FAQ 1:Can I stay Anonymous When Raising Capital from Investors?
No, you can’t. If you are raising capital from private investors, you must be completely transparent. In fact, if you are doing a Federal offering under The Securities Act of 1933, Regulation D (Rules 504, 505, or 506), the SEC is going to require that the “related persons” who are responsible for your securities offering get published on their EDGAR database, which is searchable by the public. Who has to be named as a related person?
If the Issuer is a Manager-Managed LLC and the Manager is an LLC, you must look through the Manager LLC and name the individuals who function as managers or managing members of the issuer (your investment entity), as follows:
• If the Manager LLC is Member-Managed, list each individual member of the Manager LLC
• If the Manager LLC is Manager-Managed, list each individual manager of the Manager LLC
These individuals are deemed to be functionally managing the issuer, and thus must be disclosed as related persons under Item 3 of the SEC’s Form D.
Bottom Line: If your goal is to be anonymous, you can’t be in the management of a Syndicate, despite the advice of your Asset Protection advisors. See the related FAQ, “Who Shouldn’t Be in Management of a Syndicate?”
FAQ 2: Who shouldn’t be in management of a Syndicate?
1. Don’t allow Bad Actors – the asset management team has an obligation to make an inquiry as to the background of every member of the management team. People who have been in trouble with regulators for fraud or issues related to violation of securities laws or certain other financial regulations could be deemed Bad Actors and may be prohibited from participating in management of a private securities offering, or if it occurred long enough ago, you still may have to disclose the violation to all of your prospective investors. Raising capital is tough enough without adding Bad Actors to the mix. We require all of the members of your management team to undergo Bad Actor/Background checks. This keeps you from having to ask your other team members hard questions about their backgrounds, and we find that they actually rule themselves out once the learn that the Bad Actor/Background check is required. This protects you and the other members of your management team. If your attorney isn’t doing this, then you need to have those hard conversations as it’s your responsibility to inquire.
2. Don’t use your Asset Protection entity (the one where you want to build wealth), or a family trust, or any entity owned by your Asset Protection entity or family trust, to represent you in the management of a Syndicate. Those entities can be used (and should) to represent your ownership in the class where you will earn profits. If you use any of these entities to represent you in management of a Syndicate, you can kiss your assets good-bye if anyone on your management team is found to have violated the law. Even an inadvertent violation of securities laws by another member of your management team, or someone in management who misappropriates funds, etc. could trigger liability for all members of the management team – and if your trust or asset protection entity is inside that entity – all of the assets you own in those entities could become subject to attachment to pay fines, penalties, or damages to investors. This is one of several reasons we recommend that every Syndicate uses a structure that allows you to separate your ownership of your management interests from ownership of your profit share interests.
3. Don’t allow people with bad credit – Depending on how your management team is structured, every member may have to be underwritten on a loan. If certain members can’t because they have bad credit, you need to understand why, and you need to decide whether you want that type of liability associated with you and your syndication. If someone can’t manage their own money, are you sure you want them to be involved in a raise where millions of dollars of investor funds are at stake. You have a fiduciary obligation to your investors to put their interests above your own. Is it in their best interests to have someone with bad credit handling assets worth millions of dollars on their behalf? A judge or jury might not think that was a reasonable business decision if losses or damages occur as a result, so think hard about letting someone with bad credit on your asset management team for a syndicate. How would you know? You have to ask – it’s your responsbility to know.
4. Don’t admit people you don’t like or trust. This seems obvious, but in your hunger for a deal, you may overlook the fact that there is someone on the team that you don’t like or trust. If you close on the deal, you will be letting them into your life for the next 5-7 years or longer. If your gut instinct is telling you to shy away, make sure you listen to it. You will need to have regular business meetings (weekly or monthly) as long as the Syndicate is in operation. If you don’t like or trust someone on the management team, you’ll dread those meetings (like the job you just left because you hated your co-workers or boss). It’s best to bow out and find some other people to team with whom you actually enjoy and want to hang out with. It’s far better to do business with friends than people you don’t like. It’s estimated that 50-70% of partnerships fail – don’t become part of that statistic.
