Are you a real estate syndication newbie? Mauricio Rauld, the founder and CEO of Premier Law Group – an internationally well-known securities firm that spends 100% of their practice on syndication for real estate investors – cuts the legalities and complexities of syndication into bite-sized, understandable information. He tackles some of the biggest and common mistakes beginners make while getting into the syndication business. Get ready as he gives advice on how you can steer clear of such mistakes and succeed in the syndication industry.
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The Beginner’s Guide To Avoiding Common Mistakes In Syndication with Mauricio Rauld
Our guest is Mauricio Rauld. Thanks for being here, Mauricio.
Thanks for having me, Whitney. I really appreciate it.
I’m pleased to have you and your expertise is so needed in this business. You’re the perfect guest. Mauricio is the Founder and CEO of Premier Law Group, an internationally-recognized securities firm that spends 100% of their practice on syndication for real estate investors. He regularly travels around the country speaking to real estate investors, entrepreneurs, educating them about the legal syndication piece that fits into the overall syndication puzzle. He’s known for taking complex matters and making them the easiest to understand. He is jokingly referred to as one of the few lawyers who actually speaks English. He’s been on the stage with Robert Kiyosaki, Kim McElroy, Peter Schiff, Brad Sumrok and The Real Estate Guys. He is well known in this industry. Thanks again for being here. I’m looking forward to getting into it, Mauricio. Maybe give the audience a little more about your background and then we’re going to jump in to some big mistakes beginners make getting into the syndication business.
I started my practice like every other attorney dreams up. I went to work with pretty large securities firm here in Long Beach, California. It’s actually the largest securities firm in Long Beach. I did the litigation piece. It was actually interesting. I used to represent the JP Morgans of the world, the Merrill Lynch’s and all those guys, but I always got this stuff once crap hits the fan. I’d get the complaints and I’d have to answer them. I’d go through depositions, interrogatories, all those court appearances, the motions, all that stuff. Even though it was a great firm, I felt like something was off. I finally got around to reading that little purple book, which I’m sure everybody’s read, Rich Dad Poor Dad, and that resonated with me. I didn’t want to continue working at the firm until I was 65 and dead.
I actually went to work for Robert and Russ from The Real Estate Guys as their in-house counsel. That’s kind of where I started doing syndications. This was probably fifteen, seventeen years ago. Robert is still my personal client. I’ve been doing this for fifteen, sixteen years. A few years ago, I decided to drop everything else and focus 100% on syndication, which I think is important because a lot of lawyers, especially the local ones, they were securities attorneys, but that’s a pretty big field. Maybe their syndication practice is 25% and they don’t have a grasp of all the rules. I’m not the only one. There are others that do 90%, 100% of the syndication. That’s who you want to be talking to you because they don’t have to go research anything. They know and they’re updated on the latest updates on the wall.
That makes sense to me. You’re in it day in, day out. There are many people in the industry. You’re looking at so many different structures and types of deals and you’re going to be so knowledgeable doing this every day. I wanted us to discuss some of the biggest mistakes syndicators make. When they come into this industry, there are many things we need to know before we think we’re going to be a syndicator. Get us started in that.
I think the biggest issue is newbies or first-time syndicators don’t know what they don’t know. I think the biggest mistake is that they think that the way they’re putting their deal together somehow gets them around the securities laws and they’ll make up stories in their head or maybe there’ve been told by other people that, “No, that’s not a security.” They try and structure things uniquely. They’ll set up a profit share agreement. My favorite is a TIC agreement. They’re like, “We’re all direct owners in the property. This is not a syndication,” and nothing could be further from the truth. According to the SEC, the definition of a security is super broad. Why we’re involved in securities laws is that you’re issuing a security.
It includes the stocks, the bonds, mutual funds that you typically think of: LLCs, notes. It also includes TIC agreements, profit-sharing agreements, side contract, handshakes, high fives, whatever. It doesn’t matter the structure of your syndication. What matters is anytime you take money from an individual where the return is generated by your efforts, you are dealing with the security. In other words, if they’re passive, they’re giving you a check and then they’re going home and sitting on the couch, you are dealing with the security no matter how you structure it. I think that’s probably the missing link with newbies because once you’re dealing with the security, now there are three things we need to worry about. I think that’s the number one mistake for new syndicators.
You said generated by my efforts. What if this person is doing something in the business? What does that look like? What do they need to do for that to qualify?
It’s primarily your efforts. One of the ways where it would not be considered a security is if it’s you and maybe a couple other friends or buddies and you all entered a joint venture agreement. Everybody is involved in the deal. Maybe 30 should be ideal if you contributed an equal amount of money. In those scenarios, you’re not issuing a security. You’re starting a business. You, me and somebody else gets together and we started a business. It’s not a security, but you’ve got to be careful with that because the SEC has come out and said, “Once you get to about five people, we’re not going to be trusting that all five people are going to be able to be doing something.” I actually got a potential client who came in and had twenty people and they all wanted to be active. That’s going to be a hard sell, if not an impossible sell to the SEC because there’s going to be at least one person ends up doing very little work and that’s going to trigger security for at least that one person. There are ways around it, but it has to do with treating it as a business.
We’re starting a business as opposed to accepting money. If you’re doing that, you’re not taking any sponsor fees or any asset management. Why would you? You’re just starting a business. I always say whenever you’re dealing with securities, there are only three things that I think about. Number one, you need to register that security or that syndication with the SEC, the Securities and Exchange Commission or we need to find that exemption to registration or it’s illegal. It’s that simple. You’ve got to register, you’ve got to find an exemption, otherwise it’s illegal. You go through that analysis for every single transaction whenever you’re selling a security. I’m going to assume that not everybody wants to do an illegal offering. Hopefully, there are no Bernie Madoff’s out there who are looking to commit fraud and all that stuff. You have to be a little bit careful.
Illegal does also translate into misrepresentations. It may not be intentional, but you misrepresent or you failed to disclose or you don’t provide the proper documentations when you are required to. It’s not fraud stuff. That’s one of the things you’ve got to be careful about. You don’t want to register your security a full registration because it takes about one or two years to get that through the process and it takes six to seven figures. If you’re in a contract to buy a building, how many of you have one to two years to wait around for the SEC to approve your deal? You don’t have that time. Most people in my world exclusively run into the exemption side. We’re always looking for an exemption to registration. Fortunately, 90% 95% of the people who use it will be able to fit into one of these, depending on the client’s needs.
What’s an example of someone that would need to register? Who would that be?
It’s somebody who’s doing a large offering that wants to be able to go advertise into every single state and take non-accredited investors and go through that and take small investments. I had a client actually who did that. It’s an oil and gas company. They were raising $50 million or $100 million, but number one, they had to go hire an attorney in every single state. That’s one of the issues that you’ve got to deal with federal securities laws, but sometimes you’ve got to deal with the state, so you may have to hire a state securities lawyer. It’s time-consuming. Anytime you’re dealing with the government, it’s time-consuming. They’re not known for being the fastest turnaround people.
That’s why we try to avoid it. It’s time-consuming and then these guys spend $1 million in getting that offering through because for them it was worth it. They’re raising $100 million and they’re going to do all these great things. For most of us, there is probably another exemption now. This exemption didn’t exist back then. I’d probably steer them towards one of these newer exemptions that probably makes more sense now. Luckily, there are two exemptions that 95% of the people use. You’ve probably heard these if you’re a syndicator. These are the famous Reg D or Regulation D exemptions. Up until September 21st, 2013, there was only one. This is as technical as I’m going to get, but the rule 506(b) is the old exemption, which used to be called the 506.
The reason this is popular is twofold. One, it’s a safe harbor, which means if we hit all the points in this rule and we follow the rules, we’re guaranteed to be sure that we’re following the exemption and the rules. The other big deal is it preempts state law. That’s a fancy way of saying we don’t have to worry about the states most of the time. We don’t have to go hire an attorney in every single state that you’re selling into and pay them to do the work. The federal statute overrules it, except there’s still an anti-fraud division. I always joke that the states had been stripped of their power so much and they’re kind of sitting around twiddling their thumbs. If they get a fraud case or an alleged fraud case, they’re going to jump all over it because that’s the only jurisdiction they have left. That’s why Reg D is so popular. You can raise an unlimited amount of money. It’s why even the big boys, the Goldman Sachs and the Merrill Lynch’s, they’ll raise $1 billion and use a 506(b) because they have relationships with all our investors.
It’s unlimited money, so why not? The nice thing about 506(b) is that you can take an unlimited amount of accredited investors. You can take up to 35 non-accredited investors as long as they’re sophisticated. As a reminder, an accredited investor is someone who either has a net worth of $1 million excluding their primary residence or if they’re an individual that they’ve earned $200,000 the last two years with a reasonable expectation of earning that much this year. The bad news with the limitation back then was that you could not advertise or solicit. You could not go to a conference, for example, and pass out your business plan. You cannot do Facebook ads. You cannot do anything on your website. You had limitations. You cannot put together a webinar with the excuse of then pitching your deal. There are lots of limitations there.
I want to ask you a question about that. There are numerous questions that people ask about that topic right there. They’re asking, “Is it soliciting?” I’ll get on this and we’ll move on. As far as advertising, I see ads on Facebook all the time. As far as contacting me to get on my investor list, it says, “We’re doing big things this year. We’re closing many deals. Contact me so you can see our next investment.” I struggle with that. I’ve never posted anything like that. I can’t put a property on there and say, “Who wants to invest?” They’re not showing a property, but they’re saying, “Contact me so you can get on our investor list.” What are your thoughts about something like that?
[bctt tweet=”Anytime you’re dealing with the government, it’s time-consuming. They’re not known for being the fastest turnaround people.” username=””]
You cannot do an offering. If you’ve got a project, you can’t post your offering. Again, newbies get caught up. You also can’t condition the market, which is another type of offer. Even if you don’t have to deal, if you start talking about your past results and how great their ROI has been or that, “I project on all my deals with 20% IRR,” that’s going to be considered conditioning the market. If you’re talking about your business as a whole and you’re an investor and you say, “This is what we do for a living and we’d be happy to help you out. Please contact us,” that’s fine. Now you’ve got to separate them from the rest of your lists. You’re going to have to have some mechanism to separate them because you’re not ready to be able to send them a 506(b) offering.
There’s a bunch of steps. There are about six or seven steps that you need to follow in order to go from somebody whom you had never met before and you don’t know to somebody that you have a substantive relationship with, which is the easiest way to get around the advertising laws. Once you go through these seven things like getting on a phone call with them for fifteen to twenty minutes, giving them a questionnaire that gets to know them pretty well, at that point you can offer them a future deal. Not only do you have a substantive relationship, but it also has to be pre-existing your deal. You couldn’t offer them at your current one. At that point, you can do the rest.
We’re talking about doing some videos. I did a video on this and I’m not sure when it will be out, but if your readers want to contact me, I’m happy to give that out. I can send over the list of seven things that you go to, but the main ones are the phone call and a detailed questionnaire that’s not just, “What’s your net worth and are you accredited?” When you sign up for a brokerage account and options and margin, they have all those questions they ask you. Your experience, how long you’ve been doing it, all that stuff would be in that questionnaire.
It’s like a risk assessment also.
You’re trying to find out what their level of sophistication is, whether it’s suitable for where they are.
I appreciate you elaborating on that and maybe we’ll cover that another time more in-depth.
I think the other thing we’re missing there is there are some bad actor provisions now that they added, which is important when you have a co-sponsor. You know that you haven’t been convicted of securities frauds or haven’t been sanctioned by a state and it’s about eleven scenarios that will make you a bad actor. Your partner, how well do you know your partner? You want to do a little bit of research at the minimum. Go through Google or whatever and maybe hire an investigator. That’s maybe a little extreme, but make sure that they don’t have any of these things. I have a bad actor questionnaire that I insist that all my clients and their partners and co-sponsor sign. At least you have something in your file that they’re representing that they haven’t done some of these bad acts. If they’d done the bad act before the rule passed, which is September 2013, then you need to disclose that. If it happened after 2013, you’re actually barred from issuing the security. If you suddenly have a co-sponsor who’s got a bad act, you better drop them because you’d be doing an illegal offering.
Any examples of what makes you a bad actor? What would cause that to come into effect?
There’s actually eleven and I haven’t memorized them to be honest with you, but most of them have to do with violating securities laws if you’ve been sanctioned by the SEC. Sometimes the state sent you a cease and desist letter. These are the normal things you would think about being sanctioned. That’s probably something that would show up on a Google search. The last one is something to do with almost like postal fraud, like with the post office. It seems like it has nothing to do with anything. Again, I can send you that list or I can actually send you a copy of the bad actor. I’m happy to do that, if anyone wants to reach out.
The last thing with all Reg D’s, you have to file what’s called a Form D with the SEC, which is a notice filing. It’s not a registration. It’s letting the SEC know, “This is what we did. We raised $1 million.” You’ve got to file a copy of that Form D in every state that you have sold into. We do take care of all that stuff for you. They’re called the Blue Sky filings. That’s the only requirement for the states and in my opinion, what they want is there is a fee. They charge anywhere from a couple of hundred bucks to $500 in Texas and California. In New York, it’s outrageous. Call me if you have somebody from New York because it may not be worth taking a $50,000 or $100,000 investment because the compliance costs in New York is ridiculous.
That’s good to know. You said you have to file that form in every state you’ve sold into. That pretty much means any state that you have an investor that lives in.
You’re going to have a list of all your investors that you’ve sold to, then within fifteen days of that sale. Fifteen days from the first sale period, you’ve got to file that form with the SEC. I was going to say something, I don’t know if I should say it or not, but I’m going to say it anyway cause it’s true. There’s actually no penalty if you filed out SEC form late. As long as you followed before the crap hits the fan, there is no late filing fee. It’s not going to blow your exemption. When you sell it to a state, you have fifteen days from the first sale into that state to file a copy of the Form D. The states do have late fees and some states like Wisconsin will actually claim that you may have blown your exemption because you failed to file a form D, which is utter nonsense and not true, but they’ll take that position. There will be a little bit more consequences if you blow the states. It’s a form. It’s not a big deal.
[bctt tweet=”Once you run out of friends, family and foes, then you’ve got to get your capital from somewhere.” username=””]
In 2012, if you remembered the JOBS Act that President Obama and the Congress passed, that included these new rules. The idea was let’s open up the capital markets. We just came out of recession. We’re trying to liberate the capital formation. They came up with this new 506(c), which was exciting at the time because it basically lifted the restrictions on advertising. All those questions you asked me about advertising, that’s all fair game now. If you want to hire the Goodyear blimp and put your ad on Goodyear or take out a Super Bowl ad or Facebook marketing or webinars, it’s all fair game under 506(c). The only limitations are number one, you can only accept accredited investors. You can’t take the 35 non-accredited and you must take what’s called reasonable steps to verify the PR. In fact, accredited under 506(b).
We send them a questionnaire, they check the box and they tell me if you’re accredited or not and I can rely on that. Under 506(c), you cannot. You’ve got to dig into their financials, look at their tax returns. W-2s and there are several ways to do it. I personally recommend if you’re doing a 506(c) to outsource that. There are many third-party verification companies. The easiest way to verify is actually through a CPA verification letter that your CPA is knowledgeable about your finances, so they can actually verify, so can an attorney and also a broker-dealer. That’s probably the easiest thing. What I should say is try and get as many verifications through the CPA letter. If, for whatever reason, they can’t get it that way, then farm it out to a third-party verification company. They’ll do all the dirty work. You’ll not see any of the financials. They’ll give you a deliverable that says, “These guys were accredited.”
Not having to verify, investors are signing saying that they’re accredited. Let’s say you took 30 non-accredited and then all of a sudden there’s eight that you thought were accredited that are not. How would the SEC find out? When would that come up? Should we do something to safeguard against that even though we don’t have to?
First of all, it’s going to come up probably with the states. The SEC, in all honesty, it doesn’t care about your $1 million, $2 million puny raise or $10 million raise. They’re going after Bernie Madoff and pyramid schemes and Ponzi schemes, so they’re probably not going to get involved with it. Although I did do a cryptocurrency fund couple of months ago and I think that’s a red flag. We went through a preliminary audit, but as long as you have all the docs in line, my experience has been they’re looking for low hanging fruit anyway. If you send them 150 pages of disclosure documents, they’ll be like, “These guys have their T’s crossed and I’s dotted.” If you send them over a two-page business plan and articles of organization, they’re going to be celebrating because that’s when they can go after you.
You can rely on the 506(b). If they check the box and say they are accredited, you can rely on that in your file. The protection is having that questionnaire in your files so that if you ever get an audit into the state, you present the questionnaire. The only time in theory and probably in practice is if you know for a fact that they’re not accredited. He’s your good buddy or it’s a homeless person, you know there’s no way this person’s accredited. If you know them well, then that can’t get you into trouble. Otherwise, if you don’t know, you can rely on that questionnaire, which is why it’s so important to have that in your file. You can send it over to the SEC or the states once they open up an audit.
Do you mean the questionnaire when you’re getting to know them, the seven things?
This is a different questionnaire. This is a questionnaire that’s part of the offering package. The offering documentations are we do a PPM, a Private Placement Memorandum. There’s an operating agreement that we draft and create for the Syndication LLC. There’s an investor questionnaire, which is what I’m talking about. There’s a subscription agreement and then there’s your business plan. That questionnaire, it’s pretty simple. It’s like, “Are you accredited? Check the box. Are you not accredited? Check the box.”
If you’re not accredited, then we do a little bit of follow up to find out what their net worth is and what their income is because if you’re talking to a non-accreditor whose life savings is $50,000, you don’t want to take $50,000 from them. There’s no legal limit. I would probably encourage people not to take more than maybe 25%, 30% of an investor’s net worth or income, but certainly if you’re dealing with a little old lady who has $100,000 in retirement money, you don’t want to take $50,000 or $60,000 from that person. That’s the question I’m talking about, separate from the one that you’re trying to qualify or get to know them to create that substantive relationship.
I’m glad we clarified that because I knew they signed it down when they’re investing in a deal, but I wasn’t sure which questionnaire you were talking about.
It’s two separate ones if you’re capturing people through the advertising. It has the same. It preempts state law, which is huge. Again, we don’t have to worry about the state. You still have to file a Form B. Everything else is the same, from bad act to provision. It’s primarily the advertising and then limited to accredited investors. That’s the main thing. When it came out, we were like, “The world’s your oyster. You’ve opened up to the world. That’s going to be easy,” but the reality is 92% of the Reg D filings are 506(b) and only about 8% are 506(c)’s.
I think the reason is that verification process. If your investor is pretty sophisticated and is looking at ten deals or five deals and one of them requires verification and financials and the other nine don’t, all else being equal, they’re probably going to go with one of the ones that don’t require that. They don’t want to be pending over tax returns and things. I think that’s the reason it’s not there. I think it’s a great exemption. Once you run out of your friends, family and foes, then you’ve got to get your capital from somewhere. The reality is there’s unlimited capital if you can advertise.
What would you say is the hardest part of the syndication process as far as the legal standpoint?
[bctt tweet=”If you ask better questions, you get better answers.” username=””]
I always tell people that the legal piece is one piece in the overall syndication puzzle. My job is to make it as easy as possible for you to not worry about the legal piece. Yes, we’ll be talking a lot, especially on the front end. I underwrite every single deal. I have a thousand questions. I have a thousand comments. We’ll get on the phone and I’ll work on the business plan with you. We’ll do draft number two, three, four, five until it’s done. You make it so that it’s the lawyer that takes that burden off you. The hardest part I think is what you refer to earlier, which is the gray area of advertising. You’re like, “Can I do this? Can I do that?”
As I always say, I like to ask better questions, so you get better answers. How can we do this or how can we do that is probably a better question and will open up your mind. That’s probably the danger because I have clients who still are on Facebook. If it’s public, forget it. It’s advertising. If it’s private, they’re still, in my opinion, crossing the line and potentially blowing their exemption. Remember once you do a 506(b), the minute you advertise, that’s when you’ve blown your exemption. Now you’d have to go to a 506(c). If you’ve already accepted some non-accredited, you basically have to kick him out or starting a new offering.
What’s a way that you would recommend someone could improve their business right now, specifically in the syndication business. Maybe you saw that it’s a common thing people mess up on or some way they should improve?
I think in the syndication business, it’s all about relationships. It’s all about investors. I would encourage, even if you’re starting off or even if you’re a pro and the pros probably know this, you shouldn’t be waiting for a deal to be ready to go before talking to your list. Constantly be in communication with your list. Add value to your list, educate them about the market, educate them about the asset class so that when you do have a deal, it’s not the first time they’ve heard from you in two years and you’ve been consistently adding value. Then here’s a business plan and an invitation to a webinar. I think the webinar concept is great instead of sending out a business plan and saying, “Call me.” Do a webinar presentation and you can either send the business plan after or before. I think most seasoned syndicators get that.
What’s the number one thing that’s contributed to your success?
Adding value and relationships. I believe in relations for life and the more I add value, the more it reciprocates. People appreciate that and people would call me and I’m fortunate to have a pretty robust syndication business year. I think it’s all because of the value added and the relationships that I’ve created with not only the investors but what I call the gatekeepers like yourself or The Real Estate Guys or all the guys that are out there doing it. It’s a relationship business and I think I’m pretty good at that.
Is there a need in your business right now that you’d like to put out to the readers?
Is there a need for syndication? I think there’s always a need for education. Robert Kiyosaki talks about financial education. I got a call with prospective clients and they were putting together their own PPM. I’m saying this is not a do-it-yourself business. Being educated, that’s probably the number one need. Understand what you can and cannot do and hopefully, you’re talking to your legal counsel early in the process and not when everything’s already been sent out and it’s too late.
Tell us how you like to give back.
I’m constantly doing videos. I’m constantly doing articles. In fact, I’ve got my current one. I’m working on an article on opportunity zones, which may be a topic for another time. I do have my latest blog, Eight Critical Steps to Practicing Safe Syndication. If somebody wants to get a copy of that, they can email my team. It’s Team@PremierLawGroup.net. If you want any of the questionnaires and everything we’ve talked about, reach out to me and I’ll get that info to you.
That’s a big value add right there. I appreciate that. Do you want to tell us any more about how to get ahold of you or maybe how to get to your website?
You’ve been a great guest, Mauricio. Thank you so much for your time. I can’t thank you enough for the value you’ve added to me and the readers. I hope you’ll go to Life Bridge Capital and connect with me and also go to our Facebook group, The Real Estate Syndication Show, so we can all learn from experts and grow our businesses together.
- Mauricio Rauld
- Premier Law Group
- Rich Dad Poor Dad
- The Real Estate Guys
- Eight Critical Steps to Practicing Safe Syndication
- The Real Estate Syndication Show – Facebook group
About Mauricio Rauld
Regularly traveling around the U.S. as a noted speaker to business groups, Mauricio is also as regular contributor to The Real Estate Guys™ Radio show (consistently one of the most downloaded podcasts on real estate investing) and is Robert Helms’ personal advisor.
Twice a year, Mauricio joins Ken McElroy (master syndicator with close to 10,000 apartment units totaling $500m) and The Real Estate Guys™ to teach a few hundred students, the ‘Secrets of Successful Syndication’ a comprehensive course on raising capital for entrepreneurs.
Once a year, Mauricio shares the stage with the likes of Robert Kiyosaki (Rich Dad, Poor Dad, best selling financial author of all times), Tom Hopkins, Simon Black, Peter Schiff, Chris Martenson, and others as a faculty member of the ‘Summit at Sea’, a week-long high-level summit with elite, like-minded real estate entrepreneurs.
Mauricio previously served as a member of the elite group of “EVG Advisors” who along with the Elevation Group,™ are committed wholeheartedly to provide real education often overlooked by traditional educators.
With almost 20 years of experience, Mauricio has previously been selected as a “Southern California Rising Star” by the Southern California Super Lawyers Magazine, recognizing him as one of the top 2.5% up-and-coming lawyers in Southern California. A graduate of The University of California at Berkeley, Mauricio obtained his Juris Doctorate degree from Loyola Law School in Los Angeles, where he was a member of the Scott Moot Court Honors Board.