Transcript: ‘Capital Raisers & Finders Fees’

Edited transcript from the podcast episode: ‘Capital Raisers & Finders Fees’ 

Featuring special guest Securities Attorney Michael Fugler

Originally broadcast on Nov. 4, 2021

Kim Lisa Taylor:

Good morning, everyone. Welcome to Syndication Attorneys’ free monthly podcast. We talk here about topics of interest to real estate syndicators and other people who are raising money for small business, and we do have the opportunity for live questions and answers at the end of the call. I’m Attorney Kim Lisa Taylor. 

Before we get started, please note that all of our podcasts will be recorded and may be used for future promotion, posted on our website, or broadcast in a podcast available to the public. If you don’t wish to have your voice recorded, please schedule a one-on-one consultation instead of asking questions during the live call. Information discussed during this web podcast is of general educational nature and should not be construed as legal advice. 

Today our topic is capital raising and finder’s fees, what’s legal, what’s not. And I have invited someone who’s become a close friend and a colleague, Michael Fugler, who is a very esteemed attorney. He’s represented some very high-profile cases. He’s been practicing securities law for, by my estimation, about 35 years, right, Michael?

Michael Fugler:

Well, let’s see, maybe about 25 or so.

Kim Lisa Taylor:

He’s been doing this for a long time. I constantly find myself answering questions about what’s legal about capital raising. I get people that come to me that say, “I am a capital raiser.” I get other people that come to me and say, “I want to hire a capital raiser,” and we always have this discussion about what’s legal and what’s not. Let’s get a second opinion, so you guys actually know what can happen if you don’t do it right and what’s okay, what’s not. 

Michael, tell us a little bit about you and your background.

Michael Fugler:

Before I do that, I know that you read a disclaimer and I know that you said that we’re not the audience’s attorneys and we’re just doing this for the educational benefit. But I want to bring to the attention of anyone that’s listening now and anyone that’s going to listen from an archive position that when we give out information, it’s supposed to be educational in nature. And we might use some examples, and then we might give an answer to the example.

Be very careful that you don’t try to analogize and slip yourself into one of those examples and think that it’s okay. Because as we get into this topic, you’re going to find that the regulatory people, although they may issue what’s called a “no-action letter,” that no-action letter or that opinion is based on a specific set of facts to specific people and a specific instance.

If you get a copy of the no-action letter and then you read it and assume, “Well, that’s about what I’m doing, so I should be able to do that,” you will find if you look at a history of regulatory enforcement that they don’t always have that opinion and they don’t always agree with you. So unless you have your own individual opinion, you really have to be cautious. That is my additional information on the disclaimer.

With regards to telling you a little bit about myself, I think that the best way to describe me from a historical perspective is I’ve been very lucky and very fortunate in my career because I have actually had several careers along the way, and I’ve enjoyed each one of them. During those positions of being in those individual career phases, I was also fortunate to be in the right place at the right time and have the people that I was involved with help me rise to the top of what we were doing at the time.

I’ve had a really broad cross-section of experience, which has served me extremely well. Because while it’s great to be an expert after all these years of securities, I had the benefit of … I started out as a prosecutor. We were trying cases and trying to bring people to justice on the prosecutorial side. And like happens in America, when the people you work for lose the election and someone new is coming in or they retire, the new people coming in move everyone out.

And then those people that are prosecutors typically flip over and immediately become criminal defense lawyers. I had the ability or the opportunity to be a prosecutor and then a criminal defense lawyer. Along the way, I got involved in civil litigation, personal injury, the type of things that you see and hear about on TV all the time today, business litigation. Back then people didn’t specialize and you were a generalist, because there just wasn’t any such thing as people being narrowed in the departments of their field.

People weren’t called experts. As I got into litigation, I began to draw a lot of corporations, a lot of partnerships, and then we ended up going to court on those contracts. And I was able to test how we were drafting these things and seeing what happens when you get in front of a judge or a jury with the words that you created in your own mind and put to paper and then later were tested.

And that was a really strong experience for me … I know a lot of the people listening today are in the real estate world. And all too often, people just cut and paste, copied, cookie cutter. It’s very dangerous. I can tell you that people in my industry are guilty of it as well: cut, paste, and cookie cutter. But every situation could have specific nuances. You don’t really find out and you don’t really think about it as much as you should until you get into a courtroom and you have to defend what you wrote.

And then moving forward from that, one of the cases that I got into was securities, and that was quite a long time ago in the early ’90s. And I realized I knew nothing about securities. I was more into the litigation side of the world and this was turning into a litigation case. Well, I hired a law firm in New York and a law firm in Washington, D.C. I got another case that was similar in the securities. I got advice from one about one case and another from another case, and through learning through them began to get a feel and a flavor for what securities was all about.

I had a golden opportunity and seized it. One of the cases that I had involved the raising of capital that involved both real estate and oil and gas, and the capital had come from two foreign countries. Well, I did have an expertise in international law and finance, but I was always curious. And after I got involved with the securities lawyers, I thought, well, I need to find out how this all started and how people … you always hear about all this money from Switzerland.

Coincidentally, some of the money came from Switzerland, some came from Canada. I told them that I needed to go and do the due diligence on the case. So I flew to Switzerland and I told the people there at the investment bank that had put this all together, “I need you to give me the files and explain to me … Put me in a room and explain to me the very first piece of paper that was involved in this case and let me bring it forward so I can look at all the documentation.”

The very first document that I opened up was the names and details of 19 private Swiss banks, who they were, who the contact person was, and how much they invested. And I’m like, “Wow.” And then, I started reading it like a novel, where you get all caught up in what’s going on. And that was the beginning of what got me intrigued with securities. I ended up settling both of those cases, and eventually the law firm in New York I worked with invited me.

They said they were expanding their firm. I’d taken a real interest in it, and they thought that I had learned fast. During the year that we settled the case and I was no longer going to New York every week working on that, I stayed in touch and I began to write articles and do things. I think it gave me an opportunity to make a switch that oftentimes lawyers don’t get to do. They offered for me to become the securities attorney, be a partner in the New York law firm.

And when I went up there, they gave me a desk, a computer, and I sat next to the senior partner. He was a semi-adjunct professor who was off for a year from teaching. I became a student. Every day, seven days a week, I’m sitting at his right-hand side and just doing document after document after document. That’s how I learned the securities world. And then from that, one of the clients I represented was an investment bank in Europe.

They decided to open an office up in New York. They offered for me to open it up. I opened it up. And then for 10 years, I traveled around Europe, raising money for a lot of clients and companies that you might know, companies that are on the New York Stock Exchange. I got a real healthy jump in the swimming pool of education completely as to not only how the securities documents were drafted, which I learned in New York at the firm, but once you get the documentation, how you take it around in Europe and raise capital. And then subsequently thereafter, we began doing some capital raises in the U.S.

Kim Lisa Taylor:

Let’s move on to some of the questions, because I think everybody’s really interested in the questions that we have today. We only have a limited amount of time. Today’s topic is “Capital raisers and Finder’s Fees.” Let’s just briefly start with how people raise capital.

Michael Fugler:

Sure. You can fund it yourself. You can take out a business loan. You can borrow money from friends and family. You can do crowdfunding. You can do an angel investment. Your personal contacts, pull your organizer or your address book out. A lot of people think that venture capital is the way to go. They see all these articles in The Wall Street Journal and other news organizations of this large amount of money venture capitalists are investing. But let me tell you, only 0.05% of small businesses ever raised venture money.

Kim Lisa Taylor:

Wow!

Michael Fugler:

And even when you do, the terms and conditions are basically they want to get a bigger interest in your company than you do and they want control mechanisms. You almost become working for them in many instances. It’s not as glorified as you might think. 

There’s generally equity financing, debt financing. On the debt financing, let’s touch on it. Things like term loans, lines of credit, merchant cash advances, personal loans. We touched on family and friends. We touched on invoice financing, otherwise known as “like factoring,” equipment financing, bonds, where you’re issuing your own bond from a company or your project and trying to raise money.

One of the things I’ll say about debt, you end up having to put the company’s assets and receivables up. I mean, while it is non-dilutive, the factor is that it’s risk capital and it’s less costly than equity because you’re not giving up an ownership interest in your company. Let’s say you’ve decided you wanted to explore debt financing. What are some things you should consider?

Kim Lisa Taylor:

Let’s kind of move away from that topic because I think what everybody’s interested in here is the … You mentioned the way that people raise capital, and I think the number five that you mentioned was personal contacts. That is really what 90% of our clients are doing is personal contacts. And then we have another 10% that are maybe considering crowdfunding.

All of them, because all of our current clients are doing real estate ventures, they’re all typically getting debt in some form or another, unless they’re actually doing single-family stuff where they’re buying for cash and flipping. I think they kind of have the debt portion down and I don’t want to get off track with that. If we could focus on like how people can capital raise with their personal contacts and crowdfunding, I think that’s going to be more relevant to our audience.

Let’s talk about the overall topic of finder’s fees and finders. Can you define what that is? What’s a finder and what are we talking about when we mention the words “finder’s fees”?

Michael Fugler:

Sure. Let me just say this before I get to the answer to that question. Overall, when I’m discussing on this podcast, I know many of the people that follow you are into real estate, but I also know that people have received your information because I’ll talked to a couple of them that are not in real estate. I am talking to the whole audience. I’m not just addressing answers and questions real estate only.

I’m talking to all entrepreneurs that are interested in raising capital. No matter what kind of venture, whether it’s the type of thing you want to build cars, you want to be in the pharmaceutical industry, you want to be in the manufacturing industry, whatever. My answers are not specific to real estate, unless the question is specific to real estate.

Kim Lisa Taylor:

Sure.

Michael Fugler:

You’re going to be looking mainly at Regulation D — Securities and Exchange Commission Regulation D — 506(b), 506(c), 504, Regulation A, and Regulation CF. Regulation CF is the one that Kim just mentioned, which is crowdfunding. All of these are emanated from the JOBS Act and all of them in the last several years have relatively new nuances in their application.

We want to talk about finders and finder’s fees. First, let me throw this in thought before we get started. If someone comes to you and they say, “Hey, I’m a capital raiser,” and they’re not licensed, look out. My advice would be if somebody’s saying, “I’m a professional capital raiser,” and you ask them, “Are you licensed,” and they say no, my suggestion is don’t do it.

Next, we’ll say finders. Finder is a little different maybe because a finder is an individual or company or service that receives compensation in connection with solicitation of potential investors. The most common examples of legal finders are broker-dealers or investment bankers working for broker-dealers. Now, on a fairly regular basis, entrepreneur clients, investor clients ask me if they can pay their employees, or can they pay a finder or consultant a piece of the deal if they help the company raise investment dollars.

In almost every case, the answer is no. The payment of a finder’s fee or commission in connection with the sale of securities to a person who is not a broker registered with FINRA, which is the Financial Regulatory Authority, is generally illegal. Another common misconception among entrepreneurs is that the payment of finder’s fees is within what they call a gray area. That’s just not right. It’s a myth that seems to be perpetuated by entrepreneurs and finders who have engaged in this activity and not been caught.

Let me get you an example. A couple of days ago on television, there was an automobile accident with an athlete traveling 156 miles an hour and he had a crash. Apparently he was under the influence. Let’s assume that he would have been lucky and he wouldn’t have crashed. He wouldn’t have gotten caught. Was he violating the law? Yeah. The speed limit I think around that area is 40 miles an hour.

Have you ever been on the interstate and had people pass you going 80, 90, 100? Maybe the speed limit was 70. You were going 75, 78, trying to stay in that little zone. It’s still violative of the law. It just means you never got caught. And the same thing happens for finders. Plenty of people will say to me, “It happened to me twice this week already.” And by the way, this is a hot topic. I’ve already had four people this week that have inquired with me about finders and finder’s fees and payment of compensation.

It’s something that happens every day. It’s something that is ingrained in the whole capital process. So be mindful. The business of getting paid commissions for introducing investors to companies is something that our government and the regulators have taken a real keen interest in.

Let’s talk about a broker. A broker is defined under the securities laws as a person engaged in the business of affecting transactions and securities for the account of others, helping a company sell shares to raise capital, engaging in other activities like participating in presentations, negotiations, making recommendations to investors concerning securities, receiving transaction-based compensation, which is like commissions or finder’s fees, and continuing on a regular involvement in the sale of securities.

Those are evidence of activities of a person that is a broker and should be registered. If your employees or finder consultants perform these tasks, typically the person is obligated to be registered as a broker. But the question is, can an employee help a company raise capital lawfully? And the answer to that is, under certain circumstances, yes. But here’s why you have to be careful.

A company can permit its employees to help raise investment capital without triggering the registration process to be a broker. But what they’re going to be looking at if you’re an employee, an officer, or director of a company to participate as a finder in the private offering, you’re not considered by the SEC to be a securities industry “bad boy.” There’s a long list of definitions that accompany that.

But basically that means that you’ve been in trouble before and you’ve been caught and you have been fined, jailed, or otherwise censored, or your risks have been slapped even though lightly. There’s a clear definition. You can Google “Securities and Exchange Commission bad boy” and make sure that the people you’re working with don’t fall into that, because that’s really bad and that’s who they’re really looking for. You can’t get paid commissions in connection with the offer.

Kim Lisa Taylor:

I’m sorry to interrupt, but there’s a term you mentioned and I want everybody to really understand this term, and it’s called transaction-based compensation. Could you elaborate on what that is exactly?

Michael Fugler:

Transaction-based compensation is simply the payment of fees based on the success of the transaction ending up where you want it to be. In most instances, it’s the capital that’s successfully raised. You’re going out and you’re looking to raise capital and your transaction is totally dependent upon the raising of capital. And your fee is completely tied to the success of that capital coming in. And that’s a transaction-based compensation.

Kim Lisa Taylor:

Is it correct to say, and maybe I’ll interpret it too narrowly, but I’ve always said that transaction-based funding is anything that’s related to the amount of money that’s raised.

Michael Fugler:

It’s a fair statement.

Kim Lisa Taylor:

Okay.

Michael Fugler:

Often the fee is a percentage of the amount of securities sold. Unregistered persons are not permitted to receive this type of fee from a company.

Kim Lisa Taylor:

It doesn’t matter if they’re a manager, managing member, officer, director, employee, anybody that’s within the company, correct?

Michael Fugler:

I had a client that was in the oil and gas business and he had people that had been, let’s just call it “hanging around him.” The Securities of Exchange Commission came in, investigated it, and they really came down very, very hard on him. In an effort to continue raising capital and change it, he made them all employees. He paid them a weekly salary. They became W-2. They took out the typical taxes and everything that they had.

They had a bonus pool … As they were successful as a group, they would give them a motorcycle. They would give them a car for achieving a milestone. Even then when the regulators came back to see what they were doing, they really zeroed in on whether or not the bonuses and the awards were contingent upon the raising of capital and measured.

Let’s just say you raised $1,000,000 and you’re paying people 3%. You’re looking at $30,000. And then all of a sudden, you happen to get a $30,000 vehicle. This is a pretty good analogy and direct line that says that just happens to be exactly the value of the commission you were paying that we told you that you couldn’t pay. You can’t put sheep’s clothing over a wolf and call it a sheep. You have to be very, very careful. The real question that comes in is, are the people that are doing this activity, is that what they do for a living, or do they do something else for a living and this is just a byproduct of what’s going on in their life?

Do they happen to just be well-connected and have friends that they have a pre-existing relationship with, or maybe past customers that they know have money? Is that the only thing that they do? Let’s say you’re making them an employee. Do they have other duties, or is their only duty capital raising?

When they get on the telephone, are they going to make recommendations? Are they going to inquire about the suitability of the customer, the potential investor, and whether they should be investing and how it might impact their life and their finances? Every act that you do is adding up to address the issue of whether you’ve crossed the line of just being an occasional finder and then finding permissible ways to get compensated there, or if you’ve crossed the line and really and truly you consider yourself to be a professional capital raiser or professional finder and that’s how you make your living.

One of the things that you can do is be involved in the raising of capital where your fees and your compensation are not transaction-based, meaning you get paid $1,000 a week, whether you raise a dime or not. If you get a bonus at the end of a certain period of time because you’ve worked there, whether the money is raised or not, then there are ways that you can structure it that you can be compensated and you can get involved in these activities.

Then you have to go back to the list we talked about. How deeply are you going to be involved? Are you simply educating them on the company and telling them you have an investment page on the website of your company or you’re on a deal platform like DealMaker or SeedInvest or one of the other angel lists where you’re just saying, “Here, go there and you can learn more about it. You can fill out the forms, and you take it from there.”

The person goes and finds the due diligence. Are you also providing the due diligence, giving them the advice? The deeper you go and the more acts you have that look like a duck and you’re quacking, you’re a duck. The more of these duties and responsibilities you take on, the more you look like to the regulators that you are, in fact, a capital raiser and you’re just trying to mask it.

Kim Lisa Taylor:

Let me talk about what I’ve always advised and let’s see if maybe even that needs to be adjusted. I’ve always advised my clients that you have to have a role in management of the company other than raising money, and that’s what you’re getting compensated for. And the amount of compensation that you get cannot be any way tied to the amount of money that you’ve raised. Do you think that’s fair?

Michael Fugler:

I think that’s a fair, safe, conservative approach. Now, for people that don’t mind pushing the window or pushing the envelope, some people don’t mind sitting on the fence. The problem with sitting on the fence is things happen and you can fall off. And if you fall on the wrong side, you’ve got a problem. What I mean by that is I think it’s possible that you can hire people to come and assist in the capital raising process and not make them an officer, not make them a manager or a person of some sort of seniority.

You’re bringing them onboard for the simple purpose of working on a project, and that project is you’re trying to close on an offering. And in the closing of that offering, these people are coming onboard and you’re giving them a weekly salary. Maybe you have a lead generation. Maybe you’re paying for a list. As long as the way you got them is legal, like general solicitation, you have to be doing the right kind of offering like Regulation D 506(c) that allows general solicitation.

But I think that if you’re limiting their activities and they’re not giving advice on the investment, they’re educating on the company and then they’re directing people because they say, “Yeah, I like that company and I understand you all have an offering. I like to know more,” so then they direct them. “Look, here’s a URL and go to dealmaker.com or go to seedinvest.com. We’re listed there. You’ll go into a deal room and everything you need, the due diligence and the subscription agreement, the private placement, it’s all right there.”

All this person is doing is facilitating the lead generation process to direct the people where they go to get more information and they’re not acting as an advisor. They’re only getting compensated to do a task or a job, and they’re not going down that whole list we went through earlier and doing all those things that if you add them all up, the regulators will say, “Oh no, you’ve gone too far.”

There is an area in which you can push it. Your description is the conservative, safe harbor approach. If you want to push it to kind of the description that I gave you, I think that you can do it and stay legal as long as you don’t go too deep into the duties and responsibilities that you have.

Kim Lisa Taylor:

From my understanding, that’s really kind of the distinction between acting as an unlicensed broker-dealer, where you’re actually going out and you’re engaging with the clients, you’re trying to make a sale to these investors, you’re trying to make a sale, you’re sending off the offering documents, all of that versus somebody who’s just making an introduction, right? Is that kind of what you were talking about?

Michael Fugler:

One year ago approximately, the SEC came up with a proposal.

Kim Lisa Taylor:

Yes.

Michael Fugler:

And in that proposal, they came up with two tiers of suggested activities where they differentiated between a person that was a pure introducer. “Hey, here’s the name and number.” They may not even talk to the investor. Which kind of goes for those of you that like the legal world of knowing about cases and no-action letters, a famous one is the Paul Anchor case where the SEC gave a no-action letter to him. But then years later, other people assumed they could do the same thing.

But their situation like I gave in my example earlier was a little bit different. And they came in as like, “Oh no, you’re a little bit different. You didn’t ask us for a no-action letter, and you don’t qualify on the Anchor letter.” They have problems. I think that what needs to happen is you need to go down the conservative approach.

And if you’re going to go down a more liberal approach, for God’s sake, get an attorney that’s going to help you draft with clarity the right words and the right descriptions so that people are limited in their activity and stay within the guidelines that we have. This proposal that the SEC has come out with and the second tier that they had, they had a laundry list of about eight or nine activities that would help you describe what a person could and could not do.

Problem is, it hasn’t been formulated into an official rule and so we’re still into that no-man’s-land of the regulators that just assume no one be a finder if you’re not registered. That’s what they want and that’s what they like. But I think that they recognized because of the changes with the JOBS Act and because of the changes in the thinking of our legislators in Congress, they’re understanding that there’s a cry to help small businesses raise money.

They’re beginning to bend and to try to cooperate and find ways that would allow people to provide the resources and the list of investors and people that could invest, but they just haven’t quite figured out how to define that activity and figure out how to deal with the compensation issue.

Kim Lisa Taylor:

Let’s talk about the status of that proposal. Because as far as I know, it got through the public review and comment period. We actually submitted a comment, but did not get picked up when the new administration came into office. Is that your understanding?

Michael Fugler:

That is my understanding.

Kim Lisa Taylor:

Mm-hmm (affirmative). That’s kind of dead in the water right now. If you want to get it revived, start calling your senators and your congressmen and ask them what happened to that and tell them you want it back and you want it to be reconsidered.

Michael Fugler:

I think it would be very helpful not only to real estate investors and entrepreneurs and developers, but also so for small businesses if the SEC would come up with some guidance and clearly define it. They came up with, I think it’s the Series 79 with FINRA. The Series 7 is a complicated test. It’s hard. A lot of people complain about how complicated is, so they came up with a much simpler test.

And then that test … evolved from a merger and acquisition world where people were doing mergers and acquisitions and they weren’t licensed. They said, “Well, let’s put together something that’s a simpler test and is more in line with people that have a very limited activity.” So that is one thing that you can do that you can maybe more easily get registered that way and fall under that. The other is this, some states have a specific exemption.

Kim Lisa Taylor:

Before we go there, I want to just expand a little bit on the Series 79. The Series 79 gives you the right to register in the business of investment banking. Correct?

Michael Fugler:

Right.

Kim Lisa Taylor:

Do you still have to work underneath a broker-dealer if you get that license?

Michael Fugler:

Yes.

Kim Lisa Taylor:

Okay. Here’s the thing about getting a securities license. It’s kind of like a real estate agent’s license. A real estate agent is not able to work and accept commissions independent of a real estate broker. In the securities world, a securities broker is in the same position as a real estate agent.

They’re not able to operate independently of a securities broker-dealer. Please correct me if there’s any exceptions to that, Michael. You have to actually be employed by a securities broker-dealer before you would be able to use a securities license, your own securities license, to raise securities. The transaction fee would actually go to the broker-dealer and then you’d get your share of that from them.

Michael Fugler:

Correct. They’d limit your activities, but they make the test easier and make getting the license easier, but they still want to know what are you doing. They can monitor your email and monitor your activities under the wing of whoever sponsors you for that license.

Kim Lisa Taylor:

Mm-hmm (affirmative). We get a lot of people that come to us that have securities licenses. And usually what happens is if you have your license with a broker-dealer, they’re going to prohibit you from doing your own independent private offerings. That’s been my understanding. You can be a broker underneath a broker-dealer and you can earn commissions, but you can’t necessarily then participate and originate your own offerings unless that broker-dealer allows it.

Michael Fugler:

Well, yeah. Because I was going to point out, there are exceptions to that concept and that is… I know of too right off the top of my head, because I got involved in representing them on that. The one issue was a person told the broker-dealer that they were just doing a very simple friends-and-family, two or three people coming together, pooling their money to buy a real estate.

I think it was a multifamily property. They said okay. They talked to the compliance department and felt like, well, we don’t need to monitor that or get deeper into it. Well, what they ended up doing was they put together an actual offering document, an offering memorandum, and they went out and raised like $5 million. They expanded on what they represented, because the brokerage firm trusted and believed what they told them.

I don’t think the guy was intentionally being deceptive. Things just worked out and it got bigger. What they put together, they were able to expand. Well, guess what? During an audit, the federal people came in and like, “Well, did you look at the documents of that individual representative that was putting it together?” It’s not just buying an apartment complex. He actually put together a fund and put together a PPM to raise a fund.

“Well, no we didn’t.” I mean, they slapped them. They fined them, penalized them. The idea being licensed under whatever license you have is that that the brokerage firm that owns it is going to have to look at what you’re doing. Every document you have, they need to see it. They need a copy of it in the file, who you’re talking to and how you’re communicating.

You’re going to need to use their email system, so they can archive it and keep it, if the regulators want to know what happened. It’s usually not a problem unless something blows up. It’s kind of like friends-and-family. A lot of people think, “Well, I don’t need to have a document or a formality or anything to raise money from my family.” But if you watch some television and you see some of these shows which are really depicting real life, families blow up and siblings fight and fathers and children and mothers and children fight.

When that happens, then you find out, “Oh my god, even dealing with inner family, we had securities and we had legal obligations for the documentation and we didn’t do all that. We didn’t feel like that was really necessary,” but yes it is. The minute you start raising money and somebody else is giving you their money — friend, family, brother, sister, aunt, uncle, whatever —  it’s a security.

You’re giving a partnership interest, a member in an LLC, whatever it may be, and you need to do it correctly. It’s just like the example of the speeding ticket. If you don’t get caught and it doesn’t blow up and the deal works out, no big deal. If something happens, then it’s kind of like where did they dig up all the dirt on some of the issues that are coming out in the professional sports world? They went in and they started investigating and looked at…

Kim Lisa Taylor:

Let’s not get too far afield here because we’ve got some other really important questions that I want to get to. One is: what can happen if a regulatory agency determines that a finder or consultant or employee is acting as an unregistered broker?

Michael Fugler:

Well, if they raised money and you have an offering, then they would potentially force the offer back to every investor to get their money back.

Kim Lisa Taylor:

A rescission. You’d have to offer rescission.

Michael Fugler:

That’s one issue that could come up. Number two, the person that’s unregistered, fine them. I have a situation last week and I’m working with a person that’s trying to get back into doing what he’s doing, but he was an unregistered person and he raised capital. Got caught. They fined him $1 million.

Kim Lisa Taylor:

Wow!

Michael Fugler:

The fines can get big. The other is they can fine the company.

Kim Lisa Taylor:

Yeah, that’s the other side of that. But before we go away from what happens to the person that’s raising the money, I’ve heard before, and maybe this is a misconception, that the person raising the money could actually be held responsible for all those investors that they refer to that deal for their investment for the life of that investment. Have you ever seen that situation?

Michael Fugler:

Well, I’ve certainly seen people be included in litigation. Problem is, most people that are capital raising probably have not accumulated wealth. The likelihood of their judgment (is) they just lose their assets. But yeah, I think there’s some continuing liability all the way to down until it’s all over.

Kim Lisa Taylor:

Litigation, fines, disgorging any commissions paid, and then that person could also be barred from ever participating again in a Rule 506 offering or any securities offering, right?

Michael Fugler:

That’s a possibility. I told you about a minute ago, the $1 million guy, they only suspended him for a year. He had a lot of loss, a severe penalty, but they didn’t restrict him from coming back. It just depends on the facts and circumstances of each case. Barring is certainly one option.

Kim Lisa Taylor:

And then from the other side of that, what happens to the company that uses an unlicensed broker?

Michael Fugler:

The company can be fined by the regulators. Their whole deal could be in jeopardy. If you look at historical examples of this, usually what ends up happening is the company begins to implode litigation and sues or they go bankrupt. Once this surfaces, if you will, and it’s exposed, people are nervous and they’re like, “Oh my God, if that’s happening, what else is going on? I want my money back. I want out of here,” and then the cradle just … It just comes tumbling down.

Kim Lisa Taylor:

Right. Rescission. The company could be forced to offer rescission to all of its investors. And of course, if you’ve got that money invested somewhere, then how are you going to do that, unless you…

Michael Fugler:

In most instances, they’ve invested it and spent it.

Kim Lisa Taylor:

Yeah. Unless you recapitalize and do a new legal offering to buy out the investors that don’t want to stay in or get your previous investors to recommit despite the violation. But have you ever seen this kind of litigation ensue, independent of other things that are going wrong in a company? Have you ever seen just a charge for the cause of action of acting as an unlicensed finder or operating independently of other violations?

Michael Fugler:

Usually litigation arises when there’s a problem with the project or somebody’s lost money, or they didn’t get what they were proposed to receive. They go through a transaction. They were supposed to get a 25% return on their capital. They end up getting their money back and 2%. They could have put it in the bank, maybe, or a CD and done just as well. And they’re upset, so they go find one of these attorneys.

There are tons of them in South Florida that say, “Have you lost money in the securities world? Have you lost money in the stock market?” Billboards all over. In those instances, people have a leverage to get their money back at any point in time that it surfaces. It’s a big risk and it’s not often worth the risk … It’s better to just document it properly, structure it properly, use people that are doing it right. Because anytime you do it the wrong way, the company is at risk, the person doing it is at risk. And on both sides, you’re looking at all sorts of exposure for penalties, fines, disgorgement, rescissions. It could be nasty.

Kim Lisa Taylor:

It’s just a mess. And I know somebody that got in trouble for securities litigation. Their legal fees quickly became many hundreds of thousands of dollars. Plus, they ended up getting a $500,000 fine. It just snowballed, right? And then your reputation is lost. Your likelihood of ever doing this again is going to be slim. Even if you’re not prohibited by the regulators, it’s going to be out there and it’s going to be on the internet. Everybody’s going to know what happened.

All right, we have some questions I want to get to. I think somebody had asked a question earlier about the SEC’s proposal for tier one, tier two finders, and we’ve covered that. One of the things that we didn’t mention when we were discussing it that I wanted to point out is even though that was proposed, it only applied to people who referred Accredited investors. You still couldn’t go and refer Non-Accredited investors to a Rule 506(b) offering. That wasn’t going to be allowed. 

Let’s see; another question we have is, “If someone is part of a company…” —  I think we may have answered this, but let’s just reiterate because this is the one I get most often — “…someone that’s part of the company, the member or the manager in a syndicate or is a company that’s raising money, can they receive compensation for raising?” I think we talked about that … yes, as long … Well, they can’t receive compensation for raising capital; they have to have a job. The job is what they get paid for. Capital raising just happens to be one of their duties and they’re not getting compensated based on the amount raised. 

Okay, here’s another one: “We are in the process of vetting out an international family office fund to provide debt for our real estate deals. What are the major SEC and other issues we need to focus on and vet out? The fund is comprised of 17 family offices located in Spain, in the UK. The bank they transact from is in Switzerland.” You want to answer that one, Michael?

Michael Fugler:

I’m not sure I understood.

Kim Lisa Taylor:

This is asking, how do you vet an international fund? That’s not really an SEC issue. That’s really more of making sure that the money’s legitimate, right? And that it’s not in violation of money-laundering rules.

Michael Fugler:

Whenever you’re talking about activity outside the United States, the first issue is, are any U.S. people involved or any U.S. companies involved, and is any company involved in a U.S. exchange or other activity? I just didn’t understand the facts of the question. You have a Spain group of family offices. You have a bank, and then you’ve got a bank of some kind in Switzerland. But I don’t understand what are they doing and does it have any relationship to the United States.

Kim Lisa Taylor:

They’re providing debt to a client that’s in the U.S. raising money for real estate.

Michael Fugler:

Okay. That can be done, but is there an issue that they want answered?

Kim Lisa Taylor:

Yeah. I don’t know that that’s really a securities issue. That’s more of making sure those people aren’t involved in money-laundering and you’re not getting involved in some money-laundering scheme. That’s hard to do.

Michael Fugler:

The description that I heard is something that certainly can be handled, and there are all sorts of exemptions with Regulation S, with foreign debt, foreign equity. There are tons of even foreign finders. I’m not aware — I did research — of there being any kind of enforcement action against foreign finders or foreign people that were registered under their particular jurisdictions.

When you start moving outside the United States, the real question you need to ask yourself is not so much what’s going on out there, but “What are they doing that has to do with here?” Because once you get into the geographical United States of America or an exchange they’re listed on or people that live here, that’s where you need to focus the question.

Kim Lisa Taylor:

Okay. Paul, we’ll connect you with Michael if you want to explore that question directly with him. And then as somebody asked, “Who are broker-dealer companies and would Series 82 allow us to raise money for syndicates?” Do you know the answer to that one?

Michael Fugler:

Who are broker-dealers?

Kim Lisa Taylor:

Yeah. Broker-dealer companies, there’s a lot of them. I’ve been doing this for 12 years. I’ll tell you that I’ve only had maybe three or four times that people actually were successful in getting a broker-dealer to take on their private offering, because those broker-dealers are going to be very selective about who they do business with. They’re not going to do business with first-time syndicators.

You’re going to have to show a significant track record, then they’re going to do due diligence on you, due diligence on your deal. They could charge you a lot of money to do that due diligence. And then they may agree to take on your deal. I’ve heard of a few more cropping up here and there. I met somebody recently that said that they work for a broker-dealer. They do raise money for private offerings.

But when I asked what their criteria was, they said they’ve got to have had five deals closed, start-to-finish, before they would usually consider them.

Michael Fugler:

In my experience, all the deals that I’ve done, I’ve always had probably four or five, maybe 10 broker-dealers in my syndicate. There are tons of broker-dealers. There are organizations that you could look into like ADISA, which is the Alternative Investment Securities Association, NEBA (National Investment Banking Association), TNDDA (The National Due Diligence Alliance). I was chairman of the National Investment Bankers.

I’ve been a very active member of both of the other organizations. They have hundreds of broker-dealers that are involved. It’s not a question of, are there broker-dealers? Yeah, but Kim’s point is well taken. I prepared and designed a $50 million fund for a guy that was doing projects in Texas. 30 years’ experience. Great guy. Owned everything from title companies, the real estate brokerage firms.

And then what happened? Just what Kim just described, we bring it into an environment where they’re having a trade show for investment banking firms and there were seven other booths competing. All of them had five more, and most of them had 10 or more years of experience with multiple successful funds. There was an attraction to them, and it was very, very difficult. We’re making some traction, but it’s been hard.

We’ve been working on it for months to finally get them to take the time to learn more about the individual and what they’re doing. What we did was we pulled the fund back and made it smaller, like $15 million instead of $50 million, because we felt people would be willing to take a better risk. The other thing we did was to find the first three properties that were going in it so they could see exactly where the money was going to be spent.

The realistic returns became more visible because you could actually take the property and put real numbers and be more realistic instead of some wild projection that a lot of people use. When you run into these problems, there are ways to solve it and cure it to make it easier. But it’s tough when you’re just starting out. You have to get the fortunate first deal under your belt and have it not blow up and be successful to really make it easier as you go.

Kim Lisa Taylor:

Yeah, I think that’s good advice. One thing I wanted to ask you about is that you have some experience as an investment banker. Can you tell us about that? What is an investment banker? What do they do?

Michael Fugler:

Well, investment banker, think of it like a coach, maybe a quarterback, if you will, in a sports analogy. Usually there’s a point person. That’s the lead and usually there’s an investment bank that’s the lead. Their job, they’re all registered with FINRA licenses. The people involved will have Series 7, 63, 24, general principles licenses in most instances. A lot of them have had experience in the stock brokerage world buying and selling stocks, and they wanted to move into investment banking because that’s the deal portion.

The investment banking is where … One of the things that I did for years was to take companies pre-IPO, help them raise some capital, and then take them out with initial public offering and raise a minimum of $15 million and more like $25 million, $35 million, or $50 million and get them on the NASDAQ or the New York Stock Exchange. It’s understanding that entire process. It’s understanding the documentation process, the sales and marketing process, the building of syndicates, of other broker-dealer processes. It’s putting it together.

One of the jobs I had was not only to help formulate the due diligence that everybody else was going to rely on, but also how to tell the story and how to tell it where money would be attracted to it. And more particularly, we were doing a lot of institutional work. It was, how can you attract institutional money? Then on the retail side, you had to make sure that you had something that was going to be viable and of interest to the high-net-worth Accredited investor.

And then you had issues like helping with valuation and how to price it. You probably read in the newspaper or watch on whatever news shows you watch or financial news shows that they’re talking about, how are they going to price this stock? It’s getting ready to come out. The range they put when they file their S1 or they’re filing with the SEC said they were probably going to come out with $14 to $16 a share. Well, if they do that and they come out at $17, it means it’s a really strong offering and chances are you going to see a bump and it’ll go up.

They come down and price at $14 or $13, it’s like, oh, well, they didn’t have a lot of interest. It looks like a weak offering. You do all of these things to help put together a solid offering for success so that when it goes into the public marketplace, you’ll have a victory. On the private side, it’s similar, but you’re not at that stage bringing them to a public market, but you’re helping them put it together.

The most critical thing is structure. How are you designing the offering so that the issuer, the person raising the money, is not diluted too much, meaning they don’t give up too much equity in their deal? How can you put together something so that the investor gets an upside, but it’s not dilutive to you as the issuer? It’s all the creativity that goes in here. And a lot of people just look at what other people do and that’s how they put their deals together.

But the real winners are the people that get creative out the box and find new ways to offer it into the marketplace that people say, “Wow! I hadn’t seen that before,” or “That’s a neat trick. That has the potential for some really big upside. I think I might want to invest in that.” One thing that’s real popular right now is designing things in such a way that equity is not given. You have revenue sharing, loyalty sharing. You have the buyback design. Maybe using preferred shares and those shares are going to get redeemed.

You give them a good return there and you minimize the equity portion. The equity becomes kind of free to them. Boom! Big upside. And that’s attractive to the company and the investor because their money’s not at risk as much. Because if it’s pure equity, they’re in there for the long haul. If it’s redemption that’s coming back out, they’re going to get their money, a preferred return, and then they just sit back and play with the house’s money and they’re looking forward to your success. But if not, they got their money back.

Kim Lisa Taylor:

All right. Well, we need to wrap up. We’re on the hour. Let’s end with a little announcement that I have joined forces with Michael. We are creating a new subsidiary law firm that’s called The Business Finance Law Firm. And it’s really to focus on non-real-estate offerings, so based on Michael’s experience, and then putting together some of our experience with running Syndication Attorneys. We’re just going to collaborate on this together.

If you want to reach Michael, you will be able to reach him at michael@businessfinancelaw.com. We will be setting that up later today. Give us a day to get that set up. This is just a brand new venture. We hope to be able to talk to all of you later. I know there were a lot of other questions in the chat that we weren’t able to get to. If you want to send us those questions, then we might create some little FAQs out of those and post them to where you’d be able to see them. But anyway, we thank you all.

Michael Fugler:

One final note, didn’t mean to interrupt you. You can look at my website. It’s first and last name — michaelfuglar.com — as well. And while you’re doing the email that’s brand new, I’ll go in and add that to the website as well.

Kim Lisa Taylor:

Very good. Thank you all for joining. We hope this was informative, maybe a little more in-depth than some of you are used to. We kind of keep our topics a little lighter on these programs just so we can touch on a lot of subjects. But as you can see, Michael is a wealth of information and he’s got a ton of experience in this area. I’ve tried to impart for years that bad things can happen when you do the wrong thing. Michael has actually seen it.

I just want you to realize that being a capital raiser is a dangerous business, unless you have the right licenses or you’re working with a broker-dealer to do that. Whenever someone comes to me and asks me, tells me that they’re a capital raiser, my response is usually “Forget those words and never say them again, unless you have the right licenses.”

Michael, thank you so much for joining us today. We hope to talk to all of you at some point in the future. Thank you so much for joining.

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Are you ready to raise private capital?

At Syndication Attorneys LLC, we are committed to your success – book a consultation with one of our team members today!

Are you ready to raise private capital?

At Syndication Attorneys LLC, we are committed to your success – book a consultation with one of our team members today!

About Syndication Attorneys

We are NOT your stereotypical law firm. We don’t believe in simply taking your money, handing you a stack of technical, often-incomprehensible legal documents and then bidding you good luck and good-bye. At Syndication Attorneys PLLC, we are committed to your success – not just with the project at hand, but your continuing success in business and investing. We are your long-term legal team.

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Are you ready to raise private capital?

At Syndication Attorneys LLC, we are committed to your success – book a consultation with one of our team members today!