Securities Mistakes Syndicators are Making Today

Edited transcript from ‘Passive Wealth Strategies for Busy Professionals’ podcast

With Host Taylor Loht interviewing Kim Lisa Taylor, Esq.

April 8, 2020

Taylor Loht (host):

What’s going on guys? Thank you for tuning in. This is Passive Wealth Strategies for Busy Professionals. And today our guest is Kim Lisa Taylor from SyndicationAttorneys.com. Today we are discussing a lot of the legal issues that syndicators and syndication investors need to be aware of … the mistakes that they’re making today … and a lot of other very important information that you need to know if you’re going to be in the world of real estate syndication.

For those of you who do not know, I’m your host Taylor Loht. I am a real estate investor, a real estate syndicator, a busy professional and I love talking about investing and learning about investing alongside you with all of these great industry professionals that we bring on the show.

As a general comment, we talk about the state of the market in this episode. This episode was recorded before some of the recent drops in the stock market but I wanted to take the opportunity to make a comment on that. As investors, we need to not panic when the stock market is on its way down or there’s fear in the market. We need to remain level-headed and, like Warren Buffett says, the most important thing is to not lose money. So we need to be looking for good deals and not just panicking when we hear general economic news (that’s less than favorable).

We need to look to do good deals at all times and not just sit out of whatever the market is. We need to remain level-headed. So I wanted to take the opportunity to comment on that. The coronavirus fears, at least at the time that I’m recording this, are real — I understand that. But there are good investments out there and we need to remain level-headed and keep looking for those good deals.

So once again, our guest is Kim Lisa Taylor from SyndicationAttorneys.com. Here we go. Kim, thank you for joining us today.

Kim Lisa Taylor (guest):

Thank you for having me. I’m happy to be your guest today.

Taylor:

It’s great to talk with you. We first met at Ultimate Partnering. You had a table this past year and now we’re catching back up. And since then, you launched a book. What is the name of that book? 

Kim:

I did. It’s “How to Legally Raise Private Money.” Subtitle is “Definitive Guide to Syndication and Raising Money for Real Estate and Small Business.”

Taylor:          

Perfect topic for this podcast. And before we get into the topic of the book, can you tell us about your background so that we and the listeners and know why you’re uniquely qualified to teach us about this?

Kim:

Yeah, so I started practicing law in 2008, exclusively practicing since 2009. So 10 years prior to that, I was a real estate litigator and also an environmental law litigator. And even before that I was an environmental consultant. So just an interesting bit of trivia: I’m licensed as a professional geologist in California.

Taylor:

Cool.

Kim:

Yeah, but I looked into my future. When I was doing that, I was doing a lot of soil and groundwater samples standing behind drill rigs with those steel-toed boots and hard hat. So I looked into my future and said, “Yeah, I don’t think I want to keep doing this forever. And so what can I do different?” I decided to go to law school. Didn’t really know what I wanted to do, what kind of area of practice but having come from an environmental background that was kind of my first stop. I always liked real estate. I started doing some real estate litigation but then I learned that I don’t like litigation. I don’t like fighting. I don’t like going to court and fighting about things. Everybody’s always mad.

And I just thought I really would like to get into more of a transactional type practice. I met a mentor and started working with him. And what I really liked a lot about this area was helping people put deals together and figuring out how to split money with investors and how to structure deals. And at the same time the reason that I met my mentor was because my husband and I were actually learning how to buy multifamily. We went to a RE Mentor real estate training event — I think it was one of their Multifamily Millions events — and then decided, “Well gee, we should really learn how to do this.”

We got into the coaching program and we ended up buying and syndicating our own multifamily property with some friends. And so then I just started doing this area of the law and decided that I really liked it. I started working with a lot of syndicators and had a lot of clients who became returning clients and gaining ever-more success. So I just thought it was a really cool thing and decided to make it my practice.

Taylor:

Cool. You really took it full circle there with the RE Mentor folks and first you started attending and now you’re exhibiting so that’s very important.

Kim:

Yeah, yeah. Well that and I do some training for them, too, in their Private Money Bootcamps.

Taylor:

That’s awesome. That’s great when you can make that happen. So let’s get into the topic: “How to Legally Raise Private Money.” We’re mainly talking about syndications and what people can do. What are the biggest mistakes that people are making today that you’re seeing happen? 

Kim:

Well, when people are first starting out, unless you come from a background where you’ve been dealing with investors in the past — which certainly some people do have that background —  then it can be uncomfortable. So you start looking for the easy way out. We all want to sit in our basements in our pajamas and search the internet and find that perfect investor. But more often than not, that kind of strategy doesn’t work out. You might find some real folks who have a lot of money who say they would be interested, but there’s a whole lot of “ifs” and usually the final “if” comes down right before closing and they often disappear.

So don’t do that. You can raise a whole lot of money from people —  $50,000 or $100,000 at a time — if you take the time to get to know them and talk to them about their investment goals and what you’re doing and find some compatibility and stay in touch. And then when you have deals, you share your deals with them. That’s the best tried-and-true method of finding and keeping investors. 

Taylor:

OK, so I go to a lot of events like Ultimate Partnering and frequently I come home to find myself on a couple of people’s deal list pretty quickly after talking with them for 10 minutes at whatever the event might be and suddenly they consider us to have a substantive pre-existing relationship when they might not really know anything about me and we’ve never had any kind of interaction outside of meeting at this event. Granted, they didn’t hit me up about their investment opportunity at the event, but they didn’t follow up after that. Where do you think that falls? Does that put up any red flags for you?

Kim:

We’re trained to say, “It depends,” right? And so it does. It depends on two things. One, there are the securities exemptions that do allow people to freely advertise their deals. The only people who can invest in those deals are verified accredited investors but they can advertise them to anybody. So they wouldn’t necessarily have to know you and have had a conversation with you before they started advertising those deals to you. However, the flip side of that is: How likely are you to invest with them after a 10-minute conversation and no follow-up? 

Taylor:

Not very. 

Kim:

Yeah. But most people at those events are trying to meet people who they can put into deals that don’t allow advertising. So maybe we should just talk a little bit about what those exemptions are and the differences.

Taylor:

Yeah, absolutely. I’m really pulling that question. I probably should have specified as 506(b) syndications, which cannot be publicly advertised. 

Kim:

Right. So just to give your audience the 30-second primer on when they have to follow securities laws: Basically, if you’re raising money from passive investors, then you’re selling something called an investment contract that applies whenever you’re selling interest in a company. If you’re doing repeated sales of promissory notes to people in order to raise money, those also are securities. So in both those instances, most of the people at the events you’re talking about are going to be selling off interest in a company and raising cash that way. When you’re doing that, you have passive investors, you’re selling securities. When you’re selling securities, you have to follow securities laws.

That means you either have to register your offering by getting pre-approval from regulatory agencies before you can make offers to anybody, or you have to qualify for an exemption from registration. And every exemption has its own set of rules and restrictions. These are self-executing exemptions, meaning that you have to keep track and keep records on how you complied with the rules of the exemption that you’re going to claim.

I mentioned just a minute ago that there was an exemption that would allow you to freely advertise, but you can only sell to verified accredited investors; that’s the regulation D Rule 506(c) exemption.

The one that most people are doing, according to SEC statistics and also from our own client base is regulation D Rule 506(b). And certainly people who are starting out should be looking at the regulation D Rule 506(b). Why? Because that’s the one that allows you to invite your friends and family or people with whom you have substantive pre-existing relationships. You get to invite those people to invest with you.

Rule 506(b) says that you can raise an unlimited amount of money from an unlimited number of accredited investors and up to 35 non-accredited investors; all investors must be sophisticated. So you have to actually ask them about their past investing experience, and you’re not allowed to find them through any means of general advertising or solicitation.

So therein lies the problem with meeting someone for 10 minutes at an event and then having them start email-blasting you. The SEC has defined what that pre-existing substantive relationship means: Pre-existing means that it predates your offering. It predates the time at which your offering was current or contemplated. So certainly by the time you have your securities attorney drafting your offering documents you have a contemplated deal. On the timeline you have your offering documents in your hand, you have a current offering. So if you’re still meeting people when you have a current or contemplated offering you probably shouldn’t be putting them into that deal. You should be meeting them, getting to know them, putting them maybe in a future deal if they’re suitable.

But the substantive part of the relationship was defined by the SEC in 2016 and they said that it’s more about the quality of the relationship than the quantity of time that you’ve known somebody or the fact that you’ve just met them casually at an event and exchanged contact information. The quality of the relationship that they want to see is that you actually know enough about that investor to understand their financial situation and to have asked about some of their previous investing history and their investing goals to determine whether they’re suitable to be in your offering.

You have to be able to prove that by a record-keeping system showing that you not only met that person but you had further conversation with them about their suitability to be in your offering. And then after you’ve had that suitability conversation it would be appropriate for you to start making offers to them, preferably after a little bit of a passage of time. There is a process that you have to go through. If people want to know more about it, we have an article on our website at www.syndicationattorneys.com called “Determining Investor Suitability” that explains the SEC’s rationale and how they arrived at it and what kind of questions you might want to ask some investors and keep some records of those conversations.

Taylor:

What do they consider an acceptable record-keeping? I mean, a lot of people have maybe a CRM that they might be using or some people use Google sheets … that never worked for me. I couldn’t make it work, but are there any examples given of what can work as a record-keeping system?

Kim:

You can use whatever you want. I mean, people for years have used Excel spreadsheets before CRMs became so popular. But there’s a variety of CRMs out there. The good starter one that I used for a long time is Insightly. At that time when I was using it, it was free for two people. So it allows you to keep track of people, keep notes about conversations, keep track of when you send things to them and just to show all the steps you took in developing that relationship.

Taylor:

You touched on something during that last little segment that deals with a question that comes up on Bigger Pockets occasionally. I was on a thread about this very topic just before we got on the call. This is the example from the thread: Buying a $2 million property and I have a handful of investors who would invest $50,000 to $100,000 apiece. So probably I need maybe a total of $500 grand to close this deal. Just to put a number on that, I need to raise $500,000. At what point can I no longer do promissory notes to each of my investors and I don’t have to do a private placement memorandum? That is, where’s the line?

Kim:

I would argue that there is no point; that even doing those promissory notes to your investors is a securities offering. If you want to borrow some money from your parents to go put a down payment on a house, nobody cares, right? The regulators aren’t going to regulate that. But when you start going to your real estate investment association meetings and you’re talking to everybody there about loaning money to you for all these fix-and-flip houses that you’re buying and things like that, you’re selling securities and you really should be following the same securities laws and the same exemptions that you would if you were selling interest in a company.

The determining factor for when promissory notes are not going to work in a deal is if you’re going to be using an institutional loan to buy a property. If you’re buying a loan that’s going to be guaranteed by Fannie Mae, Freddie Mac or most commercial lenders, they’re going to have prohibitions in the loan agreement that says that you will not allow any subordinated debt. And they’re going to be asking you where all the money came from to buy the property and they’re going to want to see the list of investors and their percentage interest. They’re going to review the operating agreement to make sure that they have a bona fide percentage interest in your company.

They will allow that, but they will not allow you to show them a pile of promissory notes and say, “Well, I borrowed it from all these people.” Because now you got seven people standing in line behind them with potential liens against that property, and they won’t allow that. If you’re dealing with single-family residential properties those lenders aren’t as either savvy or picky about it, and so they don’t really seem to enforce it. But if you’re dealing with institutional loans, you’ll never be able to do it. 

Taylor:

Yeah, great. And those seven people are all in line behind the bank and each of the seven … one is behind the other, right? And if each have different lien positions…

Kim:

Well, yeah. Or you could technically issue notes of equal priority and then it becomes a race to the bank to see who gets there first if you stop paying. Or another choice would be to use a fractional note where you have those seven people all buy a piece of a note to equal the whole amount that you need and they each have their requisite percentage interest.

Taylor:

OK, yeah, I didn’t know that. I’m not a note expert.

So I’d like to go back to kind of the question from the top and focus on some of the mistakes that you see people making today in the syndication world. I’m sure that the topic of your book “How to Legally Raise Private Money” is a bit predicated upon the fact that there are obviously people doing it illegally. So what are some of the mistakes you see happening?

Kim:

We talked about the fact that you’re looking for the single investors who usually don’t come through, or if they do come through, then they change the terms on you right at the 11th hour and you don’t want to do the deal anymore. I’ve just seen that happen so many times over the years whenever someone comes to me and says, “I’ve got a single investor who’s going to take on the whole deal.” My advice is keep raising money, because the more money you raise, the less you need that person, and when you get around to the point where you’re saying “Are you going to invest or not?” it doesn’t really matter whether they do.

And don’t counsel somebody as an investor until their money’s in your company’s bank account. Once you have your securities offering documents in hand and you’ve set up your company’s bank account, you can legally start raising money. It’s first come, first served. And so you just tell those people, “As soon as you want to deposit your money then we’ll count you in as an investor” and tell them you’re raising money.

There’s clearly a lot of other mistakes. One of them is waiting too long to hire your securities attorney. We get a lot of people who are reluctant to hire an attorney and to begin to incur fees until they’re 100% certain that they’re going forward with the property. So they’ll wait until they’re completely done with their due diligence, but that leaves them with maybe too short of closing time. That’s another mistake that they make.

You want to make sure that you have enough time for your securities attorneys to draft your documents and so you usually want to do that during the due diligence process; the process can take several weeks.

I always say hire us when you have a property under contract. You’ve got to have a signed purchase and sale agreement and you or someone from your team has physically been to the site and driven through the neighborhood surrounding it and said, “Yeah, OK, we could buy this.” And you’ve reviewed the financials. So I say contact us when you’ve got the signed purchase and sale agreement. Pull the trigger and get us going as soon as you’ve done those three things because those are the three things that are most likely to kill the deal. Most other things that you might find during your inspection of the property and things like that or maybe your lease audits are going to be things that you can use to negotiate the price but not necessarily going to kill the deal.

So that it’s always a balance between getting us going and waiting too long. But waiting too long to start raising the money will kill your deal because your investors will feel rushed. I’ve recently known of people who have not been able to close on deals because they weren’t able to raise the money within the necessary time frame. 

Taylor:

Wow. 

Kim:

Yeah. And then the other big mistake is not taking time to get to know investors and to develop those relationships. You really have to do that. You’ve got to do the legwork. There are no shortcuts. The only shortcut is maybe bringing in some rock star that’s got experience raising money onto your team and delegating the duties amongst your management team. So some of the people are doing due diligence, some people are finding deals, some people are talking to investors. That might work to try to accelerate your money-raising process but there’s no substitute for developing healthy face-to-face investor relationships.

So I always say find investors locally but find your properties where they make sense. And it may not be in your local market. If you live in Southern California or New York City you may not be able to find a deal that’s going to make sense right now, but you got to just figure out where you can meet investors locally and start showing up at those places again and again, taking the time to have some conversations. Have that difficult suitability conversation early on and just tell people, “I’ve got to ask these questions before I can invite you into my deals.”

Taylor:

Nice. At least in those markets — Southern California, New York City, some of the higher-end markets — you should definitely be able to forge those relationships over time that you can get the money piece and then in other areas you should be looking for the properties. I don’t know how people are doing it in investing in those areas. It seems like it’s probably not super-profitable. 

Kim:

Well, you’ve got a lot of foreign money that comes in and they don’t care so much about the return; they want the investment, maybe to get a green card or get their kid a green card or they just want to get it out of their country.

Taylor:

Yeah, and we can get a much better return in other markets. So it absolutely makes sense.

Now, you’ve been practicing syndication law throughout this current market cycle that we’ve had, and things have changed over the last few years. I’m curious how things have changed from your perspective, not necessarily based on the SEC putting out opinions but at least from observing your clients in the changes that they’ve had to make to raise money at least in an execution sense. What are your thoughts there?

Kim:

I think there’s absolutely been some changes in the market. The people who jumped in and bought right after the last market correction have done really, really well. Some of our clients have doubled and tripled their money on certain properties. They’ve done extremely well. They bought when the prices took the downturn when they lost value. And so what happened during that time is that Fannie Mae and Freddie Mac never stopped lending money on multifamily. And so there might have been some other asset classes that slowed down a little bit more than the multifamily, but the multifamily kept going. And as long as people were able to get loans they were getting lower loan-to-value loans, so they were maybe getting 65%, 70% loans for a little while and then it started to creep up again to the 75% and 80% loans that you’re seeing again today.

But now there is starting to be a tightening up of the market again. So it’s harder right now for people to find good deals. I see more deals falling out and I see less deals happening than were happening in 2009, 2010, 2011. But as far as for our business, it was good because we had people who kept buying deals, people kept raising money. 

Taylor:

Interesting. OK, here’s another topic I wanted to touch on with you because I feel like this isn’t brought up too often and I’m not sure people really understand it: Conditioning the market for syndicators and what that really means for people who are out there generating content or kind of putting the word out there. There is, it seems to me, a pretty … I don’t want to say fine line, but there’s some spectrum in there between talking about your business in a compliance sense and then blowing your exemption by conditioning the market. So can you define that for us? And then help me understand that a little bit better.

Kim:  

I like to speak from more the practical terms. And so I think you do have to do some conditioning of your market to explain to people what kind of a market we’re in right now.

One of the ways that you can meet people for 506(b) offerings and get to know them well enough that you can invite them into your future deals is by holding generic educational events. I think it would be completely appropriate to hold a generic educational event that talks about how preferred returns have changed over time, where maybe a few years ago people were offering 9% to 10% preferred returns on certain deals and now it’s contracting a little bit. I’m seeing some people who are doing 5% or 6% in the early years and going up to 7% or 8% in later years of a deal.

So I think it is important to train your investors that the markets change. There were times when people were projecting overall annual returns in the 20% range and they were getting them on certain properties. Now we’re not in that market. We’re in the mid-teens but if you compare and contrast that to what you might earn on stock market investment, it’s still a good investment. So you just have to tell people those days aren’t here anymore although they may come back, but if you still want to do deals and you still want to get a good return it’s still a good time to invest. We just have to wait for the really great deals to come back again. They’re not out there right now. Not in the multifamily space. There are some other spaces I think are maybe performing a little bit better. And they’re maybe under-marketed. Maybe “under-saturated” is the right word to say.

In the multifamily space right now I think that there’s a lot of saturation in the market. There’s a lot of trainers teaching people how to buy multifamily and they’re flooding the market. And in some ways maybe just by having that many people out there looking, they’re driving the prices up in addition to the fact that prices are just generally going up because that’s the part of the market cycle we’re in right now. If there’s a correction, those who poise themselves now and do a few deals now and get some experience so that when there is a correction that they can hit the ground running will be well poised to take advantage of any corrections in the near future. 

Taylor:

Yeah, it’s hard to say. I mean, how much is our current state of the market due to kind of a … I don’t want to say irrational exuberance because I’m still an investor myself … but an exuberance about where the economy is versus just the fact that the economy as we talk right now is pretty good —  though it might change by the time this is published. People are still working, things are still headed up and the Fed is again, as we talk, they’ve recently cut rates a little bit. So there could be signs of some negative things on the horizon, but it doesn’t look like we’re at the door of the next 2008-style Great Recession. 

Kim:

Well, and I think a lot of that hinges on what happens in the next presidential election. And that one way or another it will change things. So I think everybody has to be prepared because we don’t know and we can’t predict.

Taylor:

Yeah, that’s definitely true. I don’t want to touch that with a 10-foot pole but…

Kim:

I know ,and I don’t want to get into philosophical discussion about that, either. But it’s just a reality of the world we’re in right now that it will have an impact one way or another.

Taylor:

Yeah, yeah. Absolutely. Are there any other important lessons that we should get to before we move on to the second part of the show? I mean it’s hard to get time with well-qualified attorneys. We’ve got you right now and I definitely want to just ask you, what’s on your mind? And what do you want to get out there for Volume Two of “How to Legally Raise Private Money”? 

Kim:

Yeah, Volume Two is how to develop relationships with investors. That is the least understood skill of all of the syndicators that I’ve met. I think that the trainers that are out there are doing a really great job of teaching people the mechanics of finding deals and doing and analyzing deals and getting them to the closing table, but the elusive part is how do I get those ambassadors so they’re ready when I need them? And the only way you do that is to dedicate yourself to meeting as many people as you can and developing relationships with those people. And if you’re not the kind of person that wants to do that, then you have to team with somebody who is. So creating a team of people that have the right skill sets and realizing that this is a bifurcated business.

One part of the business is finding and getting the deals and overseeing the deals. The other part of the business is finding and developing relationships and dealing with your investors. And once you master that and create the marketing systems that are necessary to sustain those relationships, those are the people that that really do well for the long term. But those that don’t take the time or create the databases and figure out a way to keep in contact with people through newsletters and drip systems and all of that stuff, those people are left behind because they get to a point where they don’t have enough investors. And then they start making kind of dumb decisions.

Some of the decisions that I hear a lot of people talking about, “Oh, well, I’ll just bring in these capital raisers.” But when you start bringing in people whose job is to raise money for you, then you start treading in some very dangerous waters from a security perspective. Because it’s illegal to pay finders who are outside of your company to raise money for you unless they have a securities license. And it endangers not just them because they’re technically acting as an unlicensed broker, but it also endangers the syndicator who pays them because they’re in danger of losing their exemption for paying unlicensed brokers. And in both cases the penalties can be dire. There can be huge fines, there can be litigation, there can be investor lawsuits, there can be forced rescission where you’re forced to give everybody’s money back, you could be banned from ever raising money again. So then whatever job you had before, you’ll have to dust it off and go back into it whether you like it or not because you still got to make a living and you can’t do this anymore.

So it’s not worth taking a chance; read the book. We actually created a spin-off division from our law firm that called InvestorMarketingMaterials.com that creates investor marketing materials so that these syndicators and people who are wanting to get in this business or people who’ve been in the business and just need to step up their game have professionally edited and designed marketing materials to hand to their investors when they meet them face-to-face so that they can compete with some of the bigger private equity funds and hedge funds and the other people who are out there with big marketing budgets. 

Taylor:

So have you seen or is there anything on the horizon with regard to the SEC taking action on this? I mean one example right now in my market of Richmond, Virginia, is a gentleman being taken to court by the SEC for allegedly committing fraud, which is very different from an unregistered broker-dealer type of situation. But the point of that statement is that the SEC is out there taking action and acting on investor complaints. I know you don’t have a crystal ball, but are they looking at this right now? What do you see? 

Kim:

Well, it’s interesting because it seems like every year the SEC determines kind of toward the beginning of the year what’s going to be their focus for the year. A few years ago it was insider trading, and so they pick what’s going to be their passion for the year and then they start to really dig into it. And I haven’t seen them pick this as their target yet. I don’t know that they will in the near future, but it’s always a possibility. But it’s not just the SEC that you have to worry about. The SEC usually goes after the big fish, the people that really steal a lot of money. Just watch “American Greed,” right? It seems like they only get to go after people that raise or that steal $50 million or more or some crazy number.

But who goes after the little guys are the state securities regulators. Every single state has its own securities agency, and they will go after people for small stuff. I’ve seen them send letters to people like, “Hey, you borrowed money from two people in our state; tell us what exemption you used to do that and show us all paperwork that shows you have the right to do that. We don’t have any record of you filing in our state.” So along with having the right securities offering documents you also have to do filing. So be careful if there’s any do-it-yourselfers out there or people who think, “I’ll just grab somebody else’s documents and change them for my deal.” That’s a minefield.

There are securities notice filings. They have very strict deadlines. You have to file notices with the SEC and then also in the states where your investors claim residency and you have 15 days from when their funds become irrevocably committed to do that. And if you don’t, then they can say, “Hey, well, you didn’t follow our rules which required you to file this notice with us within 15 days so therefore you don’t get the exemption in our state and now we’re going to do an enforcement action.”

Taylor:

Wow. What is considered to be funds being irrevocably committed? Is that closing on the property? 

Kim:

Well, it depends on what is said in the offering documents. This is from the SEC; they said it. If the offering documents are silent on the issue, then the SEC is going to take the most conservative approach and they’re going to say it is when you receive the funds. But not if it’s written in your documents that the funds aren’t considered irrevocably committed until you close on the property. Because up until that point if somebody said, “We need our money back; something’s happened,” then you’d give it back and you’d find another investor. And as long as that’s the case, those funds are not irrevocably committed until you close on the deal. But certainly the point at which you’ve used them and if somebody came to you and said, “I really need to get out. Can you help me?” And you had to say, “I’m sorry, the money’s invested in the deal,” it certainly has happened at that point. 

Taylor:

Wow. So that’s definitely good to know. Obviously it makes sense about when people would say, “Oh, I need to get my money back.” When you could say in the documentation your funds are committed the day we get them or the date a property is closed or something else like that. It makes sense obviously, if somebody says “I need my money back” then you have that on the paper and can say, “Sorry, no, this is what you agreed to; we can’t do it.” I didn’t know that on the securities regulation. And so that’s definitely good to know. This is why we hire securities attorneys. Actually, we don’t need to know all those things. 

Kim:

But we’re not sitting next to you in your office. So we don’t often know what happens. So we’re trying to beat it out of people to have them send us their list of investors after closing and saying “Look, we’ve got to get these things filed or you’re going to lose the exemption and all the money you paid us and all the things that you’ve done to comply with the laws is going to be for naught. And the Rule 506 exemption is considered a safe harbor; you don’t necessarily have to file the notice with the SEC to be able to claim the exemption but it just becomes a bigger burden because it’s like well, you didn’t do this; what else did you do?”

So now you’ve got an uphill battle. Whereas if you did it in the first place and you complied with the law, then you’d have an easier time convincing them that you complied as well as you could in all respects. And again, here’s what the states want: They want the notice but they also have fees associated with their filings. They want the fees. So their rules say, “Hey, we’ll allow the Rule 506 exemption in our state as long as you comply with all rules of the 506 exemption and you file a notice in our state whenever you sell securities to investors in our state and you do it within our timeframe.” And they’ve made it fairly easy to do it. Some states still require paper filings and the check be sent, but a few most of them have gone to an electronic system where it’s all in one place.

We just go and we check the box of what the states are and they tell us what the fees are and then we are able to just file the notices. But the other thing is realizing that you can’t raise money forever. Your offering usually has some stop deadlines, right? It’s usually going to be written in, and the SEC is going to require that if you’re going to keep raising money for more than one year that you have to do an amended filing and let them know, and it has to be filed before the anniversary of your offering. And that anniversary is going to start … usually it’s going to be the date on the front cover of your private placement memorandum. 

Taylor:

Just taking a note on that. That’s definitely good to know for some specific reasons that are in my head. So great. Alright, so I’ve got three questions we ask every guest on the show. Are you ready? 

Kim:

Yes. 

Taylor:

All right. First one, what is the best investment you ever made? 

Kim:

Certainly I think the RE Mentor training that I got paved the way for me to come into this area of the law. So I would say that that was a really good investment for me.

Taylor:

On the other side of that what is the worst investment you ever made? 

Kim:

I bought a rental house in Cleveland with the idea that my stepdaughter was going to manage it as a vacation rental. 

Taylor:

Do you still have it? Did that not pan out? 

Kim:

It’s actually in escrow right now and it’s supposed to close in December. The reason that we actually even bought the house was because we had a property in Ohio that we needed to refinance and no lenders would talk to us. It was in Columbus. And so we bought this property just kind of as a fluke. And then all of a sudden all these lenders are like, “Oh, you have a property in Ohio. Well, we’ll give you a loan.” So we were able to get our other property refinanced because we owned a different house. We had to buy a house to get our property refinanced. That’s the true story. 

Taylor:

Sometimes the hoops you have to jump through can be onerous or silly. 

Kim:

Who knew? Yeah, but it did cost me dearly over the years. I’ve shed blood, sweat and tears trust me. 

Taylor:

Well by the time this goes live you will have sold that property. So if you come back and listen to this congratulations you’re out of it. 

Kim:

We also sold the other property in Ohio too and that was pretty good to get rid of so yeah, that was an interesting lesson. We learned a lot of lessons about investing in Ohio but we happened to buy that property in 2008 so the timing was really bad. And we kept it for years and years and it did OK. At times it required some funds from us that we were always like, “Oh, I don’t want to do that again.” But we did and eventually we sold it and we made some money and we paid off our investors and they made some money. So everybody was happy. But yeah, my husband was the one who managed that for nine years and it was an ordeal. 

Taylor:

Wow. And you had investors in the deal too, so that makes the ride even rougher because if you’re having a hard time — I hate to put it this way but — if you’re losing your own money it’s one thing. If you’re losing somebody else’s money it’s way worse. 

Kim:

Yeah, well and these were really great friends. And they were wonderful and patient. So it all worked out and we learned some important lessons about that property as well. 

Taylor:

Well, that’s good. That leads to my favorite question, the last one: What is the most important lesson that you’ve learned in business and investing? 

Kim:

Perseverance. You really need to spend a lot of time learning and continuing to get out there to meet as many people as you can. Every time I meet somebody new I learn something new from them. Every time I read a new book I learn something new. And all of these things help just invigorate you, keep you interested and keep you moving forward and I think all of that’s very important. But I would say also having a coach. Having a coach in different aspects of your life. I have a law firm coach. It’s been very important.

Taylor:

Nice. I found that with the most successful people I know. One, they read a lot and two, they tend to have a lot of coaches. Not all of them, but most of them have a few coaches.

Well, thank you for joining us today and all the lessons. Where can people get in touch with you, learn more, pick up a copy of the book all that stuff? 

Kim:

Oh, gosh. Our website at SyndicationAttorneys.com has a library that is chock full of all kinds of articles, frequently asked questions, recorded teleseminars. We do a free monthly teleseminar. There’s a lot of information there. There’s also a way to get a free copy of the book. If you want a free digital copy of the book you can get that at SyndicationAttorneys.com. Click on the link for the online store and that’s going to take you to InvestorMarketingMaterials.com.

If you don’t have a deal right now this is when you should start working on your investor marketing materials and developing your investor relationships. And we even have a very low-cost program where you can become a client and we can start coaching you on developing those investor relationships through our Facebook Live group. So we’ve got a lot of opportunities. Most of it you can find through our website, SyndicationAttorneys.com, and you can make an appointment with us there, too. 

Taylor:

Cool, that’s a lot. There’s going to be a lot of links in the show notes. So a lot of great options there. Thanks again for all the lessons today and taking some time with us. It’s evening time that we’re recording this. So thanks for burning the midnight oil with me. 

Kim:

All right. Thank you Taylor. It was my pleasure. 

Taylor:

Happy to talk with you again. To everybody out there, thank you for tuning in. If you’re enjoying the show please leave us a rating and review on iTunes; it’s a very big help. If you know anyone that could use a little bit more passive wealth in their lives if they want to learn more about real estate syndication, please share the show with them and then bring them into the fold. Once again, thank you for tuning in. I hope you have a great rest of your day and a great week and we will talk to you on the next episode. Bye bye. 

Kim:

Bye.

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