Transcript: ‘Determining Investor Suitability & Establishing Preexisting Relationships’

Edited transcript from the teleseminar ‘Determining Investor Suitability & Establishing Preexisting Relationships’

Originally broadcast on April 26, 2018


Listen to the teleseminar


Kim Lisa Taylor:

Hello; it’s nine o’clock Pacific Time and noon Eastern Time, and we are ready to get started on our monthly teleseminar. This is a free monthly teleseminar offered by Syndication Attorneys to our database. Hopefully, some of you are clients and some of you are prospective clients, and we want to make sure that you have all the information that you need, so that you can go out and confidently raise money from investors. And that’s the whole purpose of this call.

Additionally, we invite guest speakers, so that they can talk to you about services that you might need for your syndication or just for growing your business. We’re a small business. You’re growing a small business, so whenever we have cool things that we do or find that we like to use in our business, we like to share those with you, as well.

So as any good attorney should, I have a disclaimer, and that says that all of our calls 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 do not wish to have your voice recorded, please schedule a one-on-one consultation instead of asking questions during this live call. Information discussed during this free teleconference is of a general educational nature and should not be construed as legal advice, which may only be obtained after establishing an attorney-client relationship in consideration of your specific facts or questions. The attorney-client relationship does not begin until we have a fee agreement in place signed by all parties.

So with that, let’s launch right into the topic. Typically, I’m going to talk for about 20 or 30 minutes because not long is needed to cover this subject, and then we’ll open it to live Q&A.

Our topic today is really kind of twofold. It’s about determining preexisting relationships and investor suitability. That’s a subject that I get asked about a lot. I’ve been asked it many, many times over the years, but I thought we should address it head-on and give you some guidance, so that you know when you’re out talking to investors that you are squarely within the rules when you’re doing an offering that requires you to determine investor suitability.

The first thing we need to do is figure out when that occurs. So just a little primer, in case somebody has joined us for the first time ever and has never heard it, but also just a reminder for all you that are seasoned investors, what’s a security? Well, when you’re dealing either issuing promissory notes repeatedly to private investors or if you are selling investment contracts, then you are selling securities. An investment contract is an investment of money in a common enterprise with an expectation of profits based solely on the efforts of the promoter. So that basically covers any situation in which you are accepting passive investment dollars and those investors are relying on you to make a profit with their investment.

Examples of that: any time you form a manager managed LLC or a limited partnership where there is a manger or a general partner that is running the show, making day-to-day decisions about your property, then that is where you are running into those investment contracts.

Conversely, what’s not a security? If you are in a situation where all of your investors are staying actively in control of generating their own profit, then you can consider that to be a joint venture. You wouldn’t have to necessarily follow securities laws, as long as everybody is staying actively involved and actively in control of their own money. But when they give you their money, you put it in a bank account for your company, your company goes out and operates the property, acquires the property, you’re definitely selling investment contracts. You’re selling securities.

So what if you’re selling securities? If you’re selling securities, you have to register them in advance of sale. That means going through the public offering process, and that’s going to be a long and expensive process, not something that you’re going to be wanting to do for a real estate offering. Certainly, not something you’re going to do when you’re first starting out and you’ve got some properties under contract you need to find.

So if you don’t have the time to go out and do the registration process, then the alternative to that is to qualify for an exemption from registration, and there are many. There are exemptions at the state level, if everything is contained within one state — all your property, all of your investors and you — then we might be able to look at an intra-state exemption.

If you are raising money from people who are coming from multiple states, or if you’re buying property across state lines, then you probably need to be looking at one of the federal exemptions, and there is a federal exemption that is going to preempt all individual state laws, so those states can’t impose further restrictions on your offering, and that is Regulation D, Rule 506. Rule 506 is by far the most common exemption that’s out there in the world today and that people are using. Even giant hedge funds are using this exemption in order to raise hundreds of millions of dollars, but the average person is also using this exemption.

According to the SEC statistics, the mean raise for a Regulation D, Rule 506 offering is one and a half million dollars. So that’s squarely in the realm of where many of you are going to be starting out your syndication practice, and you may stay there for a long time, raising a half a million dollars or so at time.

Additionally, an interesting statistic from the SEC is that the average investment where one and a half million dollars or so is being raised has 10 to 14 investors in it. So that’s kind of squarely in the realm of where most of our clients are and probably where you’re going to be.

The exemption has rules, so once you decide, “Okay, I am selling securities. I want to get an exemption,” which exemption are you going to choose? Well, you’re going to choose the exemption that fits what you’re trying to accomplish, and that’s where your consultation with an attorney is going to come in because we’re going to ask you a series of questions to try to figure out which exemption is going to work the best for you and provide the least amount of restrictions on what you want to accomplish.

So when we’re talking about Regulation D, Rule 506, there are two choices under that. One of them is Regulation D, Rule 506(b) — B like “boy” — and that regulation, or that rule will allow you to raise an unlimited amount of money from an unlimited number of accredited investors and up to 35 non-accredited, but sophisticated investors. The hallmark of the Regulation D, Rule 506(b) offering, though, is that there is no general advertising or solicitation allowed. So this is the “friends and family exemption.” This is where you’re able to approach by word of mouth people that you already have established, substantive, preexisting relationships with. And there’s a new wrinkle here. You have determined that they are suitable to be in your offering. So you have to have a preexisting relationship, and you have to determine whether they’re suitable to be in your offering. And that’s going to be the subject of today’s call: how do we determine suitability and who does that apply to?

The other hallmark of a Regulation D, Rule 506(b) offering is that the investors will self-certify. That means that you don’t have go digging into their financial background or ask them for documentation to prove whether they’re accredited or sophisticated. You only have to inquire, and they will tell you by checking boxes next to the definition which one applies to them, and they will certify that to you.

So that’s the 506(b). Well, just to put that in context, what is 506(c)? Rule 506(c) is a relatively new rule. It’s been in existence for a few years now. That rule will allow you to raise an unlimited amount of money from an unlimited number of verified, accredited investors. So no longer can the investors just check a box. They actually have to go through a verification process. That means either you have to review their financials or their net worth statements in order to make sure that they meet the qualifications as an accredited investor, or they have to get you a certification letter from their investment advisor, attorney, CPA, or a third-party company that will do this. You have to have a reasonable assurance that they’re accredited at the time they make the investment, and that’s actually within 90 days of when they make the investment.

So if somebody comes to you and says, “Oh, no. I was accredited last year. I was verified,” That’s not going to work for you. You have to actually have them get re-verified in order to be able to accept them into your deal, but with a 506(c), you can freely advertise. So you can do anything you want to advertise to investors as long as your advertisements are truthful and don’t contain fraudulent statements or misrepresentations. And that again, is where a securities attorney is going to come in because they’re going to look at your materials and make sure that you’re not making claims that could be attacked later by a regulator or a disgruntled investor.

All right. So we talked about accredited versus non-accredited. Just to give you the little background again, what’s an accredited investor? That’s someone who has over a million dollars net worth or they have over $200,000 a year income as single; $300,000 a year, if married; and that has to have been for the last two years with the expectation that will continue into the future. So that’s an accredited investor. A non-accredited investors is going to be anybody else.

So let’s dive in. We talked in other teleseminars extensively on how to establish preexisting relationships with investors. We’ll touch on it a little bit here, but the meat of this particular teleseminar is on suitability, determining investor suitability, because that’s taking a little step farther than just saying, “Oh, I met somebody at a seminar.” And it’s not necessarily good enough.

The reason that you have to have a preexisting relationship is for a Regulation D, Rule 506(b) exemption. That’s how you are able to prove that you didn’t find these investors through any means of general advertising or solicitation because the investors are going to attest to you when they find a subscription agreement for your offering that they already knew you, and they’ve known you, and they’re going to talk about how they met you, and what kind of a relationship you have.

The SEC has opined in some past things they call “no-action letters.” A no-action letter is where somebody who wants to do something —  they want to promote their offering in a particular way, or they have some policy they want to establish on how they’re going to determine suitability and preexisting relationships with their investors — they have actually hired an attorney to write a request to the SEC, saying, “Hey, if we did everything just this way, would that be okay? Would you consider that to be sufficient to establish a preexisting relationship and suitability?”

And so through these series of no-action letters that the SEC has reviewed over time, they have the body of law related to how preexisting relationships are established and how suitability is determined …it has evolved based on the SEC responses to these letters. The latest one was a letter from a company called Citizen VC, who sent to a letter to the SEC asking them if they could engage in a particular practice of putting things online and putting their offerings online, and then they had a policy as to how they were going to reach out to people who contacted them and what they were going to say to them and what kind of questions they were going to ask of them in order to determine whether or not they were indeed suitable.

We have sent out an article that addresses this subject, and if you got our newsletter, then you have the article, or you can go to our website at and under the “Library” tab you can find the article titled “Determining Investor Suitability.” So if you don’t already have it from the newsletter, you may want to go there and get that article, so you can read it because that tells you all about this case Citizen VC and this no-action letter that they sent to the SEC and what it was they were proposing to do.

I don’t really want to go too far into the facts of that case here because I really want to get you guys to the meat of what you need to know and that’s what the SEC ultimately said. And that has kind of become now the new rule for how you’re going to determine investor suitability.

So what is that? Well, the SEC looked at what Citizen VC proposed doing, and they said, “All right. Here are the requirements for determining investor suitability. First, there must be a preexisting relationship between the issuer and the investor.” And so the issuer is you. If you’re the one selling the securities, you’re the issuer of securities. If you’re the one promoting and selling investment contracts or promoting and selling promissory notes in exchange for investor dollars, you are the issuer of those securities, okay? Issuer, syndicator, general partner, manager … all those things really mean the same thing.

So first the SEC said, “There must be a preexisting relationship between the issuer and the investor that is not built solely through a specific duration of time or a short-form accreditation questionnaire.” So you can’t just give someone a prequalification questionnaire and say, “Hey, check the box if you’re accredited or sophisticated. Give it back to me and now we have a relationship.” That’s not good enough. And you may have heard of some rules that say, “Oh, you have to have three touches in 30 days or three in 45 days.” Well, those aren’t SEC rules. Those are good rules of thumb because they’re going to help establish the relationship.

So how do you determine the preexisting relationship? First, you have to meet somebody. Second, you have to actually get to know them, right? So I always talk about this, as if it’s like a dating relationship. It would be a little weird if you met somebody at bar, and then 10 minutes later asked them to marry you. So you wouldn’t do that. They’d think you were weird. They wouldn’t want to have anything further to do with you, and an investor’s going to feel the same way. But if you got their contact information, if you followed up with them later, determined if you had some common interests, and then maybe made a date, even did some activities together, or at least started having some regular communication, then you would be able to establish that relationship. But more than that, you also have to understand that investor’s financial situation. You have to be able to know before you start making offers to invest to them, whether they are accredited or sophisticated.

How are you going to do that? All right; so they have to be a preexisting relationship. You have to meet somebody. You have to develop the relationship over time, okay? And you have to understand their financial situation, and you can’t just do it by getting a short-form accreditation questionnaire and sticking it in a file, and then calling them six months later and asking them to invest with you. It’s not going to be sufficient.

So the SEC said, “Rather, a preexisting relationship can be established by adhering to specific policies and procedures both online and offline, where appropriate, which enable the issuer to evaluate the prospective investor’s financial sophistication, circumstances, suitability, and his or her ability to understand the nature and risks of the investment interests to be offered, and that the issuer actually follows this process to make such an evaluation.”

Okay, that’s a lot of words. So let’s break that down. We have to have specific policies and procedures, so each of you should think about that and think about what is your method of meeting investors and what is going to be your method of developing these relationships with these investors. So specific policies and procedures, if you write them down, then not only are you able to do them, but you’re able to share those with your team, so as you partner with different people on different deals, you can say, “Here are the policies and procedures we have to follow in order to make sure that we have established preexisting relationships with our investors.” So that’s number one: policy and procedure.

Second, “Which enables the issuer to evaluate the prospective investor’s financial sophistication, circumstances, suitability, and ability to understand the nature and risks of the interests offered.” So where we’re going to go next is what kind of questions would you have to ask someone in order to evaluate their financial sophistication, circumstances, suitability, and their ability to understand the nature and risks of the interests to be offered.

For those of you who did get the article or did read the newsletter, there was a place where you could click and actually come up with a list of questions. We gave you a list of sample suitability questions that you can put into your written policies and procedures as to what kind of questions you’re going to ask of your investors. We’ve given you some examples. This is not an exhaustive list. This is just some ideas on some things that you might be able to ask investors, and if you had the answers to all of these questions, then the SEC or state regulator would probably look at you and say, “Yes, you really did take some time to establish the suitability of that investor,” and they wouldn’t hassle you about not having the right relationship.

So what kind of questions might those be? Just kind of running through the questions, in case you don’t have the list in front of you — and again, if you go to the website under the Library tab and then Articles and pull up that article, there is a place you can click in there and get those questions.

“What is your current net worth?” is a good question to ask. “Has your last two years’ income exceeded $200,000 a year if single? Or three hundred thousand dollars a year if married?” Okay, that tells you right there. Are they accredited? Are they not accredited? And remember, if you’re going to do a Reg D, Rule 506(c) offering, that would disqualify anybody who said no to that question, but you’d still want to establish a relationship with them, even if you’re doing a 506(c) offering, because you might decide later on for your next deal, “Hey, I met enough people who are qualified to do a 506(b) offering. Maybe my next offering is going to be 506(b), so that I can include those investors.”

Third question, “Do you expect your current income to continue into the future?” Remember, I said in order to establish someone as accredited, they had to have for the last two years met the qualifications and with an expectation of continue into the future.

“What kind of investments do you currently have?” Well, this goes into the SEC’s question on their financial sophistication and their ability to understand the nature and risks of what you’re going to offer them.

Next question, “What is the value of your other investments?” That’s going to give you an idea of where they are with their sophistication level.

“What kind of returns are you getting on your other investments?” This is going to help you determine if they’re suitable for your investment. It’s going to do two things: One, they might tell you a number that’s very, very low, and you can do better than that, and then now you can open the door to talking to them about the fact that you can perhaps offer them something better than what they’re earning right now. And then other thing is, if their number’s too high, then you may want to have a further discussion to see if that’s a real number or if that’s just what they’d like to get, but if their number’s significantly higher than what you’re able to offer them, they’re not going to be suitable for your offering because they’re never going to be happy with what you have to offer. So that’s going to help you determine suitability. It’s going to help you open the door to talking about the kind of return that you might be offering with your investment opportunity.

“What experience do you have in private placements?” That’s going to go to their ability to understand the nature and risks of the interest to be offered. And one thing you might do if they don’t have any experience with that, on our website — again under the Articles tab —  we do have an article on “10 Things Investors Should Know Before Investing in a Syndication.” You’re welcome to show that to your investors. That article will help them understand how a syndicate works and help them be able to understand that there are documents they’ll have to review, you’re going to be in control of the deal, things they should ask about you, and what kind of due diligence they should do before investing, which will help them get educated about private placements. You can also send them to our website and ask them to review the articles on our website, so they can understand.

“What are your investment objectives?” All right. So you want to know how long do they want to stay invested, what is it that they’re trying to achieve with their investment dollars?

“What is your investment time horizon?” Is someone planning to retire in two or three years where they’re going to start needing their money out? And you’re offering five- to seven-year investment opportunities or maybe 10- or 20-year investment opportunities. They’re not going to be a good fit for that.

“What liquidity needs do you have?” If they think, “Hey, in two years, I’m going to need money for this,” and you’re not going to be able to liquidate your offering within two years, or you’re not planning to liquidate the offering within two years, then you won’t want to put them in a long-term deal, but maybe if you’re doing single-family fix-and-flip, and you’re just borrowing money, then maybe that would be a suitable investment for them.

And then, “How would you rate your risk tolerance?” Risk tolerance is something that the SEC, the securities regulators, always focus on. And this goes to the fact of, “How much money do you have to invest?” You don’t want to take everybody’s money, all of somebody’s money. You also don’t want to take money that they’re depending on in order to pay their bills, and you don’t want them depending on the returns from you in order to pay their bills. This has to be money that they can invest and that they can afford to lose in the event something went wrong with the investment.

So as you can see, this might have given you some ideas about other questions you might want to ask, but these are the kinds of questions that you might want to start thinking about asking all of your investors.

All right; so back to our questions, the requirements for determining investor suitability that the SEC said in this Citizen VC no-action letter. Okay, we had to have a preexisting relationship. We have to determine an investor’s financial sophistication, circumstances, suitability, and their ability to understand the nature and risks of the interest to be offered, and that you actually follow this process to make an evaluation.

So when you’re asking those questions, you need to be writing down the answers, or maybe you’re going to send those questions to them in a questionnaire, and they’re going to send you back their answers. Either way, you’re going to want to keep a record of what they said because that’s going to be your defense later, if the SEC or somebody says, “These people weren’t suitable to be in this offering.”

And then the third thing that the SEC said is that the relationship must predate the offer. So if you’ve got an apartment complex or property, multifamily property, commercial property, something under contract right now, this isn’t the time to go out and start establishing relationships because you really have to have the relationships in place before you have a current or contemplated offer. And certainly an offer is current or contemplated at the time you have your offering documents in hand. It’s also current or contemplated at the times you have it under contract, you’re doing due diligence, and your securities attorney is drafting the offering document. Prior to that, you don’t have anything to offer. That’s when you need to be making these relationships, building a database of people who you vetted through this process, and if you do that, now you’re going to have a ready group of investors that you are eligible to ask for investment dollars once you do have a current or contemplated offering. So that’s really how it works, and then the final thing is that you have to have a record-keeping system in order to prove compliance with these suitability requirements.

So that’s pretty much how to determine investor suitability. I know it’s a little bit complicated. I know these conversations can be a little uncomfortable to have, but remember this, it’s all in your mindset. You are not asking people for money. You’re not asking them for a favor. You’re offering them an investment opportunity that they need to meet their investment goals. The whole reason that you’re going through this questionnaire is to determine whether what you have to offer is a good fit for them, so keep it in that reference, and tell them “that’s why I’m asking you these questions; I’m not trying to pry. I really just want to understand whether the kinds of things that we might be able to offer you in the future are going to be suitable for you because your time is valuable. We don’t want to waste your time, having you look at deals that aren’t going to meet your financial requirements. So if you can tell us what things might fit your financial requirements, if we can go through this list interview, then we’re going to have a much better idea of what you’re looking for, so that we don’t offer you things that aren’t suitable for you.”

So that’s it in a nutshell. We’re going to open up the call to questions now, and while we’re waiting for people to ask questions, I do want to hand out our contact information. The website is There are many free articles, podcasts, previously recorded teleseminars like this on our website that you can review at your convenience. We would love to have you do that. You can call us at 844-SYNDIC8, 844 and that’s S-Y-N-D-I-C and the number eight. So that’s a good way to reach us. If you go to the website, you’ll see that there are places there that you can schedule a free teleconference, and we’ll be able to talk to you about what you’re looking to do and see how we can help you.

All right. So we do have some callers with some questions, and I’m going to go ahead and start taking those now. First caller, please state your name and your question.


John Tanner:

My name is John Tanner, and my question is, is there a form that you have to fill out and send to the SEC or to the state of Florida that registers you as an exempt business looking for those sophisticated investors? And do you have to do it multiple times with every syndicate that you create?


Kim Lisa Taylor:

Well, that’s a really good question. And yes, it is syndicate by syndicate. So you won’t register yourself. You’re going to register the securities offering that you’re going to use to actually ask people for money. So as an example, if you’re going to buy commercial property, then you get a commercial property under contract, and you would have a securities attorney draft your offering documents, and then those offering documents will constitute your securities offering. So that’s going to be usually a private placement memorandum, the operating agreement for the LLC that’s going to take title to the property, a subscription agreement, and then the securities attorney should also be doing the securities notice filings for you.

The first thing is what’s called a Form D that we file with the SEC, and that has to be filed within 15 days of when the first investor’s money becomes irrevocably, contractually committed. So that’s going to certainly happen when you close on the property because if somebody gave you some money, you put it in the bank account, you’re awaiting for closing … In the preclosing if they came to you and said, “Hey, I just can’t do the deal anymore. Something happened.” You’d probably give their money back and find somebody else, but certainly when you close the property, and you’ve given that money over to the seller, you don’t have it anymore, that money is irrevocably, contractually committed, so therefore you must, at that point, within 15 days file this notice with SEC. One notice per offering. The way we handle it is when we give you your final offering documents, when your offering has started, we also go ahead and do that Form D filing.

The second thing you asked about is, “Is there something you have to file with the state?” Florida is the only state that doesn’t have a state filing requirement. All of the other states require that as you sell securities in their jurisdiction, that you have to file a notice with them, also within 15 days of when the first sale was commenced in their jurisdiction.

So for instance … It’s only one notice per state, regardless of the number of investors. So for the first time you accept investors, say from Massachusetts, we would file a notice in Massachusetts. Those state securities notices do require a fee at the time that you submit the filing. The Form D that we file with SEC does not require a fee.


John Tanner:

Thank you.


Kim Lisa Taylor:

You’re welcome. All right. Let’s move on to the next question. All right. Please state your name and your question.



Hi Kim. My name’s Grace, and I have a question about investors. So in the deal, I know there’s a limit of investors. Are there any dollar amounts for a person?


Kim Lisa Taylor:

No, there’s no dollar limits on the amount that sophisticated investors can invest, but one thing I didn’t say when I was doing the lecture — and I do want to point out — is that the SEC was very clear when they were talking about the suitability requirements in the Citizen VC no-action letter, that the suitability requirements applied to all investors, and not just unaccredited investors. So you actually have to ask those questions even of your prospective accredited investors.



Okay. Cool. Thank you so much.


Kim Lisa Taylor:

All right, moving on to the next question. Hey, Ken Brown.


Ken Brown:

How are you? Two questions: One, I believe you said on a Reg D, 506(b) that we have to personally meet with the person?


Kim Lisa Taylor:

No, you don’t have to personally meet with them, but you’re going to have to have some live interaction. You can do that on the phone or in person, it doesn’t matter which. And you have to document it. So you want to document every meeting with an investor. Really your record-keeping system should be such that you can, first of all, get the answers to these questions, save them, and put them in a place where you’ve got one compartment, whether it’s a file folder on your computer desktop or in your drawer where you can keep all of that investor’s information together about when you met them.

So when you’re meeting people, you’re picking up business cards at these events you go to, make sure that you’re writing on the card what event it was that you met them at, and then as you follow up with them, you’re going to keep a record of date, time, who was on the call, what things were discussed. If you have them fill out any kind of questionnaire, then you’re going to keep that in that same file folder and just kind of keep a running total of all of the communications you have with that investor. And ideally, you’re going to want to do that even after they’ve invested with you because you might have some follow-up conversations with them that then unfortunately become the subject of a lawsuit, and if you have all of that stuff documented, it’s going to serve you very well.


Ken Brown:

Do you recommend recording all your conversations?


Kim Lisa Taylor:

No. I don’t. I think that, that’s onerous. I think it’s too much, and I think it makes your investors nervous and that actually could work against you, so I would not do that, but I would keep a written record of those things. And remember, we have to establish policies and procedures, so if you have a policy and procedure that says, “Every time I have a conversation with an investor, I’m going to take a note, and I’m going to record the subject of the call and who was on it, and date and time,” then now you’ve established a business record. Business records which are a normal part doing business, and those would be admissible in court, if you’re doing it consistently all the time.


Ken Brown:

Great. The second question is, if I advertise, clearly I will get a percentage of people who are not accredited. If I have spoken to them a few times over an extended period of time, can I offer them a Reg D, 506(b) offering?


Kim Lisa Taylor:

It depends on what you’re advertising that you are doing. If you’re advertising and saying, “Here’s my offering. I’ve got this apartment complex under contract. I’m raising a million and a half bucks,” well you can’t advertise and put them into that deal because that would have to be a 506(c) offering, in order to be compliant with the rules, and so you could never say, “Oh, I’m going to do that as 506(b) instead,” and now you can get it because you have met these people through general advertising and solicitation.

So if you meet somebody because of your advertisements, you’re always going to put them in a future deal, nothing that you have available right now, even if you’re scrambling to raise that last money prior to close. You better be real careful about putting anybody who you just met into that deal, if it’s a 506(b). If it’s a 506(c), doesn’t matter. You don’t have to develop relationships with them. You don’t have to determine suitability. You just have to advertise and verify that they’re accredited, and then you can bring them into your deal.


Ken Brown:

Excellent. Thank you so much, Kim.


Kim Lisa Taylor:

You’re welcome. Thanks for asking. Okay, next question.



Hi Kim. Nick from Montreal.



Hi Nick.



First question, I know we talked about 506(b) and 506(c). Is there a way that you could just have both? Like is there a way to pay extra, just have both?


Kim Lisa Taylor:

No, because the whole point is in the one case you’re advertising and one case you’re not. And so if you have a property that’s the subject of a 506(c) offering or you have a fund that’s the subject of a 506(c) offering, then you’re going to be advertising for that, and it’s only available to verified, accredited investors. So by definition, it’s going to exclude any unaccredited investors.

There’s two reasons you do 506(b), and I will tell you that most of my clients are doing 506(b). The reason you do 506(b) is because you want to be able to bring in unaccredited investors, or you have accredited investors that don’t want to go through the verification process, and that is a very real issue. I’ve got a lot of clients that have developed relationships with investors over the years. They’ve kind of run through that group of investors. Now they want to expand and advertise, and they try to switch over to 506(c), and they get resistance from their prior investors who don’t want to go through the verification process.

There is a fix for that, and the fix is that one of the ways that a person can be verified is if they invested with the issuer on a prior offering as an accredited investor, then they can be grandfathered in, and they don’t actually have to go through the third-party verification process. They would have to tell you if any of their circumstances have changed since they last certified themselves as accredited. So that’s one way that you can get past that, but there is resistance amongst accredited investors to share their financials with anybody. People are nervous about emailing their sensitive financial information because of cybercrime. And if you haven’t listened to it before, it’ll scare the heck out of you. Listen to our last teleseminar on cybersecurity because you really do have to be cautious about how you’re going to safeguard that information if somebody’s going to give it to you online.



Thank you. Thank you. And the last question is, so basically no matter the circumstances, the only way to raise money is you have to have an offer on the table, right? You can’t just advertise without having an offer, also it would be a blind pool. Correct?


Kim Lisa Taylor:

Well, you’re still going to have an offering even if you’re doing a blind pool. So a blind pool, you’re just going to have a set of offering documents that say, “I’m not raising money for a specific property. Here’s my business plan. This is what I’m raising money for.” And so in any case, you still have an offering.

Now, can you have an ongoing marketing program for your company? Yeah, you can. You can always advertise your company. You can only advertise deals if you’re doing a 506(c). Or some other interest exemption that might allow you to advertise, but in most cases, you’re only going to advertise if you’re doing 506(c).



Okay. So I can always advertise my company and my business plan, but the moment I accept any…


Kim Lisa Taylor:

Yeah. You can put up a website. As long as you’re not posting your deal. That’s when you have to start thinking about, “Okay, now what am I doing?” If you’re posting deals, first of all you shouldn’t be posting any 506(b) deal on a website, unless you have a very clear process of making sure that nobody can review it until they’ve been vetted and you’ve established this preexisting relationship and determined their suitability.

If you’re doing 506(c) offerings, you could put up a website, and you could post your offering materials, but I’m going to tell you, you have to be super-careful about that because there are people out there … the dark web exists … and people will actually try to hijack your offering and get people to send their money to them impersonating you. And I’ve seen it happen. Even though you can advertise under 506(c), you’re still going to be far more effective in getting people to invest with you if you do this same exact process we talked about on this call, with every single investor, no matter whether it’s a 506(b) or a 506(c) offering.

First of all, you’re going to know that person. You’re going to know a lot more about that person. And suitability isn’t just about their financial circumstances. You also have to get to know them and understand whether this is someone you want to be business with. I actually was talking to someone not too long ago, and they said, “Well, I’ve got a lot of friends who want to invest with me. And, I’d like to make them joint ventures.” And I said, “Well, before you go doing that, why don’t you take a look at their spouses and decide if that spouse is someone you want to be in business with because if something happens to your buddy, guess what? That’s your new partner.” Anyway, you got to think about crazy spouses, too.

So anyway, my whole point there is doing investor suitability, you really are trying to get to know the person, as a person, and see if they’re reasonable and somebody you want to do business with as much as you’re asking these questions that are required.



Okay. In a nutshell, let’s say I’m a 506(b). I’m able to advertise my business plan to people. I’m able to talk to people about my business, my company, what we do, but I cannot get any money from them until there’s a relationship and all that stuff. Correct?


Kim Lisa Taylor:

That’s right. That’s right.





Kim Lisa Taylor:

Okay. You’re good. Okay, we’ll go on to the next question.



Gary, calling from Austin. I think you’ve answered a lot of my questions, however when you were talking about the spouse of an investor and “Do you want to be in business with her?” can you comment on, perhaps, buying life insurance policies, insurable interest to pay off an investor, kind of like…


Kim Lisa Taylor:

You could certainly do that. We always recommend that the manager or general partner of a syndicate purchase director’s and officer’s liability insurance. That will cover the members of the management team in the event that they get sued by the investors. And as long as they haven’t done something illegal, it should indemnify them. It should provide at least for the payment of their legal defense, and that is actually a benefit to the syndicate because if somebody sues the manager, then the first thing the manager’s going to do is they’re going to suspend distributions because they have to go out and hire an attorney to defend themselves. And it’s going to affect all of the investors.

So we always recommend that. As far as giving yourself some kind of key-principal insurance so that you could be replaced, that’s also something that’s advisable, making sure that there’s a key-principal insurance policy. You have to careful if you’re a manager of 15 syndicates, and you got a million-dollar insurance policy on yourself for each one, maybe your life is in danger. I don’t know if somebody would consider that, but somebody might think, “Hmm.”

But as far as buying insurance to be able to pay off an investor, I have not heard of anybody doing that, and I don’t know if such a policy exists. I do know Lloyd’s of London will pretty much insure anything, so I guess if you can find it and get someone to sell it to you. The question would be, “Who has to pay for that?” And I don’t know. What typically is going to happen though, and most often, is if you have a disgruntled investor, somebody who’s just unhappy or really needs to get out, you’re going to go to the other members and say, “Hey, this is happening, and this person’s threatening litigation. Or they’re making a threat.” And ask the other investors if they would all contribute so that, that person can be bought out.

There’s a section that we put into our documents where if somebody wants of a deal, they can go out and find another investor, but they have to sell it to your company at the same terms offered by the other investor, which might only be 50 percent or 60 percent on their original investments.



Oh, okay. Secondly, my business now is single-family homes through pre-foreclosure, subject-to, or probate properties. In order to keep investors’ money active, if I don’t have any deals to offer them, but my fellow investors in my investment club do, is there a way to translate that?


Kim Lisa Taylor:

Well, you could do a blind pool or a private equity fund where you raise the money, and your business plan says that you’re either going to use the money on your own deal or you might loan to it to other people.



That would not require a license on my part though?


Kim Lisa Taylor:

It would require a securities offering. So you’d have to have a business plan, a private placement memorandum. You’d have to have some kind of investment contract with your investors, whether you’re giving them promissory notes or if you’re offering them interests in an LLC, you’ve got to have some kind of an investor contract, and then a subscription agreement securities notice filing. So you would have a securities offering in order to do that.



Okay. An offering, but no requirement for me to have a …


Kim Lisa Taylor:

Yeah. Well, but it depends, too. I don’t know what you’re doing. Are you just brokering their money to somebody else? Well, in that case, yes, you’d have to have a license. If you were raising money in your own fund, and then your own fund was deciding whether it’s going to invest in deals that you find or deals that other people have, then that would be something that wouldn’t require a license. But if you’re just saying, “Oh. Well, I don’t have any deal for you right now, but Joe does. Why don’t you invest with him? And he’s going to give me a 2 percent commission on what you invest.” Well, then you’re going to have to have some kind of a license to do that. Probably a mortgage broker’s license, if it’s promissory notes or a securities license, if Joe is selling equity interest.



All right. Thank you.


Kim Lisa Taylor:

Okay. We’ve got one more caller.


Lee Crutch:

Hi. My name is Lee Crutch. I’m calling from New York. I just wanted a little clarity for the filing of the 506(c) and (b). Are they both required on the state level and the federal level? Or just the state level?


Kim Lisa Taylor:

Okay, 506(b) or 506(c). And you do have to file a Form D with the SEC and in the states where the investors are claiming residency, so if they’re individuals, then where they live, where they pay taxes. If they’re investing through an LLC, then it would be the state that the entity was formed in. So yes, there are usually filings required at both the state and the federal level.

New York is a little bit different. Usually when we’re doing New York offerings, the securities attorneys community is split on whether filings are required. If you call the New York State Security Agency, they’ll tell you they absolutely are, but there are some reasons that they may not be, and they’re very onerous. They’re very expensive. For an offering of over $500,000, it doesn’t matter how you sold in New York, they want a $1900 filing fee. All the other states filing fees range from like 50 to 750 bucks. So you got to be careful in how many states that you’re bringing in investors from, and this is one of the reasons you don’t want to set your investment amounts really low, because if you have $5000 investments amounts and you’ve got people coming in from New York, and you have to pay a $1900 fee for a $5000 investment, that’s not a good return, but if you have $50,000 or $100,000 investments, then maybe that’s worth it.


Lee Crutch:

Okay. Another question piggybacking off the previous caller’s question, the liability insurance, you mentioned two types of insurance. One is for the general partner or the manager of the LLC, against being sued. And you mentioned another type of insurance that I missed.


Kim Lisa Taylor:

So that would be what’s called key-principal insurance. It’s really just a life insurance policy.


Lee Crutch:

Right. That’s it. Okay.


Kim Lisa Taylor:

Yeah, it’s a life insurance policy that if you died, then it would kick in and it would pay the company, if you made the company the beneficiary or pay your spouse or somebody or maybe the other members of the management team, so that you could be replaced.


Lee Crutch:

Okay. And last question, how quick will this call be uploaded to your website?


Kim Lisa Taylor:

We usually get them up within three to four days.


Lee Crutch:

Okay. Okay. All right. Great.


Kim Lisa Taylor:

And we’ll also send out the recording in a follow-up to our database. Hey, thank you so much everybody for being on the call today. We appreciate that you took time out of your busy day to listen to us, and we love your questions, and we love to talk to you, so always visit our website. Schedule an appointment. If you want to cruise through the stuff that’s on the resources page, we’re constantly updating the FAQs and adding new articles and these new teleseminars. And if you have any specific questions or a topic that you think would be good for us to cover, we’d love to hear about that, too. So we hope to you have you all as clients in the future, and we hope you all have a wonderful day. Thank you so much.


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!