Why Friends, Family, and Facebook Could Get You Sued

[00:00:02] So I know there's a gap when people first start their first investment until they buy something where they don't have a lot of money, and they don't have a team, and they don't have an attorney, and it's all kind of funded later, and they build that over time, right? And there's some massive risks there. Yeah, it's a huge problem. I first realized this when I was over at my old firm, Premier Law Group. I was getting all these questions from syndicators, like legitimate legal questions about, can I do this? Can I not do that? Or, hey, I've got this social media post. Can I post it? All these questions.

[00:00:31] And I was like, you're not my client. Why don't you talk to your securities attorney, right? Like, why don't you talk to your SEC attorney? And I realized that a lot of them didn't have a securities attorney because they weren't quite ready, right? Usually the SEC attorney comes in towards the end of the process when you're already in real estate once you're in contract. So once you get in a contract to a building, that's when you bring in the SEC attorney. But then there's that huge gap, that timeline from when you're starting to when you hire the attorney, and there's a massive compliance gap, right?

[00:00:59] I call it the syndicator blind spot. Yeah. Because syndicators are out there doing things, going to meetups, communicating, posting on social media, going to podcast, not realizing that there's all of these landmines out there, and they're stepping on them, not even knowing. Like, when people say, you know, I speak at your event, I speak at a lot of events, I always say, hey, what's the biggest fear that you have? What's the biggest concern you have about raising capital? It's always, I'm worried that I don't know what I don't know.

[00:01:28] And it's during that gap that that is the most concerning, because you don't have a lawyer. Once you hire the attorney, assuming they're a good attorney, that's an SEC attorney, you know, you've got access to someone, they should be protecting you, they should be, you know. Well, maybe, they might not have been asking the question. Maybe, yeah. Let's go into the landmines, because I agree. Yeah. This, the, what do you call it? The syndicator. The syndicator blind spot. So the syndicator blind spots.

[00:01:54] So what are some of the most obvious ones to you that you get asked a lot? Yeah. I think the biggest landmine out there is not, not understanding or not being able to answer one critical question, right? When it's a simple question, so yes or no question. But if you get this question wrong, it literally will blow up in your face. And that is, am I taking money from this person? Is that taking of the money a security or not?

[00:02:20] Because if you answer that question, no, because, hey, it's a, it's a promissory note, or it's just my friends and family, or, hey, it's a joint venture. And you say, no, it's no, and it turns out that you're wrong. Well, now you've got an, you've just completely, you have a non-compliant offering. You've violated securities laws, and there's nothing you can do to unwind it. Because once the cat's out of the bag, like, once you take that money from investors and you haven't followed securities laws, you can't put that, that cat back in the bag. And this is the biggest risk, too, right? Because I think a lot of people don't understand what security is.

[00:02:50] And so, therefore, they figured, ah, well, I'm not big. Yep. I don't have a million dollars of funds. I don't have a hundred million dollar fund. You know, I'm not raising money on a big platform. I'm just doing a little deal, just a little me with six or eight people. But they don't realize it is a security. Yeah, we were just talking offline. You know, my buddy, Stu, I've known for 20 years. He's in the hospitality space. Used to be a bartender and a server. He just started a new venture where he's, actually, he's a wine guy. So he's got wine in a can, right?

[00:03:20] And so he's been, there's a new company he launched. And he went out to friends and family and raised a bunch of money. One of those happened to be a friend of mine. So we were talking about it. And I realized that he didn't seem like he was following any of the securities laws. So I reached out to him just to make sure he had a securities lawyer. And he said, no, I've got a startup attorney. So we're all good. It's just friends and family. Like, I'm not advertising. It's just friends and family, people who really support me.

[00:03:41] And he didn't realize that what he was selling was a security and therefore didn't comply with all the securities laws, which means if something were to go wrong, if investors lose their money and they wanted to come after him, they have a really, really strong case because he has a non-compliant offering. He's violated securities laws without even knowing it. So not even knowing that you are in the business of selling securities is by far the biggest landmine, which is why it's so important to just realize that as soon as you're taking money from investors.

[00:04:08] And when I say investors, anytime you're taking money where the returns are generated by your efforts, meaning you're doing all the work and somebody just giving you money and going home, that is a security. And you should immediately start figuring out who should I go talk to to make sure I'm doing it compliantly? Because if I don't, once it's done, it's too late. Yeah. I think you should just automatically assume it is a security and do everything you can, even if it isn't. That way you're covered. Right. So that is an amazing one. Yeah. How about number two?

[00:04:36] Like what is another huge blind spot or landmine? The second landmine I would say is anything having to do with social media, websites, and even email communication. So, so many people are on social media, not realizing that they're not supposed to be on social media. They're violating securities laws. We talked about it earlier, but most of the time you are not allowed to advertise your deals. So let's put, let's put this in context. So like your guy that started this wine thing in a can. Yes.

[00:05:06] If he posts that online and says, I'm starting a new business, I'm raising money for this business. He's already crossed the line. He's already blown the exemption because once you realize that you're selling securities, right? Then you either have to register the security or find an exemption. And there's a bunch of different exemptions, but the minute he puts something on social media in your hypothetical and says, hey, I've got a new company. I'm looking to raise money. Contact me. He has now blown one of those exemptions, which is the most common one. Yeah.

[00:05:34] So if he then later on down the road decides to hire an attorney and says, hey, I want to do it right. Let's do it. The fact that he's already advertised for it already makes him ineligible for the most popular exemption. And now he's, he's SOL. Like he's going to have to find a different exemption that he may or may not like. So he might have a different exemption that doesn't allow him to bring in his, his friends and family because they're non-accredited. They don't have, they're not high net worth. So understanding what exemption early in the process. So you know what roadmap to take because you make that decision early on.

[00:06:03] I'm going to do this exemption or that exemption. And this is a 506B or a 506C. Or a reg A or whatever exemption you want to do. Once you make that decision early, now I know the roadmap. I know what the rules of the game are for that particular exemption. And I know, yes, I can go on social media or no, I can't go on social media. Yes, I can pitch my deal at a meetup. No, I can't. Yes, I can email this person. Like all those things that people do all depend on what exemption they're relying on. Let me ask you a question real quick.

[00:06:30] So if, could, could that person put something up on a website and then just drive people there? No, the website. Yeah. The website's a great, great example. Website. I put in the same category as social media because a website is public. Unless you have a password protected tab, which some people do where, Hey, my website is just general information. Investor login only. Investor login only. Because generally speaking, if you're, if you're not allowed to advertise, you have to have what's called a preexisting substantive relationship.

[00:06:58] And so an easy way to do that is like, Hey, once we establish that relationship, then I'll give you the password and you can go access all this information. But in the meantime, my website has to be very generic. It has to be, you know, value added. So there's nothing wrong, for example, about posting, you know, why real estate is the greatest wealth building vehicle of all time or why multifamily or why self storage or why Arizona is a great market or all the tax benefits, like all of that kind of educational stuff. No problem. Your resume, no problem.

[00:07:26] Like, Hey, you people need to know this isn't your first rodeo. You've got a lot of experience. You've done, you've gone full cycle, your investment thesis, that kind of stuff, but never talk about a specific deal or anything that really, you know, conditions the market really gets people excited about a potential future deal. So that's whether it's a website, whether that's social media or honestly, whether that's email marketing, I put those three in the same bucket because there's no special rules specific to social media, websites, email marketing. It's just advertising and generally solicitation in general.

[00:07:55] And that's just one that people are violating daily. I mean, the amount of posts that I see, in fact, I use it for my coaching programs. I'll literally will screenshot a post and then we'll go through it in the session. I'll just outline, you know, all the issues with the posts and how to make it more, make it compliant. But too many people are screwing that one up. That's a good point. Okay. Third landmine. Another big landmine would be, let me tell you this. One of the, there's a couple of times when I cringe, when I get calls for potential clients,

[00:08:23] one of them is, Hey Mauricio, I've already got all the soft commitments in place. I just need you to do the docs. Oh wow. And so I go, holy, holy. This is super common. This is super common. It's like, they've already done all the work. They just need you to paper it. And I'm like, what in the world have you been showing your investors or telling your investors in order to elicit the soft commit? Cause people just don't soft commit. You've probably sent them underwriting. You're probably sent them a business plan. You've sent them a bunch of emails. You've had phone calls with them. You've done social media posts.

[00:08:53] People don't commit with money without seeing something. I, by the way, guys, this is a big one because like sometimes when you see these high rises, like in Miami, they go out and they actually sell these condos that aren't even built. And then they bring all that paper to the bank and then they call for the commitments and they pair it up with the debt and then they start building. Right. So this is a very common, you know, what's the vision, right?

[00:09:18] They put all the stuff out, websites, brochures, sales staff, all that kind of stuff. And they raise all this capital and they get all this stuff. And then of course they bring it all papered up and then they go execute. Right. Right. Right. So you get to call later. I get the call later. And it's like, again, a lot of, not a lot of times, but, but I've had calls where people like, okay, Hey, paper it up. I want to do this as a 506 B, but it turns out they've been advertising this whole time. So I'm like, I give them the bad news. Like you're not eligible for 506 B. We're going to have to do, I don't know, a 506 C maybe.

[00:09:48] And they're like, well, I have non-accredited in the deal, which you wouldn't be able to do with the 506. I said, well, tough. Like, you know, I don't say that, but that's, you should have thought of that earlier. You should have contacted some earlier. So that's just, it really, I get cringed when I hear that. Cause, uh, because you know, it's just, it's just an issue. It's the same thing with the joint venture, which is more like the landmine number one. But you know, people used to call me and say, Mauricio, this is a really small deal. Uh, you know, it's only friends and family. It's kind of, I'm going to do this one as a joint venture. I've decided I'm going to make this as a joint venture. And I would just always smile.

[00:10:16] And I would say, look, whether it's a joint venture or a securities offering, you don't get to make that call. It is what it is. Like the way you've structured it is either a syndication or, or a joint venture. And most of the time they were not joint ventures. There were securities offering. And so that's kind of part of my, because, uh, to your point, when people put money up and there's a soft commit, they've actually looked at a whole bunch of stuff somewhere. Yeah. Right. Because people are investing based on some kind of return, right?

[00:10:44] Even if it's in the future, even if it's a range, it doesn't really matter, but they're looking at something before they're wiring money or, or you've got to, I don't just, I mean, maybe you can get away with that these days. Like maybe you can be like, Hey, I've got a new deal. Let me know how much you're in. But most people can't do that. Yeah. Yeah. Okay. Number four, landmine. Landmine number four would be this, this thing that's going on right now. People are stepping on this landmine a lot, which is just this idea of bringing in capital

[00:11:09] raisers as a co-GP and not realizing that that's licensed activity. This is the one part that most people don't understand. I'd be, I'd be curious to know, even if you know this, Ken, cause it just doesn't come into play even for the legitimate syndicators. But the general rule is in order to raise money for other people, you have to have a broker deal license. Yeah. Right. And when you think about it, Ken, you are actually raising money for others. You're raising money for your entity, your LLC. You're not raising money for Ken. You're not raising money for you. You just wanted your company.

[00:11:38] You're raising money for your syndication LLC or your fund. The reason you don't have to have a license is because there's an exemption for that called an issuer exemption, right? Which applies because the issue exemption says, Hey, as long as you're not taking transaction based compensation, which you're not, you're raising a bunch of money and you're doing all this work. As long as you're doing substantial duties, you're doing all the duties. So, you know, and as long as your primary role is not raising the money, it's doing the substantial duties, which you are no problem. You don't have to have a license. You can fit into this exemption.

[00:12:06] But when you bring in a third party into the mix and all they're doing is handing you some money and saying, Hey, I'm just, just give me 5% of the GP or 10% of the GP. Too many people think that by giving them a percentage of the GP somehow now they're absolved from all the regulations or the licensing requirements, which is not true. And so there's a ton of folks out there that have been raising money from third parties, giving them a cut of the GP in exchange for them bringing in a half a million, a million, 2 million thinking that's okay.

[00:12:35] Well, this has been a new thing because we saw this with a lot of social media influencers where a social media influencer has, you know, hundreds of thousands of followers, let's say, or whatever. And some dude or some group, but it comes up to them and says, listen, I'll give you a percentage of my GP if you blast this out to your group. And they do that. Right. Right. And this is exactly what you're talking about. That's exactly right. And they, you know, there's been some pretty well-known figures actually, because that's

[00:13:05] who makes the headline, right? I mean, I think not to name a few, but I think DJ Khaled was one of them. And I think even the Kardashians got it, especially in the crypto world. And they had to, you know, they had to return their compensation and then pay a fine, which was usually double what, whatever the compensation was, plus penalties. And in the syndication world, if you violate securities laws, you're typically going to be barred from raising capital for some period of negotiated time in the future. So that's a big one. And, you know, I feel like I've been talking about this for years, but people keep doing it. That's another one. Okay. Number five.

[00:13:35] Another one. Yeah. Another landmine is not understanding that you need to have a preexisting substantive relationship. And, and, and there's basically eight steps that you should be going through and people just don't go through those eight steps. A classic example is, you know, I'll go to an event, right? Like either limitless or any of these events. And, you know, we're passing, I've got business cards, I'm there to do business. And so I leave the event with a bunch of business cards that everybody else does. And lo and behold, two weeks later, I get an email from one of these guys pitching me a deal.

[00:14:04] I have no relationship. I don't even remember who they are because I'm, you know, they forgot that I'm there as a sort of a vendor or as an attorney. They think I'm a potential investor. They'll blast me a deal. And it's happened to me at times. A hundred percent. Right. And, and, and you can't do that. Cause again, if you're relying on the particular exemption, that's why it's so important to understand what exemption you're doing. You generally have to first establish a relationship with the investors before you can pitch them a deal. And generally there's about eight steps that you go through, but these guys aren't going through any of the steps, let alone, you know, the first two or three, which are

[00:14:34] probably the most important. So it's interesting. I just spoke at a conference. I won't say which one. And while I was there, I had my email and everything up and people knew how to get a hold of me, et cetera, et cetera, et cetera. And then I got on a bunch of people lists and all of a sudden, bang, bang, bang. I started getting emails, right. You know, like a week later. Right. And they, I don't even know who they are. Right. I never spoke to them. And, um, all of a sudden, so you're saying that just going out and getting emails and gathering

[00:15:03] and getting business cards and all this stuff at conferences, which is what a lot of people do. Yep. Um, is another big issue. And I know you said there's eight steps. There's eight. So what happened is, you know, we talked earlier about black and white. This is one of the few elements where the SEC has been pretty clear and has given us some good guidelines. Like usually the SEC is not very helpful at all. You know, they'll tell you you can't advertise, but then they won't tell you what exactly advertising is. But here there's actually a case or a no action letter where, where the SEC, at least their

[00:15:31] staff outlined about seven or eight steps that you should take, where if you did that, you could take a complete stranger that you met at an event, go through these eight steps and come out of it the other side, having established what's called a substantive relationship so that they would then be eligible for a future deal. Cause you still have to have a preexisting substantive relationship, preexisting your deal. Right. So these guys would go to conferences that already have a deal. They're never going to be able to get a, it's mathematically impossible to get a preexisting relationship because your deal already started, but you could get into a relationship

[00:16:00] and they say, okay guy, you're not eligible for this deal. But when I have a new deal in six months, I'll give you a call and we can see if it's a good fit. Got it. Okay. That makes sense. All right. Landmine number six. Landmine number six, which happens a ton is just not understanding the corporate structure in the entities. Like people start setting up entities wherever they want. They come to, usually would come to me at premier law group with already a bunch of entities. And most of the time those entities would be set up in the wrong place.

[00:16:27] They'd be, this has just been done, done, done incorrectly. And so understanding, you know, understand there's three types of entities, right? There's, there's an entity that's the syndication entity or your fund entity. There's a GP or manager entity. And then there's a holding company entity, understanding the difference between all those three and understanding where those get filed and how they relate to each other. That's just, again, as a, as a former asset protection attorney, it's pretty easy. And there's a good reason to have all those.

[00:16:54] So the GP is of course the group that's actually doing the deal, like the developer or whatever you want to call it. And the, the syndication entity is where all the money goes. That's right. That's where the investors own. Yeah. And then the holding company is where the property is or the, where, where, yeah, what you own. And it's not just an asset protection. I was actually talking to a good friend of mine who's a CPA. And there was actually a really well-known client. I know you know who he is, but we won't say who it is, but they had combined two of those entities together.

[00:17:21] And so they were using the holding company and the GP company as the same. I like to separate it just from an asset protection standpoint, but it also creates some tax issues and I'm not a tax professional, right? But the taxing mechanism of a GP entity is different from the taxing mechanism of a entity. And so if you combine them, you're in the situation where you have to be like, well, do I take bonus depreciation? Cause if I'm, if I'm a, if I'm a holding company, I get the bonus depreciation or do I do an S election and get some tax benefits over here?

[00:17:50] We had to split those apart in order to get the maximum tax benefit so that. You know, we could, we do obviously want to maximize your tax efficiency. And so it's not just an entity from a protection standpoint, but from a tax perspective, the tax treatment, you want to keep those separate, but way too often by the time they get to us, they've already set up their entities and they've just set up, unfortunately they've set them up in the wrong place. So we have to redo all the entities and it just makes it a little bit harder. Anything about real estate. I, for example, I'm not a real estate attorney.

[00:18:17] A lot of people think I am cause I hang out with a lot of real estate folks, but I'm the last person you want looking at a purchase and sale agreement or pulling, you know, easements. I'll tell you like, like on a deal for us, like we might counsel a landlord tenant attorney, right? For example, for some landlord tenant issues, we might have somebody specifically for the debt. Yeah. We might have somebody for title and survey stuff. We might have somebody for environmental. They're all different attorneys. Right. And then we have a general real estate attorney. That's like closing the deal. Right.

[00:18:47] And of course the syndication attorney. And now I know that's a lot of attorneys and I'm not suggesting that you go out and get all those people. You have to get them if you need them. But, uh, to, to just think that you're going to have one attorney take you across the goal line is, is, uh, is probably not the right. And I know it's very tempting to try and save a few bucks here and there by either not having an attorney or even war is one of my biggest pet pee, especially on the real estate side. And I don't do the real estate side, but so many people try and get the cheapest real estate attorney.

[00:19:15] And I tell you that the quality of an attorney that's charges you 20 or $30,000 for syndication versus one that charges you three grand, they're not doing the same thing. Right. You're getting much more protection and you've got all of the responsibilities of your investors. Like why would you put your investors at risk trying to save three or four or five or 10 grand and risk multi-million? Yeah. Like that risk reward ratio has never made sense to me. Right. Right. And then of course, uh, the other piece of that is the CPA.

[00:19:41] I, you, you were talking about how the CPA needs to be aligned with you for all the tax steps inside of the operating agreement. So the, the, the CPA and the attorneys also have to be aligned. A hundred percent. Cause I don't know the discussion between yours. I don't know your tax strategy. I know what you're trying to accomplish. And so the last thing you want to do is have the CPA review the operating agreement, you know, a week before your tax deadline and say, or after or after and be like, what is this? This is, this doesn't make sense. And again, I'll tell him my, my CPA joke.

[00:20:09] You know, you ask three CPAs the same question and you get five different answers. And so some people like certain language in the operating agreement and other, other CPAs want a different language. You want to use the language of your CPA cause that's who you're paying with. That's who has all the, you know, all the insurance. So, so make sure your CPA is in the loop early. Yeah, I know there was a time where I sold an interest and I did it all legally through an attorney. And then I later brought it to my CPA cause I had done it in that tax year. And he looked at me and he goes, I wouldn't have done it this way.

[00:20:38] I could have saved you a lot of money. If you would have come to me while this was going on, we could have structured this over, uh, over a couple of years and you could have saved a lot of money in tax. It was a real learning lesson. Yeah. A lot of people make the mistake of checking with their tax professional at the end when they get the money at the backend, when you really need to do it before you even get into the relationship, check with your CPA to maximize your tax efficiency. Another good point. There you go, guys. Seven really good landmines for syndication blind spots.

[00:21:07] So Mauricio, how do people get ahold of you? Yeah. Well, if you're interested in avoiding those seven landmines and all the other little landmines that are out there, I do have a coaching program. And so it's coachingwithmauricio.com. If this is something that interests you, you want to make, uh, have somebody that can implement some of these things for you, then just reach out and we'll see if it's a fit. Coachingwithmauricio.com guys.