to your file and explain to the sec exactly where
and how you met this person. So at some point,
you're going to establish that substitute relationship,
and then you can offer them a future deal, right? Because again,
you need to have not only a substantive relationship,
you have to have a pre-existing substantive relationship, which means it's,
pre-existing your deal. So once you start an offering,
you're not going to have a pre-existing relationship.
So you can never offer a new person, a current offering.
But once you've gone through this,
this process of establishing the subacute relationship,
you can then offer them a future deal. So hopefully that makes sense,
but that's probably by far the number, especially these days,
I've noticed it's an,
the number two biggest mistake people are making because they're literally
skipping all these steps and they're going straight to, Hey, I met you online,
or I met you at a conference and I'm going to start pitching a new deal,
which would violate one of the bullet points of rule 5 0 6 C.
The last thing I want to talk to you about,
which has kind of become a really a big deal is using money raisers.
It's very, very tempting for syndicate.
Especially first time syndicators to pay people,
to help them attract money to their deals.
There's a lot of people out there that will be more than happy to send investors
your way in exchange for a cut of the deal and exchange it for a commission or
exchange of some sort of compensation. And it's very,
very important to understand that you cannot pay somebody to raise money for
you, unless you're a licensed broker dealer,
which most of the time they are not right.
Just like you can't practice medicine without a license.
You can't practice law without a license.
You cannot raise money for somebody else.
If they don't have a broker diesel license. And I see this time and time again,
where people are coming in and all they're doing is raising money.
And in exchange for that, they're getting a cut of the deal.
There are part of the GP, uh, somehow they're involved.
It's usually not a cash payment. Actually. It's usually a shares of the,
of the syndication, sort of the GP shares. They get a cut of that, uh,
in exchange for purely raising the money. And that's going to be a big,
no-no the way you have to do it in order to sort of, I don't want to say,
get around it,
but it's really an exemption to having the broker dealer rules as if they are a
legitimate co-sponsor.
If you bring somebody in that's legitimately doing work in your syndication,
then by all means their Rolodex is fair game and they can raise money just like
you can raise money and everybody else on the team can raise money.
But the three important things to remember about the money raising part is
number one,
you can never pay anybody transaction-based compensation in exchange for
bringing in the money you are that's that's.
The hallmark of broker dealer activity is, is,
is transaction-based compensation. So you can't do something like, Hey,
if I raise $500,000, I'm going to get 5% of the company.
But if I bring in a million, I'm going to get 10% of the company. If it's,
if the compensation is tied to how much money they're bringing in,
that's going to be transaction-based compensation, which is a big no-no.
In addition to that, they have to be involved in substantial duties.
They have to be doing real work. You know, they have to be doing whatever,
but what everybody else is doing, you know, on the acquisition side,
they're going to be doing some underwriting.
They're going to be doing due diligence. Once you find a property,
they're going to be talking to the lawyers, talk to the CPAs, you know, asset,
managing investor relations, all those things that you're doing as a syndicator,
the person that's also helping bring in the money has to be doing as well,
that you have to be involved in substantial duties. And the last one,
which is a big one,
your primary role needs to be something other than raising money.
That primary role needs to be doing those substantial duties,
because if all you're doing,
or if most of your time is just bringing in the money and once the deal closes,
you go home and don't do anything. Well,
then you're not going to be spending most of your time and your substantial
duty.
So those are sort of the three keys to making sure that you fall into what we
call an issuer exemption, which would allow you to bring in money. But again,
you're not getting compensated to bringing the money you're getting compensated
for bringing your expertise to the deal. And so these are really the three,
not realizing that you're issuing a security,
not having a pre-existing substantive relationship with your investors and using
money raise or paying money raises to help you with your deal.
Hopefully that's been the helper for you guys and, uh,
looking forward to the next video.