Ep. 43 | Navigating SEC Regs on Syndication – Part 2 of 2

On this episode of The Mobile Home Park Lawyer, Ferd continues talking about SEC regulations regarding syndication. Ferd explains the ins and outs of why you can’t pay someone to raise capital for you. Enjoy!


0:00 – Intro
0:49 – Can you pay some to raise capital for you? The short answer is no
1:16 – If you’re raising capital, people have to be part of the partnership
2:01 – The SEC has people who are trained to catch this
3:01 – Can you hire someone to raise capital? No.
4:08 – Everyone with Ferd is in the GP, meaning they can raise capital, but nobody has the sole job of raising capital
4:53 – There might be changes on the horizon as the SEC said they want to include some exceptions like tier 1 and tier 2 finders, which Ferd explains
6:33 – There are some potential loopholes, but they aren’t great
7:09 – You can take look at the PPM stuff and the 506 and 506c regs, with the documents on themobilehomelawyer.com



Welcome back mobile home park nation. Here today in part two of navigating SEC regulations. Today, we’re going to cover kind of a hot topic in that is can I pay somebody to help me raise capital for my real estate deal. As I mentioned at the end of the last podcast, the short answer is no, not unless you’re a licensed broker-dealer and people try these workarounds all the time. Sometimes the promoters would give somebody, give the fundraiser like a piece of the ownership that owns an investment. Okay, there might be a workaround there, which I’ll get into that’s a little gray. But the typical, Hey, if you raised a million dollars, I’ll give you 20%. Can’t do that. Hey, I’ll give you a car. Can’t do that. Hey, I won’t give you a percentage per se, but let’s just say I’ll pay you hourly to do this. No, can’t do that.

Basically, anybody that’s helping raise capital has to be involved in the investment and it has to be more than just an introduction. Like, Hey, here’s my cousin, Bob. He’s rich. No, it doesn’t work like that. They have to own part of the investment, be a co-promoter, basically be a part of the general partnership, the GPP in order to be issued, it what’s called an issuer exemption and then they can be compensated.

So, I mean, people ask this kind of question all the time. I see it online. I have been offered this several times. Hey, you want to do a piece, you know people and you want to raise money for us. We’ll give you a piece. It’s like, yeah, I’m not going down that way, guys. And this is unlike some other rules. Like I mentioned on my Dodd-Frank podcasts, like the Dodd-Frank didn’t really have a big enforcement mechanism to get people out there, selling homes on paper. So, people do it all the time. You’re not supposed to, people do it all the time.

This is different. In the SEC world, they got guys and gals who are literally all they do, they’re trained and paid to go chase bad actors in this. And they hit them with both financial and criminal penalties. So, it’s pretty, pretty steep. So, if you’re out there, you’re saying, Hey, can I just pay somebody commission? No. And that must be a licensed broker-dealer. Is it expensive and painful to become a licensed builder? Yeah. So, I’m not recommending you go be a licensed broker-dealer. You either work with one and pay them. Or you just don’t break the rules. And you know, when people say, what if it’s family and friends, still no. I mean, if it’s like me and my dad, we have some, it’s just, we’re sitting around the table and we say, yeah, we’re going to start an LLC. We’re going to buy this mobile home park. We can do that. But we can’t do it if it’s like me and dad and my cousin Frank, and we say, Hey, Frank, you’re going to kick in a million bucks. We’re going to do the work. We’re going to split the profits to half and half. That’s a syndication. Cause guess what? Frank’s not doing the work. He has limited power, limited effort. He’s putting in capital, we’re doing the effort. We’re getting paid indirectly. In this example, by getting more membership units, we can’t do that.

Can I just hire them? Can I hire Cousin Franklin raised money on me? Probably not. I mean, if their job is raise capital, that’s what I’m being paid for. You can’t, that’s the same difference between him and paying him commission.

Now my chief investment officer Logan, is Logan going to have to raising capital for our deals? Yeah. But that’s not his sole job function. His job function is to run. The P and L, run the investor reports, run the nerves, bank recs, underwrite deals, negotiate with banks, negotiate [02:55 inaudible]. Yeah, he’s going to raise capital just like I do it. It is an ancillary part of our job. It’s important, but it’s not the job function. You know, like my job, I’m CEO of the company, my job is to run the company. I don’t get compensation or a bigger piece of the deal if I raise bigger piece of the equity. Okay. So that’s the way you should to do it in general, don’t pay somebody.

So like Logan and I have we’re partners on some deals and dad and Andy and some other guys were in some deals on the general partner. Yeah. We’re all part of the PPM as part of the promote team. And none of us have a specific job duty of raising capital. Like we all raise capital or none of us raise capital. Somebodies got to; we all do. We put in our own capital, but all of us are in the GP, the sponsor. So, if you got somebody out there that wants a piece of the deal wants to raise capital, they have to be in the GP. And that typically means you are paying on their share of ownership. It’s either sign recourse debt, or it’s an agency loan. It’s assigned [03:51 inaudible] carve-outs and they have to actually be working the deal. We worked on the deal before closing, after closing. They can’t just be capital raising guy.

So, I know I’m being kind of a wet blanket here, but it’s kind of part of my purpose out here as a lawyer is to tell you what you can and cannot do. And sometimes you don’t get the answers you want. So, the short answer again is can I pay someone to me to raise capital now? No, not unless they’re a licensed broker-dealer.

Now, is there, are there changes on the horizon? Well, maybe. SEC has put out some comments or some opinions that they want to put some exemptions in place. I mean, recently they relaxed the standards of credited investor to include people with educational pedigree, like getting your series seven license through FINRA. And there’s some other ones, I think it’s 65 and I don’t remember 7, 16, 65. I used to have my 6 and 63, but I don’t think those would qualify me. I don’t use them anymore. So, I don’t remember which ones which frankly. But some of the other exemptions that are coming there, they’re talking about having a tier one, tier two finders. And this would be exception, basically a tier-one finder could, you know, be involved in a single transaction over a 12 month period, but they can still cannot talk to or communicate in any way with the potential investor about the investment.

Okay. Basically, that’s like a referral or an introduction. So, it can’t be somebody doing this big picture and can’t be doing this on a lot of deals. And again, these exceptions are not approved. They’re like being discussed. A tier two finder would be more, have more freedom, but also be have more restrictions requirements. You know, they could solicit investors, but it would have to be limited to things like identifying screening, contacting potential investors, distributing issuer offering materials, discussing issuer or information included in any offering materials and arranging the potential meetings with the issuer.

Basically, this person could do the grunt work and introduce them to me as if I’m the promoter, but they’re not quite the promoter. And again, these are not, these are not approved yet. They’re just proposals. So, don’t hang your hat on those.

Overall, the answer is you can’t pay somebody referrals fee, commission, etc., to introduce you to capital. There are potential loopholes if the person is truly part of the general partnership piece of the syndication, and then the silver lining is maybe there’s going to be some rule adjustments and exceptions or changes coming down the pike.

But for today, be safe, be smart. And don’t pay somebody to raise capital for you. Do it yourself, or maybe start smaller and just do your own deals. And don’t syndicate. Or if you’re in MHP space, you know, you can do assignments, the wholesales. A lot of people do that. I’ve got several episodes on how to do that. I’ve got clients and contacts that do that stuff all the time. Assigned deals. If you do want to look at the home, if you do want to look at the PPM stuff and the, 506B, 506C regs, I’ve got some links on my website, the www.themobilehomelawyer.com. They can get you started on that if you want to engage us to do that. But like anything, you know, do your due diligence on everything, including hiring a law firm, hiring a law firm is important decision should not be based on advertising. And if you do hire a law firm or somebody else to help with, make sure they actually have done these before, you don’t really want to be somebody’s first client on this. Frankly on anything. But anyway, that’s a little more on syndications, got a multi-part series here. Until next time, take care, be smart. God bless.

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