‘How to Use Regulation Crowdfunding to Advertise for Investors’ With Fred Peña

Krisha Young:

All right. Hello everyone. Welcome to the Raise Capital Legally podcast and YouTube channel, where we talk about topics of interest to real estate syndicators and fund managers, with the opportunity for live questions and answers before we sign off. This is attorney Kim Lisa Taylor, founder of syndicationattorneys.com, and I am Krisha Young, co-host and business development director. Before we get started, please note that audio and video from this event will be posted on our podcast platform, YouTube channel, website, and social media, and will be made available to the public. You can ask questions at the end of the broadcast by raising your hand or typing it in the Q&A. The information discussed during this event is of a general, educational nature and should not be construed as legal advice.

Today, our topic is “How to Use Regulation Crowdfunding to Advertise for Investors,” with special guest Fred Peña. Please join us as we interview Fred Peña of Ridge Crowdfunding about how you can use the regulation crowdfunding exemption to freely advertise your deals and raise capital from anyone. We’ll discuss the rules, limitations, mechanics, and advantages of this important exemption and how you can use it to help even non-accredited, unsophisticated investors participate in your real estate offerings with no pre-existing or substantive relationship required. Woo-hoo. During this podcast, you’ll learn how using this game-changing exemption can help you reach a wider audience of potential investors. All right, here we go. Hello.

Kim Lisa Taylor:

Hey, Fred.

Fred Peña:

Hi.


Thanks, Krisha. Hey, Fred, thanks for joining. Fred and I met recently at the REWBCON (Real Estate Wealth Builders) conference, and he was one of the little gems I got out of that conference, which was great. Had an opportunity to network with a lot of the other sponsors. He was one of the sponsors there, so we sat and chatted for a long time. Oh, jeez. And I was going to be using my Ridge cup today, and I…

Fred Peña:

That’s okay. I don’t even use one. I have a red cup here. I don’t use my own product. That’s the way they teach you, so …


Oh, no. That’s so good. Yeah, you got to have some product placement there really loud for you. Well, Fred, thanks so much for agreeing to be on our call and educate our audience. So, tell us about your background and your business.

Fred Peña:

Yeah. So, my background is an attorney also. I started practicing about 10 years ago doing securities offerings and mergers and acquisitions deals at a smaller firm in Utah. And it just so happened that when I was in law school, I was neighbors to an entrepreneur who contacted me eight years later after we moved apart. And he had an idea to do this crowdfunding business that’s affiliated with his company so that they could use it as a referral to get funding for their companies that they were working with. He called me up and said, “Are you still into crowdfunding?” And I said, “I am.” So, they hired me to set up this company for them, and then later, they asked me to run it for them, and so I left law behind. I still do law every day because of the securities nature of this business. And I started with a brand called Angel Funding and then moved now to expand it to Ridge, where we do anything instead of just film, which is the Angel funding side.


Tell us a little bit about the Angel funding side just because I think it’s so interesting.

Fred Peña:

Yeah, so Angel Studios is our partner. They’re a sister company, and I assume that the people on here probably know what that term means. But they have partners, clients that come to them. They’re doing distribution of a film or a TV series, and when they need production budget or advertising budget, they do that through crowdfunding in part, at least, in order to not just get the money but also to build their audience. We get referrals to work with those companies. That’s Angel Funding. And so, it’s just limited to the clients that they refer to us, that Angel Studios refers to us. So, we did a project, “The Chosen,” and that was the first one that we closed, and then we did “Sound of Freedom,” and we’ve done “Tuttle Twins” and a handful of other projects that some people in the industry are aware of.


Wow, so the Angel Funding side of things is actually raising money for those series or movies, right?

Fred Peña:

Yeah, exactly. And I’ll say raising money for in one sense of the phrase, but not in another, and we’ll get into that probably a little later as well, but yes.


Okay. All right. So, our audience has primarily learned how to do Regulation D, Rule 506 offerings. So they’re familiar with Reg D, Rule 506(b) and Reg D, Rule 506(c). But always, whenever I speak at an event or I teach, I get people that are coming to me saying, “Hey, we want to be able to raise money from our neighbors, and people in our community, and people that maybe they don’t have $25,000 or $50,000, but maybe they have a couple of thousand dollars, or even could we accept a $500 investment. And we’d like to be able to work with those people, but a lot of them are not going to be sophisticated. They are family, friends and acquaintances. We’d love to reach out and include them. How can we do that?” This seems like regulation crowdfunding might be their ticket to be able to do that. Am I right about that?

Fred Peña:

Yes. That’s not all you’re looking for, though, right?

Krisha Young:

Period. Yes, period.


From the 10,000-foot view, what is regulation crowdfunding?

Fred Peña:

Yeah. People, if they’ve already been trained on Regulation D, they know that it’s an exemption from registration from securities laws, so typically, every offering would have to be registered unless it’s exempt. And so Reg D is an exemption that Congress defined, or I guess it could be the SEC that defined it and said, “Hey, as long as you follow these rules, you can know that it is exempt.” And so Congress passed a law that indicated what? We want another version of an exemption that allows this ability to market to anybody and everybody like you were just mentioning, and so it is a separate type of exemption. If an issuer follows the rules of regulation crowdfunding, then they don’t have to file with the SEC in the same sense as an IPO or public offering. And it does allow them to market to non-accredited investors and have them invest as well as accredited investors.


Yeah. So, the distinction is, here, you can advertise, number one, and you don’t have to pre-qualify your investors. But there is a catch, which is you can’t do it by yourself. You have to do it through something called an intermediary, which is an approved crowdfunding portal that has gone through the process of getting approved either by the SEC, or FINRA, or both, right? I mean, that’s what you went through, right?

Fred Peña:

Yeah. So, we applied with the SEC and with FINRA. We’re a member of FINRA as a crowdfunding portal, and so it’s basically like saying we’re a broker-dealer, might be the right way to say it. We have fewer requirements on us, but also fewer things that we’re able to do, which is strictly deal in regulation crowdfunding. But yeah, we also don’t have to do all the regulation requirements that a broker-dealer has to do, which is good for us.


So, we’ve thrown out a couple of terms here, and I feel like there might be some people scratching their heads right now going, “What’s registration?” So, registration is really the process of getting your offering pre-approved by the regulators, which is the process you go through if you want to take your company public. So, if you want to advertise it on NASDAQ, New York Stock Exchange, or any public exchange and be able to offer it to anybody, then you would have to go through this pre-approval process. And there’s another exemption. So, regulation crowdfunding is also called Reg CF, so you might hear that. This was born out of the JOBS Act that got passed during the Obama administration, which was at a time when banks weren’t lending, and people were having a hard time getting financing for projects, or real estate, or anything. So they rightfully came up with another way for people to be able to do it, or several ways, and that’s when they passed the JOBS Act, which allowed Regulation A+.

Some of you guys might’ve heard of that. Some of our audience is probably familiar with Grant Cardone. He has a Regulation A+ offering. That’s really a streamlined public offering. It is a public reporting company. But then they also passed this Regulation Crowdfunding, which is, like you said, a little mini version of that that allows you to advertise.

Fred Peña:

That’s right.


So, that’s what Reg CF … And then the other term that we threw out there that people might be saying, “What’s FINRA?” Can you tell us a little bit about FINRA?

Fred Peña:

Yep. That’s the Financial Industry Regulatory Agency, I think, is the full name. And the SEC just basically hands off the responsibility to police the securities industry entities like the broker-dealers and portals to make sure that we’re being compliant doing our duty under the law. And I guess, from that perspective, I hope it’s okay to go into that just a little bit.


Oh, sure.

Fred Peña:

In my mind, the reason the SEC set up the requirement for an issuer to work through a portal is because you’re now involving the non-accredited investors who are typically seen as unable to protect themselves completely. Crowdfunding is designed to allow all of them to work together. So, there’s public Q&A tools that allow everybody to see the questions and the answers that everybody else has asked the issuer, which allows them to crowdsource that vetting process. But at the same time, because it’s involving non-accredited investors, there is a certain amount of vetting that the portal has to do, and that is, I guess, the minimum requirement for protection for the investor. And so, that’s why FINRA has us and the SEC has us involved.


Right. So, there is some vetting that gets done, but it doesn’t have to be done by the issuer. So, the issuer — just to throw out another jargon term here — we want to define that for our audience. The issuer is the company that’s offering the interest to investors, so it’s the company that is doing the thing they’re raising money for. And the SEC calls you the issuer when you’re doing that. So, if you’re a syndicator and you’re syndicating a real estate project, and you create a company that’s going to sell interest to investors, that, in the SEC’s mind, is the issuer of those securities, so that’s what we’re talking about here.

So, the structure is largely the same. As far as the corporate structure goes, it’s going to be largely the same as anybody would use with a Reg D, Rule 506 offering. Right? We’re still going to create an LLC. It’s going to be manager-managed. We’re still going to create a separate management entity, and then that manager-managed LLC is going to sell off part of the interest to investors, keep some for themselves, and that’s going to be your corporate structure. So, no real difference there. Still going to use the same kind of operating agreement, same waterfall, same fee structure that you might have in a regular Rule 506 offering.

What’s different, though, is — we’re going to get into that in a little minute. I’m getting a little ahead of myself. So, your funding portal, okay, so this is different than an investor management platform also because a lot of our audience is familiar with that. So, like Cashflow Portal, Invest Next, Appfolio, Juniper Square, all those guys, those are investor management platforms, so they’re a place where you can post your deals, and your investors can come in and see how their investment is doing. You can post your status reports, your tax forms, all that stuff. You can keep track of all your distributions. That’s different. This is a portal that is pre-approved by SEC and FINRA that allows you to actually raise capital. So, just mechanically, you say you can advertise, but what does that really mean? If I’m not able to go out and create my own website for my own offering, what can I do to advertise in conjunction with posting something on your platform?

Fred Peña:

Pretty much anything. And I don’t mean you can say anything, but you can advertise in just about any format. And so, with our film industry projects, the typical advertising is happening on common websites like Facebook, and you could see the same thing happening where, depending on the types of investors you’re looking for, you could see that on Instagram. You could see it on Twitter. You could see it on LinkedIn. You could see it through emails, like to your own email list. Theoretically, you could do billboards, posts in magazines. Whatever you want to do is fine as long as you follow certain restrictions on what you say. It’s like a “tombstone notice” requirement that when you’re advertising, again, they don’t use the term advertising, but when you’re advertising, you have to be limited in what you say because what they really want is for those investors to go over to the portal and find all the information and the disclosures and review everything before they choose to invest.


So, the real distinction here is you can advertise your own offering, but you’re driving people to the portal.

Fred Peña:

Exactly. Yep.


Right. And there is where all the information about your offering is going to get posted. That’s where your operating agreement and your disclosure documents are going to be and the subscription agreements. Now, do you guys actually handle the money, or does that go somewhere else?

Fred Peña:

Yeah, we don’t, and that is a requirement in the law. For whatever reason, they don’t trust us to hold that money. They don’t want us accepting it for a lot of different companies and then running, I guess. But there’s an escrow agent that is involved in every single deal. They call it a qualified third party, and it can be a bank or a broker-dealer. It’s someone who will accept all the funds on the investor’s behalf and hold it subject to the terms of the offering. And so because Regulation Crowdfunding has certain rules in it, one of them is that an investor can cancel up to 48 hours before the closing. And so, the escrow agent, if they receive an instruction to cancel, they have to send that money back. But if it’s hit closing and the investment has reached its minimum, we are the ones who then give the instruction on what to do with those funds, and it gets distributed to the issuer, to themselves for their fees, and to us for our fees.


Okay. All right, so…

Fred Peña:

So, it’s protected.


All right. So you’ve got a third party here, so it’s not going directly into the issuer’s company bank account. The money is initially getting held by a third-party bank or a securities escrow, not like your title company escrow for a property that you’re closing on. Right? Different?

Fred Peña:

Yeah, yeah. I mean, in my mind, using the phrase “escrow” is just someone is holding the money, and it’s not you.


Right. And then what happens after they reach the minimum? Can they then collect money themselves, or does it still have to go through the third party?

Fred Peña:

Nope. It always goes through the third party. Now, I will say there’s the concept of a rolling close. Theoretically, a company could hit the minimum and say, “Okay. Well, we’re going to close, do an early close, and allow people to leave if they want.” They’re saying that is a restriction in the law. If they do an early close, they have to notify people, and they get five days to cancel if they want to. But otherwise, the money will still continue to go into the qualified third party’s bank account and then get closed as you comply with the terms of the offering.


So, it’s possible to do … so, we write a lot of minimum-maximum offering. So, it’s like, “Hey, if we get to this minimum dollar amount, we can close on the property, but we’re going to have to keep raising a little bit more money to get all the funds we want for the rehab and all that.” So, then that initial money could be released, and then they continue to raise the money. It still goes through the third party and then gets released after some milestone. Right?

Fred Peña:

Yep, exactly. And it’s the same here. So, you just set that minimum, the maximum at the beginning, and you file it with your Form C. And this might be a good time. Instead of creating a PPM, you’ll create what’s called a Form C, and you’ll file that with the SEC just like you file a Form D with the SEC. It’s just a notice filing. They don’t review it for approval. That’s what’s different between a Reg A and a Reg CF deal. Yeah.


So, there’s no real waiting period. It’s just like once you’ve submitted it, then you could go ahead and…

Fred Peña:

Correct. As soon as you submit, submit it’s live. And we’re actually launching one today on our film platform. And so as soon as it’s filed, it’s legit.


Excellent. So, does your portal actually help raise the capital?

Fred Peña:

So, in a way, yes, and in a way, no. And what I mean by that is, according to the rules, we cannot advertise for the offerings. And so we can’t go out. We’re never on the phone dialing for dollars, trying to find people who can invest. But what we do have is a user base, and we are allowed to message our user base and say, “Hey, there is a new offering.” And so some money will come from that user base, and then the rest of the money is going to come through the advertising efforts of the issuer. So, theoretically, as well, we can advertise in general, but there are restrictions as in, again, we can’t advertise and pay money and say, “Hey, we just got this new offering. You should come and invest in it.” We can’t spend that kind of money, but we can say, “Hey, we exist. Oh, and by the way, we just happen to have this offering you might be interested in.” It’s a really interesting restriction in the law that itself provides for its own loophole. It’s on purpose, but it just means that we’re going around the normal process of advertising. We’re not doing normal advertising, but we can help a little bit.


So, is this like a broker-dealer? They can advertise that they’re a broker-dealer and come to us, but they’re not going to talk about specific offerings until you get there. And then you have your vetting call with them, and they’re going to say, “Well, here’s some offerings you might be interested in. Look at these,” or something. Right?

Fred Peña:

Yeah. And we don’t even go to that extent. So, if someone comes to us and said, “Hey, I’m looking on your site. You have these five offerings. Do you recommend any for me?” Here’s my situation. We can’t tell them anything. We just say, “Go look at the deal. And then you decide.”

Kim Lisa Taylor:

And they get to talk to the issuer too, right?

Fred Peña:

Correct. Correct.


You have contact information. They can talk to the issuer directly. So, how do you get paid?

Fred Peña:

Yeah, we get paid out of the successful deals only. So, if a deal does not hit its minimum, then the deal fails. Everybody gets their money back. The investors do. But on the successful deal, we get paid a percentage of the amount raised. So, we’ve had deals that went up to the full $five million, and we’ve had lots of deals that go to … they set a minimum at 1.235, which is … there’s some restrictions in the…


We’re going to talk about those in a minute.

Fred Peña:

… registration rules. Okay, we’ll go into why that’s the number. So, we’ve hit numbers on those, and we typically take a fee between 4% and 6%, depending on the type of deal.


So, 4% to 6% of the raise, so that means you got to build that into your raise that you’re going to be paying Fred’s company, Ridge Crowdfunding, you’re going to be paying them something for housing your offering and taking on that risk and being federally licensed so that you can put your offering there. I always have this question for crowdfunding platforms. So, if I send my people to your crowdfunding platform, do they just see my deal, or do they see everybody’s deal? How do I know they don’t get distracted and invest with someone else?

Fred Peña:

Yeah. So, they do see everybody’s deal except for the fact that you would send them to your page. And so there’s a homepage that lists all the deals that are on the platform, but typically, because of your advertising, you’re going to send them specifically to your offering page. And we actually haven’t tracked to see what is the flow a user takes, but typically, because someone has clicked on your deal and gone to look at it, they’re going there because they’re interested in that project. I guess that’s easier to say with film because you say, “Well, it’s an action film. I saw the little clip on the ad.” That’s very intriguing, and it’s easier to distinguish from other deals and say, “I’m not interested in those.” But there is the possibility that they come … sorry, I’ve been talking too much already, I guess. And so there’s no way to prevent it, but typically, people will go to the page, go through the flow, and then once they complete an investment is when we show them that other things exist on purpose. And so that can help you as well because you know that’s help happening for other people’s deals also. And so that’s one way that we help bring in additional investors.


Right. So, it’s possible that other people are doing the same thing. They’re advertising, driving their investors to the site. Once they invest in their deal, then they could see your deal too. So, you might end up with some new investors. And, of course, the issuer is going to get all the contact information and subscription agreements from the people that invest with them. Right? That all goes directly to them.

Fred Peña:

Exactly. Yeah. It doesn’t go to them during the offering stage. And we do that strategically because what we have found is that most issuers think like business people because they are. They don’t think like attorneys. And what is true of these offering periods is that if they start communicating with people outside of the public forums, they start running into potential violations of the restrictions on Regulation Crowdfunding. So, to prevent that, we don’t even tell them who those people are until after the closing has happened, and then they can communicate with them. They become part of their community. If you then look to do other private deals, you have these users who are now in your contact list that you can just contact directly and go do a Reg D with them if you want.


And largely, that’s because one of the requirements is you have to capture all the questions that are asked and make sure they’re posted so that everybody else that comes to offering can see all the questions that anybody has asked and what the questions are.

Fred Peña:

Exactly.


So, you’re really interacting through your portal, and they’re asking the questions. The issuer is posting the answers. It’s becoming public information. And that makes sense because otherwise, it would be very easy to have phone conversations with people and talk to them about things that other people don’t know, and that is anti what the rules are about. And that’s why crowdfunding…

Fred Peña:

It’s at least these ones specifically, yes.


… is supposed to work. Right?

Fred Peña:

Exactly.


So, crowdfunding, the whole concept is that the wisdom of the crowd is going to weed out whether this is a viable offering or not because they’re the ones that are going to be asking the questions and getting the answers and making their own decisions based on what everybody has asked. And those that aren’t worthy will not get funded. Right? That’s the whole concept behind it. At least that was my understanding of it when it was first proposed, is the wisdom of the crowd.

Fred Peña:

But you got it right. Yeah.


It would weed out the bad apples or the bad deals, and only those that are worthy would get funded.

Fred Peña:

Exactly. Unfortunately…


So, you’re going to want to look. Go ahead.

Fred Peña:

I was just going to say, unfortunately, if your deal, you, the viewer, if your deal is a bad deal, that’s, I guess, a negative for you because it might mean you’re less likely to get your funds. But hopefully, you’re bringing a good deal to the table.


Well, and also, you should be able … I guess an issuer could go and register for your portal and look around at what’s there and see what they’re up against before they post.

Fred Peña:

Yeah, you don’t even need to register to see what the other projects are. So, the projects are always public, completely available, but if you want to start interacting, then you have to have an account, and that’s part of the rules.


Okay. Okay. Well, that makes sense.

Krisha Young:

What is a typical good deal? I’m very curious about what…


Yeah, I don’t even think we can go into that discussion here. I think we want to table that. If we have time at the end, we can come back to that because right now, we really need to get through these rules because there’s some rules that are going to help you decide as an audience member whether or not this is something you even want to attempt. Right? And so let’s get to those next. So, what is the dollar limit an issuer can raise in a 12-month period?

Fred Peña:

Yeah, that’s $5 million.


Okay. And what does that mean? Does that mean that if I raise a million dollars in month one, that in month 13, I can raise another million dollars if I want to keep my offering open?

Fred Peña:

So, typically, there is a deadline for every offering, so you wouldn’t keep it open indefinitely. We have actually found that shorter offerings are better anyway because people will take action knowing that there’s a shorter window in which to take action. Like a typical Reg D deal, at least that I used to work on, they would always be open for a year because the issuer has to go and drum up the business. Anyway, so we found that short deals are good for Regulation Crowdfunding because you’re advertising and then getting people to act quickly. So, if you raise, let’s say, the full $5 million in that offering, yeah, you have to wait. Once the closing happens, you have to wait another 12 months before you can then do another deal. But if you only do $1 million, you were suggesting, well, you could start another deal the very next month, technically the very next day even, and raise another $4 million.


But what about … so, an issuer in our context, somebody creates a company that’s an issuer, and they go out and buy one property. Let’s say they only need $3 million. Well, now when they go out and do another offering, they’re going to create another company. Is that considered a separate issuer, or is it considered part of the same issuer?

Fred Peña:

Yeah. So, it depends. There is a restriction. If two entities are under common control, then they’re considered the same issuer. And so you have to do an analysis per deal and say, “Okay, who are the owners of the one company, and who are the owners of the other?” In your scenario, it sounds like what you’re saying is it’s the one person or the one team who is the same for both.

Kim Lisa Taylor:

The one management team, right. Right.

Fred Peña:

Right. So, those would be the same entity. And so if you raised $3 million under one entity, and then you’ve created another entity to go do another deal already, then that entity, the second entity, is limited to $2 million.


Got it. All right. So, collectively, that issuer, and then I’m not going to go into a bunch of what-if scenarios, but I’m sure people are thinking about it. What if we have this management team here, and then we swap out some members, and now we have another management team, but it has some of the same members, but different members? I guess that’s something you’re going to have to analyze deal by deal to find out how much control those original people have and whether that rises to the test of same issuer.

Fred Peña:

Yep. And we have had that where an advisor has been involved in more than one deal, and it’s that advisor who might be triggering the problem where the rest of the team is different for two companies. So yeah, we have to just analyze it deal by deal.


Okay. So, basically — now, before you guys start jumping up and down, woo-hooing about I can raise $5 million. I never have to do Reg D, Rule 506(b) again— let’s talk about what the other limitations are. So, what are annual … let’s talk about the auditing. I know that’s jumping ahead a little bit, but I think the audits are critical to talk about here because there is a point at which you’re raising over a certain amount of money, and you are required to do an annual audit on that company for as long as that company exists. Is that correct?

Fred Peña:

No. So, only as long as you’re doing offerings. And if you’ve never raised money before, the first time that you do an offering, if you’re raising over $1.235 million, you have to do an audit. If you’re doing under that, you can do reviewed financials. And if you’re a new entity, you could do an inception audit, which is much simpler. It’s basically recognizing all your financials have zeros, basically, and you still have to pay a CPA many thousands of dollars to do that. But once you complete the offering, you only have to provide an audit if you have an audit. But if you don’t get an audit, what you have to have is a statement by the officer of the company asserting that they’re accurate and correct. And then, you file with what’s called a Form CAR, an annual report, an update on the status of the company and including its financials with that statement. So, you do not have to keep doing an audit unless you want to do another offering. Then you have to get another audit, a new audit.


Got it. And then, so first-time offers, it’s $1.235 million. So, if you’ve never done a Reg CF offering before, you’re a first-time client to Fred or any other crowdfunding portal … they’re looking at them across the board. It’s not just your portal. It’s “Hey, we might …” you can’t hop portals and start over and get a new $5 million. It’s per issuer across portals, and they’re trying to prevent you from hopping portals. So, first time, $1.235 mil. So, this is great for people who are first time raising less than that or up to that. And then second-time issuer, so once you’ve been an issuer and now you’re common to maybe another issuer, then you’re going to be limited. That limit goes down. And what is that limit?

Fred Peña:

It’s like $618,000, I believe. So, if you hit that limit, if you’re going to raise more than that on your second offering, then yeah, you have to do an audit.


Do an audit. And any idea of what these … so, you said for a new initial offering with a brand new company that’s just been formed, not going to be that much because everything is zero balances. Your bank accounts are zeros. You don’t have anything to audit. But what about subsequent audits? Then you have to audit everything you did before the previous offering you did, and then this one too?

Fred Peña:

Yeah. So, the audit that you do when it’s a full audit — and that’s typically just based on when your entity was created compared to when you’re doing the offering, as in you have financials to audit — it’s always the previous two years. And what you’re looking at is, yeah, $15,000 to $30,000 for a full audit. And even when we’re talking about a cheap inception audit, even that can be like five grand. It’s unpleasant.


Yeah, that’s good to know. So, five grand and 15 to 20. So, again, I wanted you guys all to know you can raise $5 million, but you’re going to incur some audit obligations that’s going to cost some money, and you’re going to have to build that into your upfront costs and your raise so that you’ve got the money to be able to do it. Now, what’s the longest period of time somebody could have an offering posted up on your website? Could they go a full year or beyond?

Fred Peña:

They theoretically could, yes. Yeah, we just don’t encourage it because what happens … it’s from a practical standpoint. What happens is investors will come to the site. They’ll see that they have a ton of time left, and then they will take action. And a lot of action is dependent. People are looking to see what other people are doing also. Again, that’s the whole concept of crowdfunding. So, if lots of people are coming, they’re looking at it, they’re determining to take action later, then the other people that are coming to look are also noticing that very few people are taking action. And they assume that it’s a bad deal or that they’re just going to wait as well to see what other people do. So, we always limit it to time from a strategic standpoint as well, and we would recommend just about anybody do that, especially if you’re doing a real estate deal where you might have a property under contract. You have a limited amount of time before you need that cash.


Right? So, you’re looking 60, 90 days max. Right?

Fred Peña:

Exactly.


Yeah. And is that typical time frame for a Reg CF offering?

Fred Peña:

So, there is a restriction in the law that says its minimum time has to be 21 days. You cannot do a shorter offering than 21 days. And we actually find that 100% of our offerings right now are 28 days or less, so the 21 to 28 days. And we actually have … depending on the deal type, a lot of our offerings fill up in a week or two.


Okay, that’s encouraging. That’s good to know. And what if they don’t make … can they extend whatever? They put up a 28-day…

Fred Peña:

Yeah, theoretically, they can now. So, there’s two ways to handle that. One is to extend, which is making an amendment to the offering. When you do that, though, there’s a requirement in the rule that says you have to give everybody a notice saying, “Hey, we just materially changed the terms of this deal,” which the closing date is a material change. And then you have to give them five days, where they have to take action to reconfirm that they want to stay in the deal. And if they don’t take action, we, the portal, have to cancel that investment. And so that’s less preferred. What we encourage instead is for the company to just keep the date, close the offering, and then open it back up. Open up a new offering just really quickly after the first one. You just have to make some amendments to the Form C document because now you have more money, and so you have to identify that you have more money. You have a slightly less risk because of that. I guess you don’t tell the investors, “Hey, by the way, we have less risk now.” There’s always risk, so you don’t tell them that, but it’s just a matter of fact. And so then you just open up a new offering.


Got it. What about Blue Sky? Do they have to do Blue Sky notices also?

Fred Peña:

So, there is an argument that the state in which they are located, they may have to file a notification in that state, but that all other state Blue Sky laws are preempted, similar to how they are for, I guess…


Like a 506?

Fred Peña:

Yeah, even with those 506, sometimes you have to … my understanding is you do have to file a notice filing, but with Reg CF, you don’t even have to file a notice filing, like with NASA.


Okay, great. That’s good because that is a cost item that has to be considered. There could be, on a million-dollar offering, you could have $2,000 to $4,000 in just Blue Sky filing fees. And just, again, we’re using jargon. So, Blue Sky means state securities agencies want to know when you’re doing a Rule 506 offering, and you’ve sold interest to someone from their jurisdiction. They want you to file a notice with them within 15 days. Those are called Blue Sky notices, and they all have fees associated with them, except for the state of Florida. But the fees range from $150 to $1,200 depending on what state. Northeast states are most expensive, and the Midwest and the Western states are 300 bucks, not so bad, but New York is 1200 bucks. Massachusetts, depending on how much you’re raising, can be like $750, so those can get a little pricey. And if you’re raising $10 million on a Reg D offering, you could have $5,000 or $8,000 in filing costs because just the more states you have, the more your costs for that are going to be. Okay. So, that’s good. So, let’s talk about who can invest and how much they can invest. But just maybe before we go to that, Krisha, do you want to just read a little midpoint notice and…

Krisha Young:

Yeah, absolutely. This is such a fascinating conversation. Yeah, thank you. All right, everyone. Well, in case you didn’t know, we have two books on “Raising Capital Legally.” One is for beginners. One is for more advanced capital raisers. Oh, good. Kim’s doing the Vanna…


The Vanna White thing, yeah.

Krisha Young:

I just saw some movement in the background. If you would like us to mail you one for free, text the word SYNDICATE — S-Y-N-D-I-C-A-T-E — to our phone number, 844-706-3428. So again, text the word SYNDICATE to 844-796-3428. Or you can also go to our website, syndicationattorneys.com, and there’s a button there for “Free Book,” and you can go ahead and grab it there.


Well, and just to note, if some of you already have our books, you will only be able to get us to mail you one for free. We’re going to ask you a question: Whether you’ve raised capital before. If you say no, you’re going to get the skinny book, which is an easy read— how-to, step-by-step ,syndicate. If you say yes, then you’re going to get this one, which is more like a desktop reference. You’re going to want to use the table of contents and go to the chapter that describes in-depth whatever it is you’re asking about. So, just make sure that you answer that question.

And if you’ve already got one of our books, then you can go buy them on Amazon. You can also get Kindle versions on Amazon. We’re going to send you a physical copy if you sign up for one of our free books. So, you’ve got to give us your address, and then we’ll send one to you. But just make sure you do that, again, text the word SYNDICATE to our phone number, which is 844-SYNDIC8, S-Y-N-D-I-C, and the number eight. So, I see my little dog is making a guest appearance here. He sometimes shows up. I can count him as an advertising dollar. He actually participated in one of our shows because he was lost when it was a big ordeal, so we do have a lost episode.

Krisha Young:

We do.


Yeah, that was the one we did with Cashflow Portal. Yeah, we try to have a little fun doing these, Fred.

Fred Peña:

That’s good.


So, let’s go back to this because this is fascinating stuff. I know there’s a lot of information here, so you guys are … When we post this, we do, at our website, post also the transcripts, so you can scan through it. You can read it. We’re also going to post it to our YouTube channel so you can watch it, but you’ll have plenty of opportunities to get your information answered. And I’m also going to write an article about all of this and post it so you guys can really understand what this is about because I think it’s a powerful tool to know about. And as long as you understand the limitations — what you can and can’t do — then you’re going to be fine. And it might open up a whole new world of potential investors for you. So, who can invest? Anybody, right?

Fred Peña:

Yeah, anybody. So, I guess there’s technically some issues where the escrow agent, the qualified third party because they’re a banking institution or a broker-dealer, they’re subject to the Bank Secrecy Act. I’m not going to get into too many details, but they have to do a background check. They have to know their client. The investors consider their client for purposes of holding that money. And so if they can’t verify your identity, then your investment will get canceled. But otherwise, anybody can invest. The law is set up where even the poorest person with no assets, no anything, can invest every year up to $2,500, and that’s their way of protecting those people by limiting how much they could potentially lose.


But that’s across all of these Reg CF platforms? Right?

Fred Peña:

All platforms, yep.


Yeah. So, you’re really, when you’re vetting these people, because you’re the one that’s policing that, right? You’re talking to them about…

Fred Peña:

A little bit, yeah.


… what other things have you invested in? How much have you invested in other portals or other deals under Reg CF? And then figuring out, okay, if you haven’t invested anything, you could invest the full $2,500, but if you have invested in other things, that’s going to be taken into account before you can make that. Now, so that’s for anybody with no financial qualifications at all. But if somebody makes over $124,000 a year, then they can go up. So, if the investor’s income or net worth is less than $124,000, their annual limit is $2,500 or 5% of their income or net worth, whichever is greater.

Fred Peña:

Whichever is greater, exactly.


So, it’s a little bit complicated. Hey, complain to your regulators about why they made this so complicated, but that’s what they do. All right. So, if the investor’s income and net worth is greater than or equal to $124,000, then the annual limit is 10% of their income or net worth, whichever is greater, but they can’t exceed $124,000. So, you could have somebody invest, theoretically, up to $124,000 if their income and net worth are greater than $124,000.

Fred Peña:

Correct. And if someone’s accredited, they have no limit.


Ah, okay. All right. So, that’s good to know. So, they could invest $500,000, right? Okay.

Fred Peña:

Right. And that benefits people from saying, “Well, why do Regulation Crowdfunding when we could go get these big-dollar amounts from the accredited investors that we already have on our contact list?” And obviously, it’s trying to make things more equal in the sense of they don’t need to protect those accredited investors is their stance. And so they’re free to potentially lose as much as they want.


Okay. Can you do a concurrent reg CF offering and Rule 506 offering?

Fred Peña:

Technically, yes. And I will say don’t use that as legal advice, so still get your own approval. But there would have to be certain things that you do to make sure that you’re complying with both rules at the same time. There has been a portal that got in trouble for allowing an issuer to do both concurrently. And what that portal did was when they asked … they vetted the investor, and then they sent them to the specific offering that they thought was better, the Reg CF or the Reg D offering. And that was outside of their ability to do, and so they got in trouble. So, anyway, you have to figure out the right way to do it, but there is a way to do it.


Yeah, it’s tricky. It’s like trying to do a concurrent 506(b) and 506(c) offering. You meet somebody through advertising that’s not accredited, and you’re like, “Oh, hey. Well, you can’t invest in this, but you could invest in that.” And that’s the whole bait and switch technique, and not allowed to do that because you met them through advertising and you don’t have a relationship. So, that’s why we try to encourage people, don’t do them concurrently, but maybe do them consecutively.

Fred Peña:

Correct. And that’s often when someone is having trouble figuring out if they can meet the requirements to do them consecutively. It’s way easier to just say, “You know what? Just be compliant with one at a time, and then you’re certain.” And so it’s good that way.


Yeah. So, better do your Reg CF offering. See how far you get, and then close that offering. And then, go start your Reg D offering and follow those rules separately. Now, you don’t have any question of whether you complied with both. All right. Let’s see. So, any limit on the number of investors in a Reg CF offering?

Fred Peña:

No, from a technical standpoint, or I should say from a legal standpoint. But from a technical standpoint, there is public filing requirements that when you trigger a certain number of investors, your company then has to file as if they were a public company. And so you might want to avoid that. There’s some valuation triggers as well that are mixed in with that. But legally, no, there’s no limit. So, we’ve had deals go up to 9,000 or 10,000 investors because they raised the full $5 million, and that just happens to be the average.


Wow. Okay.

Fred Peña:

Huge.


So, if any of you are cringing right now, y’all should be because you just heard 9,000 or 10,000 investors. How many of you want to issue K-1s to 9,000 or 10,000 investors? So, after the offering is complete and it has been closed, what’s your role? Are you guys done? Does the offering come down off the portal, and they have to manage it in one of these investor management platforms, or how does that work?

Fred Peña:

Correct, something like that. So, the offering page is still public information. We don’t have to keep it up. We could close it down and just hide it from view. But yes, we would deliver to the issuer, the list of investors, their contact information, etc., how much they invested so that they can basically turn that into a cap table. And we have referrals, companies that we work with as referrals, that provide cap table management services. But it sounds like you and in your community, you have management platforms that do that as well.


Yes.

Fred Peña:

And that’s the idea is someone’s got to do that typically because issuers often don’t have the wherewithal to do it on their own.


Yeah, you’re not going to want to manage this on a spreadsheet.

Fred Peña:

Correct.


You’re going to need some help, and this is where you’re going to want to be looking at one of the investor management platforms that we talked about earlier and having them set up so that you can keep track of capital accounts, and what’s been distributed, and post all of your tax forms and any status reports, all that stuff about the project that you don’t have to send those out. I mean, imagine just trying to create a group of 9,000 or 10,000 people that you have to send information to that’s going to be just unwieldy and…

Fred Peña:

A lot, yeah.


Yes. Okay. So, we have a lot of syndicators that are doing specific offerings. What about someone who wants to do a blind pool fund and they have a business plan? They’re saying, “Hey, we’re going to buy five properties that meet this certain criteria.” Are they able to use Regulation Crowdfunding?

Fred Peña:

Yeah. So, my reading of the law is that in real estate, yes, they are allowed to do that as long as they do have a business plan, a thesis under which they’re investing so that the investors can have an understanding of the types of properties that that company is going to be buying. I think people sometimes get it confused. You said blind pool fund. When the purpose is to use that money to buy another company, then yes, there’s a prohibition against that. I don’t know why. Compared to not identifying a property…


They don’t want SPACs (Special Purpose Acquisition Companh) people using this for SPACs and things like that.

Fred Peña:

Okay. But yes, when it’s real estate, you can do that.


Okay. So, you can do it with a blind pool as long as you have a business plan. So, if any of you’re thinking about doing a blind pool, it really works best when you have a track record already doing that kind of thing. And you can demonstrate, hey, these are the other … part of your resume is going to be these are the other 10 projects we’ve done and how they’ve performed. So, you’re going to want to make sure that you have that. Or if you don’t, then you should have somebody on your team that has that kind of credibility or background and track record in order to do a fund. That’s the only way that really is functional.

All right. So, just a quick run-through because I know we’ve got a few questions, and we’ve got to stop right at the top of the hour.

So reports that have to be filed, so you’re going to do this Form C, initial Form C, which is very similar to a Private Placement Memorandum. It’s just a questionnaire form that the SEC has created, and we’re giving them some of the same information but, in some cases, even more detailed information than you’re going to put into a Private Placement Memorandum. You also have to do Form C progress updates within five days of reaching 50% of your target. And when you reach 100% of the target, offering them out. So, you’ve got some additional filings that have to be done.

Fred Peña:

And those are really simple, by the way. That’s just updating the SEC and saying, “Hey, by the way, we reached our halfway point. Oh, by the way, we reached 100%.” So, it’s not like an in-depth filing.


Okay. And then annual reports?

Fred Peña:

Yeah, that’s a mini version of the Form C. So, the filing that you make at the time of the offering contains tons of information. Annually, they want to know the progress of the company, and so it’s similar but in a much more condensed manner.


Any material change, so if you are doing a blind pool, you’ve added properties, or you’ve switched out some people of your management team, or anything like that, or you decided to change the business plan, you’d have to notify everybody. And then termination of reporting, so that would be when the offering is done, it’s closed. You’re not going to be raising through Reg CF anymore.

Fred Peña:

Yeah. So, it’s actually not in relation to if you’re going to be raising anymore. It’s more in relation to if they’re paid back.


Oh, okay.

Fred Peña:

So, if they’re out of the deal. Otherwise, you have to keep filing that notification year after year.


Okay. All right. And then, do you know CPAs that do the auditing that you refer clients to?

Fred Peña:

Yeah, we have a list of four companies that we typically rotate through that all do audits, reviews, the inception audits. And we can share that with you if you want to share that with your community.


All right. And Fred, how do people reach you?

Fred Peña:

So, I’m just on LinkedIn, Frederick Pená. I mean, I’m on Facebook, but that’s just personal, so I’ll probably ignore you if you try to reach out there. And then our website, which is ridgecf.com.


Okay, ridgecf.com. And, of course, if you want to reach us, go to our website, SyndicationAttorneys.com, where we have a ton of free educational materials, articles, FAQs, and all of our previous podcasts. This one will be broadcast there as well. And you can schedule an appointment with Krisha or any one of our staff there. All right. So, what kind of questions do we have, Krisha?

Krisha Young:

Yeah, thank you, Fred. This was so informative. It’s such a fascinating tool in the toolbox. All right. So, I’m just going to go in order here. So, Fatima Lewis, “Are documentation maintenance required the same as registered securities? Should it be met by the company or the attorney?”

Fred Peña:

So, I would argue that they are much more condensed requirements or much smaller. As we were talking earlier, it’s the Form C annual report or Form CAR that you do annually. And it would likely need to be your attorney to tell you, “Hey, what are the relevant things that you should include?” But you are giving those details to your attorney to finalize it.


Right. So, you’re going to get some additional legal fees associated with those filings. Okay. So, go ahead, Krisha. Any other questions?

Krisha Young:

Yeah, there’s a few here. Shirley Nelson: “Can other investors see the entire group of investors on the portal?”

Fred Peña:

I guess it depends on the portal. Our platform does not do that unless you’re asking questions. When you ask questions, you do have to identify who you are, and you have to identify if you’re affiliated with the project. We don’t want people who are affiliated seeding questions, and giving comments, and pitching through the Q&A tool.

Krisha Young:

Fair. That’s good transparency there.

Fred Peña:

Yep.

Krisha Young:

DJ Aurora – hi, DJ – “Do people who create SPV to raise funds doing 506(b) deal also need to go through an audit if they’re raising a fund, assuming less than $1 million?” So, I guess that’s a maybe Kim question. I don’t know. Would that be a crowdfunding question?


No. The 506(b) requires an audit when you get to $20 million. So, if you’re doing a convertible fund where you reach $20 million, we’re going to encourage you to talk to the attorney that created that for you to find out when that target is achieved. And then you’re going to incur the obligation if you have non-accredited investors or you reach $20 million. So, yeah, just make sure you’re … okay, go on from there.

Krisha Young:

Fatima Lewis again here: “Any SAR filing requirements?”


Suspicious activity reports for AML? Not at this time that I’m aware of. What about you, Fred?

Fred Peña:

No, I’m not aware of any, either. Again, the portal is not a banking institution. We are not subject to the Bank Secrecy Act, and so we don’t have any such responsibilities. We are unaware if the qualified third party, so the escrow agent, they may have some requirements, but I don’t believe it is for like, “Hey, someone just invested $10,000.” I don’t think they’re reporting that. I think they just used to work with them.


And I know there’s some recent proposed changes that investment advisors might start having. Even exempt reporting advisors may have to start doing suspicious activity reports. So, this is all under anti-money-laundering laws. So, if any of you aren’t familiar with that, it just means there are certain people from countries that you’re not allowed to do business with, so any sanctioned countries. You can look at the Office of Foreign Assets Control website. So, look up OFAC, O-F-A-C, which is under the Department of Treasury. And they have the rules for anti-money-laundering and the sanctioned countries and also sanctioned people, technically. And do you guys do any AML checks on investors? Or I guess the bank would probably, right?

Fred Peña:

Right. An AML and a KYC or CIP are always done on every investor.


Every single investor? Wow. Okay. And so somebody’s looking at them, making sure that they don’t appear on those lists. That list, by the way, was 500 pages long the last time I looked. So, it’s really going to the OFAC website, but you guys probably have other sources that do that for you, I would imagine. All right. So, yeah, you don’t want to get caught up in any money-laundering scheme. If you do, then you’re the one that’s going to go to jail, and probably they’re going to freeze all your bank accounts. As somebody put it to me once that was under a securities investigation, they said, “They froze all of our bank accounts. I couldn’t even buy a stick of gum.”

Fred Peña:

Have more cash on hand than that.


Yeah, yeah. And it takes a while to sort that out, and usually hundreds of thousands of dollars of legal fees, so you don’t want to go there. All right, any others?

Krisha Young:

There’s a couple more, but we’re at the top of the hour.


Okay. So, I would encourage any of you to … I mean, you can go look up the rules yourselves for regulation crowdfunding. SEC has some information on their website. Also, there’s several legal sources out there. If you look up Regulation Crowdfunding rules, you might get to one of the legal sites, and then you can read the regulation for yourself. It’s a little bit cumbersome, but thank your regulators for that. That’s just the way it is. So, I think, yeah, we’ve pretty much covered the questions we’d be able to answer today, and we thank all of you for taking time out of your day and joining us live. That was an awesome event. Fred, thank you so much for coming.

Fred Peña:

Yeah, thank you.


We really look forward to sending you some clients. We’re going to be doing Reg CF offerings, you guys, so if any of you are interested in doing it, then we’re going to be able to help you structure your company and do those Form C filings. We’ll still be using a subscription agreement just like before, and we’ll be working closely with Fred and his team to make sure you’ve got the right intermediaries and third-party escrow agents and CPAs, and all of that to get all the other things you need done. Krisha, thank you so much for co-hosting, and we look forward to seeing you all again in a couple of weeks.

Krisha Young:

Yeah, absolutely. Thanks, everyone. Thanks, Fred.


Thanks so much.

Fred Peña:

Bye. See you guys.


Bye.

Krisha Young:

Bye-bye.


Thank you.

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