‘Everything You Always Wanted to Know About Starting an Investment Club’ With Kim Lisa Taylor

You know the benefits of wise investing, but what about your friends? One way to introduce them to investing and help educate them is through an investment club. What exactly is involved in overseeing an investment club? And how do you go about creating one? In this podcast, Kim Lisa Taylor tells you how.


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Kim Lisa Taylor:

Welcome to Syndication Attorneys’ free monthly podcast, where we talk about topics of interest to real estate syndicators, with 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 a 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 free podcast is of a general, educational nature and should not be construed as legal advice. Today our topic is “Everything You Ever Wanted to Know About Starting an Investment Club.” And today I am the guest speaker. So you get me all day.

I’m the founder of Syndication Attorneys and managing attorney there. We do have other staff. We have other attorneys, paralegals. We also have a graphics department that creates investor marketing materials, and we’re constantly growing and adding new services.

So if any of you are not clients yet, we’d love to have you as clients someday. And we do have a low-cost option for you to become a client of the firm through what we call a Pre-Syndication Retainer that gives you access to the weekly Masterminds that we do with me. I host those every Wednesday morning, 9 a.m. Pacific Time/noon Eastern Time, where it’s just kind of open office hours. We practice elevator pitches. Everybody gets to ask their questions. We encourage our clients to interact with each other. That’s been really popular. And then we also give you some discounts off your future syndicates and some freebies like an investor marketing plan template, an investor relations blueprint that will help you on your journey of developing a robust database of prospective investors so that when you have deals, you have all the investors you need to be able to fund those deals.

We certainly look forward to engaging you in one of those ways, or if you get a deal and you want us to help you with that, we would be happy to assist you with that as well. One of the things we pride ourselves on is our deal-structuring and helping you figure out how to split money with investors, how to keep something for yourself that makes it worthwhile for you to do it and to take on the risk of being a syndicator. And to also introduce you to services that you need as your company grows so that you can start out buying $3 million to $5 million deals and you can eventually be buying $30 million to $50 million deals, or you can do more deals. So the whole goal is to help you achieve your goals so that you can help your investors achieve their financial goals and everybody prospers.

So that’s kind of our main mission. Now let’s get started with today’s topic and then we’re going to go to live Q&A. If you have questions that you’d like to pose, it doesn’t have to be about today’s topic. It can be anything related to syndication deal-structuring, marketing your offering to investors, developing your investor database. Any of those questions related to raising capital, I’d be happy to answer those after our discussion. You can either raise your hand if you’d like to ask the question live or there is a button at the bottom of your screen that says, “Raise Your Hand.” You can hit the Q&A button, or you could even put something into the chat; I’ll be monitoring all of those things as we go.

But before we start, I wanted to tell you we’ve hit a really important milestone with our podcast. I know that some of you, you’re logged in here and you’re listening live, which is fantastic. We love the engagement and the interaction. I think it makes the podcast much more valuable to you and then also to the other listeners as well.

We just hit an important milestone where we’re consistently getting over 200 downloads a week, and we’ve been informed by our podcast consultant that that puts us in the top 10% of all podcasts in the world. So that’s pretty amazing. We’re really excited about that. And we’re excited that you’re part of it.

If you haven’t already subscribed to our podcast, it’s 20 different podcast platforms. It’s called “Raise Private Money Legally.” It’s the same content that you’re getting here. We just kind of can it, put some intro and outro music in it, and put it up for the world to learn and benefit from what we’re able to discuss here. And then if you want to listen to other podcasts that we’ve done in the past — maybe if you’re new to our podcast — you can do that at our website, or you can do it on the podcast platform if you like to listen through your mobile devices.

On our website, if you go into our Library and then select “All Podcasts,” then you’ll be able to access all of our previous podcasts. Also, I frequently appear on other people’s podcasts and sometimes you get some different content there because a lot of times they’re asking me to kind of give a broad overview. If you’d like that kind of an overview, listen to some of the other podcasts that I’ve been on. And sometimes they ask me to talk about topics that we don’t discuss here. So that is different content.

Also, there’s 50 different articles there. I think most of them are one or two pages. So very educational, easy-to-read, plain-English documents. They’ll all help you on your journey. And you can download a free copy of my book, “How to Legally Raise Private Money.”

And it’s the book that’s behind me here, “How to Legally Raise Private Money.” It’s an Amazon No. 1 Best Seller. It’s done really well and it’s helped a lot of people. It’s got a lot of great reviews.

Enough about me. Let’s get onto the topic.

We’ve been approached a number of times by people who say, “Well, we would like to help our friends invest.” They don’t really want to do a syndication with their friends. They want to form a group, maybe a meetup or something like that, where they can get together periodically and they can evaluate different investment opportunities and decide which ones they want to collectively as a group make an investment in. And the benefit of that for your friends and family is they stay in control in what they invest in. They’re not handing over control to you, which some of them may be reluctant to do.

They don’t maybe have to invest the same minimum that would be required for an investment in a particular offering, which is sometimes $50,000 or $100,000, maybe even more. Because you can pull five or 10 people together and to achieve that minimum, so maybe everybody just invests five grand and you got 10 people in it. And then now you’re making that $50,000 investment as a single entity.

So let’s talk about kind of the mechanics of that and how it would work for you.

Most of you are familiar with the concept of meetups and you can create those through, I think there’s an app that actually allows you to create those. You can do them either virtually, or you can do them live. It’s up to you. If your friends and family are spread far apart, then that’s something you might want to do on a webinar on a weekly or a monthly basis, or maybe a biweekly basis. If your friends and family are local, then you might want to have a local meetup.

So how would you construct that meeting if you wanted to be the organizer of that meeting? Because you’re the one that’s gaining the knowledge and the experience on what to invest in and how to analyze deals.

The first thing you want to do is make it education-based. So the first thing you’re doing is you’re sharing knowledge with the attendees on how to analyze deals and what is a syndicate and how does it work and how you might make an investment in one. Talking about different opportunities, whether you’re looking, maybe analyzing different asset classes. Once a week, you look at, we’re going to look at multifamily this week, and then next week we’re going to talk about warehouses or self-storage.

You could allow guest speakers to come in, people who are experienced in those asset classes to come in and teach those sections of the courses if you don’t feel comfortable doing it yourself, or that might be something that you could teach.

One of the things you need to realize about teaching is that teaching makes you an instant authority. So once you start teaching other people, they look at you as “You know all about this; you know more about it than me. So why don’t I just kind of group with you and let you help guide me through this process?” So it makes you an instant authority. It helps you build that database of prospective investors.

One of the things that’s different about an investment club versus a syndicate is that in a syndicate, you’re going to create a management entity that is going to run the syndicate. You’re going to do all the day-to-day operations. You’re going to find the property. You’re going to do the deal analysis on the property, make sure it’s viable for syndication. You are going to coordinate bank financing on that property, and you’re going to work with the attorneys, your securities attorneys — us hopefully — to help you create the correct offering documents in the correct corporate structure, splitting money with investors, determining what kind of fees you’re going to earn as the management of a syndicate and also determining what kind of profit shares you’re going to get and when that’s going to happen, and all of that. So we’re going to help you draft all those documents. And then you’re going to have a portion of your documents that we’ll draft that are the subscription agreement that the investor fills out certifying that they meet the financial qualifications to be in that syndicate and to invest with you.

So, I guess one of the reasons you might lean toward an investment club versus a syndicate is that in a typical syndicate, if you’re following the federal rules, that would include Regulation D, Rule 506. Most of our clients are going to be starting out with Regulation D, Rule 506(b) and then maybe after you got everybody you know invested with you and you’ve run out of people that are non-accredited, then you might graduate up to Rule 506(c), offerings that you can advertise. But when you’re in that stage that you’re raising money under Regulation D, Rule 506(b), one of the requirements is that your investors have to meet some certain financial qualifications to be able to invest with you.

So they either have to be accredited investors who have over $1 million net worth exclusive of any equity in their primary residents, or they have to have $200,000 a year income if they’re single or $300,000 a year income if they’re a couple. And so it could be married couple, it could be co-habitating couple, but people who are holding themselves out to be a couple. There’s a few others. There’s actually 12 different definitions of an accredited investor, but the ones I just stated are for individuals or couples, which is the most common one that people are using. There is another definition for an entity that has over $5 million in assets or in which all of the investors are accredited investors.

And we’re going to talk a little bit more about that one later on. So you can either have accredited investors in a Reg D, Rule 506(b) offering, or you can have non-accredited but sophisticated investors. Sophisticated investors are investors who by themselves or with the assistance of an investment advisor, have the knowledge, experience or ability to be able to evaluate the risks and merits of an offering on their own and to be able to understand the offering materials that you’re going to be providing to them. So they really have to have some prior background in reviewing prospectuses, investing in private placements, maybe have owned small businesses, or they’ve owned rental real estate in the past. Something that’s more than just someone with some savings and a job. If all they have is some savings and a job, they’re not going to qualify to invest in your Reg D ,Rule 506(b) offering.

So how many of us know people like that? Many, many of us know people like that, and we’d like to be able to help those people. So one of your options might be this investment club model, where you’re getting this group together, you’re educating them on this syndication process and all the things that are necessary to determine whether it’s an appropriate investment. And then everybody makes their own decision whether to participate or not. So that is key. With an investment club, only those that raise their hand and say, “Yep, I want into this deal,” they’re the only ones that are allowed to participate. It’s not like you can force the whole club, if the majority votes “We’re going to invest in this” that everybody has to contribute. It’s not like that. So you’re going to still be creating an LLC for each investment that you’re going to make, because it’s going to have a unique group of investors.

You’re going to have 10 people that decide to invest in Syndicate 1 and 20 people that decide to invest in Syndicate 2. And you’re going to collectively pull all that money together into a bank account where you’re then going to be able to make that investment. Your LLC is going to make that investment as a single investor in that syndicate. So that’s kind of the key to an investment club.

There’s no financial qualifications. And the reason is because all of the investors are actively involved in generating their own profits. They’re all making their own decisions whether to invest or not. They’re all going to be actively involved. They could appoint one of you to be the lead person on a particular deal. And so you are the one that’s going to be gathering information about how the deal is performing, and then reporting back to the club on what’s happening with that deal and what’s going on.

So you would have to determine who that’s going to be. I would argue that it’s better if it’s not the same person every time, because in order to defend that you’re not selling securities where people are just passively investing and they’re relying on you to generate the profit for them, you want to make sure that maybe whoever that point person is, is kind of rotating amongst the members of the club and not just relying on just you. I would argue that you should have maybe two people appointed to kind of lead that particular investment, be the point people. They’re going to be the ones that open the bank account for that entity, collect the funds for that entity and make the disbursement. They’re going to be the ones that sign the subscription agreement on behalf of that particular group and submit it.

You can authorize, when you create that LLC that’s going to make that investment, you’re going to do it as a member-managed LLC. In a member-managed LLC, all of the members are considered to be actively involved in generating their own profits and they’re considered to be managing members as a result of that. So all of them are managing members. Technically, legally, they all have the right to bind the company contractually to open and close bank accounts. But in the operating agreement that we would create for that investment club for that particular investment, we would designate, these are the two people that we’ve selected who are going to be running point on this particular project in opening and closing the bank accounts. The reason I say two — and it should be two unrelated people — is because you want to make sure that people stay honest. You always want to have some independent oversight of anybody that has control of a bank account involving investor money.

Whether you’re in a traditional syndication or whether you are in this situation where we’re talking about with an investment club, you should always have independent oversight. So you want to designate two people and you kind of want one watching what the other one is doing. If maybe one person’s writing the checks most of the time, that’s okay, but checks over a certain amount of money require both signatures. And they want to make sure that they’re looking and making sure that that person is not going to the ATM and withdrawing money and doing things they shouldn’t be doing with company funds. So you would hold a meeting, and you would say, “Okay, here’s going to be our monthly meeting.” And then you would designate one or more of the members to present some offering materials.

First, you’d do the teaching section. And then the second section would be a presentation of the proposed investment. And so that could be them having gone to an event, met some syndicators, got some private placement memorandums from a syndicator or two, and then they want to come and kind of walk through it. Maybe they would create a little PowerPoint or maybe they would even invite that syndicator to the club where they could do a pitch deck and pitch it to the club. And then after that, everybody would determine whether they wanted to make that investment through the club or maybe even some people would want to make an investment directly. And that’s okay. There’s no reason you wouldn’t want them to do that. But at that point you would take a poll: “Who’s interested in investing in this particular thing?” You’d get people to raise their hand.

You would make sure that they all got a copy of the offering materials and were able to review them in their entirety because that’s not something you can do during the meeting. The offering materials that we generate are going to be a private placement memorandum, an operating agreement, a subscription agreement. You’re going to be looking at like 120 to 150 pages of legal documents. So you’re going to have to give them time to digest that. And then also there should be a property information package that’s going to be 15, 20 pages, that’s just going to talk about the property and where it is, how many units. What’s the business plan for that property? What does the sponsor of that syndicate plan to do with it to make it better than what the sellers did? What are the value-add options and opportunities? How are they going to increase brands, decrease expenses? How long do they plan to hold it?

How much money do they need to get into it? How’s that money going to be spent? That’s called sources and uses of funds. Is it going to be a pro forma? Usually they go out five years. Kind of just showing year by year, this is how we think our property’s going to perform. And then there should be some proposed exit strategy in five to seven years saying this is what we think we will have generated a net operating income of this, which is, and we are just imagining in the future what the cap rate might be. And then by that, we’re able to determine what a proposed sales price could be at that time. Be able to determine what kind of equity might be available to share with investors and then go on from there.

You’ve got to educate them on how to review those documents, but you’ve got to also present it and then give them time to review those documents.

So maybe 10 people raise their hands and they all go back and they read the documents, and then you have a subsequent follow-up amongst the group that raised their hands. “So who’s read the documents and who now wants to make the investment?” And then you’re going to get them to tell you how much they want to invest — $5,000 or $10,000 or whatever their number is. And with that, you’re going to be able to figure out, okay, our group is planning to invest $80,000. And so we’re going to create an LLC for that and name all those participants as its members. And you’re going to also reach out to the syndicator and say, “Here’s what we have. We have a group, we’re going to create an LLC that’s going to invest and we’re planning to invest $80,000.” So that they know that’s coming. And then whoever’s designated to kind of lead that particular investment group that you’ve created is going to be opening the bank account, collecting those funds and filling out the subscription agreement, sending it to that syndicate sponsor and then sending them ultimately the funds.

One of the things you have to be aware of is when your group is investing in another fund, you have to look at the financial qualifications that are required of their securities offering. So if they’re doing a Regulation D, Rule 506(b) offering, and they want to be able to include non-accredited investors, if your group is investing more than 10% of the equity in their syndicate, then they’re going to have to look through your company and count all the non-accredited investors in your group. So if everybody in your group is non-accredited and you have 10 people, you’re going to have to let them know, “Hey, you might have to count our 10 people towards your 35.” So they may or may not want to do that. But usually that doesn’t come into play unless your group invests more than 10%. So it could count as one non-accredited investor until then.

Let’s look at when you’re investing in a Regulation D, Rule 506(c) offering. If the sponsor of the syndicate that your group wants to invest in is a Reg D, Rule 506(c) offering that only allows verified accredited investors, then you are going to have to restrict your group to being only accredited investors. So you would not be able to allow non-accredited investors to participate in that. And you would make that known at the time you’re presenting it to your club and that you would say, “This particular investment is a Rule 506(c); it’s only available for verified accredited investors. So we would have to be able to provide verification of that and that might require that each of those investors go through a verification process.” And they can do that. We have a place for people to get verified through our website. We’ve partnered with a company called EarlyIQ that does those verifications.

So the investors could go there, click the “Get Verified” button. There’s a fee — I think it’s $69 or $89  — where they would pay and then upload their financial information to determine whether they are accredited. And then you would be able to present all of that with your subscription agreement to the syndicator that has the 506(c) offering and proving to them that all of your investors are accredited. So you need to make sure that you’re aware of that.

Now, you might want to know the makeup of your membership. You might want to, before you admit people to the membership of your club, you’re probably going to want to gather some financial information about the people in your club that are becoming members to make sure that you know if 90% of the people in your club are not accredited and only 10% are accredited, well, then you’re not going to want to go out and look for a lot of 506(c) offerings.

You’re going to have to figure out how to find people that are doing 506(b) offerings that will allow your group to invest with that.

So your club is just a club. It’s just a membership club. It’s going to have rules. It’s going to have maybe some bylaws and some rules. It’s not any contractually binding thing. You can charge membership dues. You can charge people 20 bucks a meeting if you want. And usually the fees that you’re going to charge are going to — not towards investment — they’re going to be to sustain the club. If it’s a live club, you’re going to want to serve refreshments. If it’s not a live club, maybe you’re going to want to have a website and whatever it’s going to take to maintain that. You want to make sure that you’ve got some method where people can pay to be members. And from my experience, what people pay for, they value, what people don’t pay for, they don’t value, and they don’t show up.

So if people are paying, then they show up. It’s similar to going to your real estate investment association meeting, where you’re going to pay 20 bucks to walk in the door and listen to whatever they’re doing and they’re going to provide some refreshments. So just think of it like that. We have had people that have done even virtual refreshments. And what they did, which I thought was kind of clever, is they actually would get everybody to pay, and you can set up payment options through Stripe or something like that, where they’re going to pay to attend the meeting. And then you send everybody a $10 gift certificate, everybody that paid, to DoorDash or something. So they can have the food delivered or they can be eating the food while they’re listening to the pitch. And it’s kind of like you’re in the same room, not quite. But anyway, we’re in a virtual world now so we have to adapt.

You won’t use a manager-managed LLC. So your club is just a club. It’s got rules, it’s got bylaws. You have to show up. You have to vote. You can’t participate in anything you don’t vote on. You have to review on your own, the marketing or the offering materials for each investment. You have to make your own decision and all of that. But the investments themselves we’re going to do through a series of member-managed LLCs. So we’ll create a member-managed LLC for each investment. And only those member that are in it, we’re going to designate two people at least, who are going to be kind of in charge of collecting the money and communicating with the syndicate to see how things are going and reporting back to the members of the club of that investment group.

Your group needs to be limited to 100 members or less. And the reason for that is because if you go over that number, you could get characterized as an investment company, which would require a registration process that would be very onerous. So you don’t want to do that. So just limit your group to 100 members. If somebody leaves, you could admit another member, but you’re going to be stuck with only 100 members. To avoid having to have someone in your group register as an investment advisor, you need to make sure that no individual gets paid fee in connection with any investment, nor should any one person select investments on behalf of the club. So this is going to be a collective effort. You can do the club dues. So this is just, again, creating the framework so that everybody can get together, review these investment opportunities, get the education and decide whether to make the investments.

If you know you want to be able to invest in advertised offering and want to be able to look for offerings on CrowdStreet or RealCrowd, some of the big crowdfunding platforms, then you’re going to want to limit your members to accredited investors only. If you are going to go take it upon yourself or the members of the club are going to take it upon themselves to go out and meet syndicators who do Rule 506(b) offerings, then you are not going to have to meet that definition, but you are going to be subject to those limitations we talked about earlier. So if you do have non-accredited investors, your club is only going to be able to invest in Rule 506(b) offerings. Unless you’re going to raise a massive amount of money and let’s say you’re going to invest $5 million. If your group is going to put together a $5 million investment, then you can qualify as an accredited investor. So the definition of an accredited investor for entities is any entity with $5 million in assets or more, or all of the members are accredited investors. So that’s one option.

The whole reason you’d want to do this is to be able to introduce your friends and colleagues to the world of real estate investing as part of these private group investments and to help them find alternatives to the stock market. You found this niche. You’ve decided it’s viable for you. If you think that some of your friends and family would be interested, then this is a good way to get them educated. The other benefit of this is, let’s say that you have a club, but you’re also a syndicator. So you’re going to have access to the contact information for all those people in your club. If you vet all those people in the club and find out what their investor qualifications are and their suitability to invest in these types of offerings are before you let them into the club, then you’re going to have that information through your database too.

So maybe one of the rules of your club is that individuals who syndicate deals would have access to be able to expose those deals to the members of the club so that they could determine whether to invest individually. So that’s another option for you. There would be nothing that would prohibit that. You just don’t want to make the club a place where it’s your show, where you are only using it to showcase your deals, because then it’s not a club. It’s now something different.

Your club should be focused on looking at opportunities from multiple syndicators unrelated to the club. If you want to allow members of the club to solicit the other members of the club for their individual syndicates, then you’re going to have to decide whether or not you want to allow that.

But it’s a good way to educate your members so they become sophisticated investors. One of the things they’re going to have to do when they decide they want to invest individually in one of these Rule 506(b) offerings is they’re going to have to attest to why they’re sophisticated. And if they can say, “I’ve been a member of XYZ Investment Club for a year, and we’ve embarked on this education process and learned all about syndication,” well, they’re going to qualify as sophisticated investors. So that’s going to be helpful for you.

So just beware of allowing somebody to take active control and making all the investors passive, not involving them on day-to-day decisions and things like that, because that would then cast you in the role of a syndicator, which is different. The alternative to this is if you decide, “Well, I don’t want people making all these decisions or telling me what to do. I don’t want to be in a member-managed LLC where everybody’s a managing member. I just want to be able to run my own show, do the day-to-day stuff. I just want passive investors,” you are now falling squarely within the definition of a syndicator. You’re selling investment contracts to your investors. The investment contracts are securities. Now you’re going to have to comply with securities laws in order to solicit that group. So that’s the distinction.

The SEC actually has a publication about investment clubs. So if you want to know more about this, you can read an article I wrote about this that’s on our website, called “Want to Help Your Friends Invest? Consider Opening an Investment Club.” It’s really just going to go through all that we’ve discussed here, but you might want to keep that as a reference.

We charge $7,500 to set up your initial club and then each investment beyond that would be $3,500. So let’s say you had 10 people that wanted to do it. You could charge them each $350 to help cover the legal costs. You just can’t make the money off it yourself.


So I would love to go to questions. I see that we have a couple, so don’t be shy. Any question you have is a question everybody else is thinking about; they’re just not asking. So be brave and give us your questions.

Cornelius, hey Cornelius. Thanks for joining. He asks, “Can you have multiple clubs, like two groups under 100 members?”

Yeah, but I think you’re going to have to be careful about that. You might want to be looking at different opportunities. Like one is for real estate. One is for non-real estate. Because otherwise a securities regulator could look at that and say, “Hmm, those clubs are really integrated clubs. They’re all part of the same. You have 200 people. You’re just operating as an investment company and you’re trying to disguise it.” So I’d be a little cautious about doing that unless there’s a way to distinguish one club from the other. Maybe one club only allows accredited investors and the other club allows accredited and non-accredited investors. That would be a way to distinguish it, or it has different types of offerings. Maybe one club says, “We won’t invest in anything unless we can raise $100,000” and the other club says, “We’ll invest in things with $50,000 minimums and non-accredited investors.” Something like that. But we’d be happy to consult with you about that. Or you can, I know you’re working with Michael on a deal, you could ask Michael about that as well. Okay. So thank you for asking that.

So we have someone who asked, “If you have an LLC with greater than $5 million in assets that is investing in syndications and few family members want to put money in that, is that okay?”

Yeah, I guess. We think we’d have to have a little bit more in-depth discussion to know, but on its face, as long as your LLC has over $5 million in assets, it qualifies as an accredited investor. So you can include non-accredited investors in that LLC. Now, realize depending on how you’ve structured that LLC, if it’s a manager-managed LLC where you are the manager, then you are going to have to do your own syndication for that $5 million LLC. Because if those family members who are putting money in are doing it passively and they’re relying on you to generate a profit for them, again, you’re selling investment contracts and then you are now subject to securities laws.

The other side of that, which gets a little bit complicated, is that if you’re creating your own fund to invest in other people’s deals, then you’re creating what is called a fund of funds. And when you are buying real estate directly you — well, so your fund of funds, your fund of funds is the securities offering. You’re invested in somebody else’s securities offering. So what you’re buying is securities in somebody else’s fund. You’re not buying real estate because you don’t have direct ownership and control of the real estate. So because your fund is investing in someone else’s securities, you are the fund manager and you are advising your fund on how to invest in other people’s securities. You now fall subject to the Investment Company Act of 1940, which requires you to have 100 or fewer investors in order to qualify for an exception from having to register as an investment company.

But it also triggers a requirement that you become a registered investment advisor. There’s a lot of different levels of investment advisors. The first one you’d qualify is usually less than $25 million under management, which means you have to file a form with the SEC, it’s called a Form ADV Part 1, which is going to require some ongoing reporting. And then you may also have to register as an investment advisor in the state where you live. So you may have to register, and that becomes a little more onerous. Some states have no requirements. Some states have onerous requirements. You might even have to take a test and get a license, and you’re going to be subject to different reporting requirements.

There’s also some pending legislation with the SEC right now, it’s out for public comment, that would require any manager of a fund of funds to become an investment advisor, but also have some even more rigorous and onerous reporting requirements. One of them would be that whatever fund your fund of funds invest in would have to produce audited financials. And I know that my clients aren’t doing that. They’re not required to do that. So if you said to them, “We’re going to invest $100,000 in your fund, but you have to produce audited financials,” they would say, “No, thanks.” They wouldn’t want your money. So we need to keep abreast of that.

Of course, we’ll keep you informed with what happens with that rule, but that could really change things for the fund of funds. But it’s not going to happen with this investment club structure that I’ve suggested because your investment club, this little separate LLC we’re creating for this group of investors that are all going to stay actively involved, this is not a security. You’re not selling passive interests. Everyone’s actively involved.

So in this structure, this member-managed structure, you’re not going to have to comply with securities laws, as you’re not going to be characterized as a fund of funds, you’re just going to be characterized as a member managed LLC, a joint venture, technically, that is going to invest in somebody else’s deal. So that may be the way around that if that comes to pass where those rigorous rules get passed. So thank you for that question. Sorry for a long, long, long answer.

Christopher asks, “Will we be talking about JVs and blind pool funds at all in this firm?”

Well, we certainly can. So here is the distinction between a JV and a blind pool fund: A joint venture is where all of the members are actively involved in generating their own profits. And the legal entity that we use for that is a member-managed LLC. And so legally, as we stated earlier, by law, all the members are considered to be managing members. They all technically have the legal right to open and close bank accounts and to contractually bind the company, although by the operating agreement, you can limit that to a couple of people. You just have to be careful that you’re not starting to pay fees to those people who are being designated as the authorized signatories. You’re not paying separate fees to them. And you’re not also establishing a waterfall that gives them some preferential treatment or some greater share of profits. In a joint venture — true joint venture member-managed LLC — you should all be getting your profit share based on how much you’ve invested. So that’s a joint venture.

In my opinion, now in this investment club model, this is different than a typical joint venture because it’s truly people who are kind of “in the know.” They understand what they’re getting into. They’re not going to be trying to run the deal. They’re just trying to make a decision of whether or not it’s right for them to invest. And then once they do invest, then they’re just designating a couple of people to be their lead people who are going to report back to them. In a true joint venture, my recommendation is no more than five people.

So where would you use a joint venture within the real estate investing realm? You could create a joint venture of up to five people who want to all pool funds and buy something together. You could create a joint venture that’s going to be the manager of a syndicate where you’re all going to be contributing the at-risk funds. You’re going to be delegating out the responsibilities of this syndicator to the five of you.

Why do I say five? Because I’ve just seen too many times when people had more than five people in a joint venture and it became contentious. Worst-case scenario, I saw one that ended in litigation immediately after they closed on a property and litigation went on for over two years and completely affected everybody’s returns. So in my experience, five people can make decisions together and they can manage to get along, but more than five starts to become problematic. So you’ve got to think about that.

Can you count a person and their spouse as one person? Well, it depends how actively involved that other spouse is. If both of them are going to be very actively involved in making decisions, I would count them as two. If one of them is just kind of a passive role and the other one is the making the decisions, maybe you can count them as one. But this is very subjective, but it’s just based on my experience.

I’ve been doing this exclusively since about 2010. I started doing it in 2008 and I’ve just seen a lot of deals fail where joint ventures have more than five people. So that’s just kind of my rule of thumb, not based on anybody’s experience except my own.

So, a blind pool fund is where you are raising money before you have a deal under contract. So instead of having a property information package saying, “Hey, this is what we’re buying. Here’s our pro forma. Here’s our business plan. We’re looking for properties in the Southeast and Midwest U.S., 100 units plus, price range of $5 million to $30 million. We’re looking for properties that are going to generate overall cash on cash returns in the 25% to 30% range. And we’re planning to split profits with our investors 70/ 30 or 75/25, something like that.” I’m just throwing out kind of parameters. These are not necessarily the parameters you’re going to use, but it’s just, those are the kinds of things you’re going to have to define in your business plan.

And so if you find properties that meet that criteria and you have people that have already invested with you, you don’t have to go back and get their further permission to acquire the property. It already meets your business plan. They’ve already invested in your business plan. You just go out and buy the property.

You have to be careful about blind pools that invest in other people’s deals because if more than 20% of your blind pool funds are invested in somebody else’s deal, now you start to fall into that fund-of-funds category, which triggers investment advisor registration and Investment Company Act restrictions. So be careful of that. Keep your investments in other people’s deals less than 20%. Meaning that you have direct control and are operating properties directly with 80 plus percent of your funds. And why that is, is because the Investment Company Act of 1940 has three exceptions, two of which apply to what you’re doing. And so this says, “If you’re doing this or that, then you don’t have to register as an investment company.” One of the exceptions is the real estate company exception, which says that you are in direct control of the real estate, which means you either control it or you have the right to remove the management for any reason or no reason at any time.

That doesn’t apply if you’re just investing a couple $100,000 in somebody’s deal and they’re managing it; they’re never going to give you that authority. If you’re investing $5 million in somebody’s deal, and it’s only a $6 million raise, you could give yourself that ability because you’ve got the power in that situation. So you need to be careful of investing too much using blind pool funds that would characterize you as a fund of funds and then trigger these other requirements.

So the blind pool fund should be created to directly own and control real estate. You can co-invest with other people. So sometimes if you have a blind pool fund and let’s say you have $2 million available and you have a blind pool fund, but you just found a property where you have to raise $4 million. You could create a joint venture, your syndicate could create a joint venture with a family office or a private equity company, that’s going to put up, or another syndicator, that’s going to put up that other $2 million and then your two syndicates co-own it together. And then you’re going to designate your syndicate managers, theirs and yours, to co-manage it. So that’s one way that that can be handled.

So Christopher, if that didn’t answer all of your questions, feel free to ask any follow-ups you’d like, but I hope that kind of helps you. There is an article on our website, again, at syndicationattorneys.com, go into the articles. There’s several articles on blind pool funds. So if you just search for the term “blind pool,” then you’re going to find those articles. There’s also some that talk about joint ventures. So I would search for both those terms and read those articles. And then also look at our past podcasts because we may have done something specifically on that topic. And in fact, one of the ones we recently did was called, “Should You Really Start a Fund?” because this is the hardest way to raise money.

It’s much, much easier to raise money based on a property you have under contract right now with a finite timeline for getting it closed than it is to raise money based on a business plan. Because a lot of investors are going to just sit on the sidelines and wait for you to get something under contract. And even with a fund, you’re usually going to raise money when you need it. Maybe you’ll take a deposit, 10% of somebody’s investment in order to secure their place in the fund. But then you’re going to, when you get the first property under contract, then you’re going to go back to all your investors and say, “Okay, you all agreed to invest $100,000 each and we need $2 million in order to be able to do this.” So you’re going to tell them what percentage of their investment they’re going to have to contribute in order for you to raise that amount of money.

When you do blind pool funds, there is a way to do it where you get people to commit to the full amount upfront, and then you use a series of capital calls to call in their investments as you need it. Again, tied to when you get properties under contract. You don’t want to do a $5 million fund raise, $5 million all at once, and have it sit in the bank account for two or three years. Your investors will not tolerate that. They’re going to allow you to have their money for about 90 to 120 days before they want it to accrue a return. So they will sit still for that long, but then they’re going to either want their money back or to have it invested in something. So you’re still going to raise money when you need it even when you have a fund. And it’s much easier for you to raise money when you can say, “Here’s the property we have under contract now for our fund.”

So let’s see. I think Christopher, we’ve probably covered this pretty good right here, but that’s okay. And I think go back and read the or listen to the “Should I Really Start a Fund?” podcast, the previous podcast, because I think that’ll also talk about it. And then of course we’re happy to talk to you individually if you need it.

So Christopher says, “I currently do JVs per property and residential typically between my LLC and one or two investors, we share in the profits. I’m trying to determine if I step it up and go to a blind fund so I have more flexibility in purchasing properties and pay out a dividend.”

Yes, you can absolutely do that. We’ve written several residential blind pool funds for people in the past. It usually works best if you just do some kind of a profit split with your investors. That’ll keep your life simple versus trying to, say, pay some kind of a preferred return.

It gets very complicated when your income is coming from selling the properties. You may want to have a tax advisor that kind of guides you on how you might be able to structure your deals so that your investors don’t get hit with a lot of short-term capital gains tax rates, because that’s going to be a higher tax rate than somebody that’s investing in a deal that would be subject to long-term capital gains rates. So you may want to consider a model where you renovate and rent for a period of time before you sell. Just so that you can hold the properties long enough that the investors can get the long-term capital gains rates. So something to look into, think about and decide whether that would be appropriate for your investors.

Let’s see, do we have anymore? We do; anonymous asks us, “Could an investment club become a co-GP on someone else’s apartment syndication and members of the club help raise capital?”

I don’t really think that’s an appropriate use of investment club funds because you’re thinking about, maybe some of you have heard of in the past this concept of investment club, not real estate related, that looks at this certain stock or bond perspectives or this particular company. Or do we want to invest in Apple or do we want to invest in something like that? It’s really more suited for people who are going to be not actively involved as far as not have a lot of active involvement. So if somebody becomes a co-GP, you have to have a job. Everybody involved has to have a job. I think you’re going to end up going crazy trying to herd cats if you get into something where there’s a lot of activity required of 20 members of a group versus having a smaller group. If you were going to do that, I would keep your group extremely small, like three people.

So yes. Could you create a member managed LLC that loans at risk money to syndicators so that they can go out and pursue deals? Yes. I would make sure that all those members are accredited because that money is at risk. If that deal doesn’t close, they don’t get their money back. They better be able to afford to take that risk. And then you need to make sure that whatever you’re getting for that at-risk capital is a sufficient return to be able to take on that risk. We do have some clients that do a seed fund. They do a seed fund where they have accredited investors. They put up like $500,000. They use it to go out and put deposits and pre-closing expenses down on properties.

Their particular model is that whether they use the money for a day or six months, it gets a 10% return. And then if they leave it in the deal while they’re raising money, so the idea is it’s working like a line of credit. So as they get a deal under contract, then they syndicate that deal. They raise the money for that deal. They pay back their seed fund. So they always want to have the money in the seed fund to be able to do the next deal. And so as long as that money is sitting in that deal.

So let’s say they needed money to close and they didn’t have enough money quite yet, to pay back the seed fund, they could leave it in a little longer. They would start to get the same returns that everybody else gets, but it’s still short-term money. It still has to be paid back. They’re still going to raise money and pay it back. And you might end up foregoing your acquisition fee while you pay back your seed bond or something like that.

There’s all different ways that this can work. You can also do a convertible note offering. We’ve had clients that have all done auction properties, where they needed to have the money within a day or two. So they got people to loan them money. In this case, they offered them 1% a month. They got accredited investors to loan them money. So all they needed was a promissory note and a subscription agreement. And then they went out, they bought auction properties. After they got the property secured, they syndicated it. They raised enough money to be able to pay those note investors back, but they also offered those note investors the first right to convert their note into equity interest in that offering. That’s called a convertible note offering. So the investors would have the option, “Yes, I want to be paid back.” So they get paid back their principal, plus 1% a month for all the time that it was used, plus a 2% origination fee. Or if they wanted to convert, then whatever was owed to them, origination fees interest principal, could be converted into Class A interest in the new fund. So they were usually offered the first right of refusal. So lots of different ways that that can be done.

So Christopher asked, “Can you practice in the state of Washington?”

We are operating under federal law. Everything we do is under Regulation D, Rule 506 or other federal securities laws. So we’re able to help clients in any state. So that’s a really great question, too.

And so that takes us to the top of the hour and also answers all of the questions. You guys have been a great audience. I really, really appreciate all the questions that help make this a much better podcast. And I appreciate that you’re listening because we’re on the top 10% of podcasts, which is pretty exciting. And we look forward to seeing you on our next event.

All right. Everybody, have a really great day.

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“Very useful, no-fluff knowledge!!!!”

Kim Lisa Taylor explains in simple language all the concepts of Syndicating a deal and do it right!!! She and her team members are true professionals. She has prepared over 26 PPM & Docs offerings for me and my companies. I highly recommend her services‼️‼️‼️🙌🙌 Thank You! Kim.

Vinney Smile Chopra
CEO of MONEIL Investment Group


“Kim is phenomenal and highly qualified”

Kim Lisa Taylor is amazing at what she does: representing her clients and holding the highest fiduciary interest for her endeavors. A phenomenal and well educated individual, I recommend anyone to look into her podcast and legal services seriously!

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“Great info!”

Attorney Taylor provides excellent information that even seasoned capital raisers tend to overlook or need a refresher on. In fact, the semi specified offerings are another way for structure that I will be looking into. Thanks Kim! These pods are great!

Kevin Dureiko
Principle Fund Manager at BirchDobson.com

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