Dont Pay Finders To Raise $ Until You Watch This! (Ep. 49)

Are you raising money and looking to pay someone to help you find investors? Or maybe you are someone who feels you can make a ton of introductions and get compensated by money raisers. Well, in the next, I don’t know, five or 10 minutes, we’re going to spend time going through when you can get paid as a finder, when you cross that line into becoming a broker dealer and having to register. And then we’ll obviously open it up to Q&A. And as always, we’ll do some timestamps so that after the presentation, you can just kind of skip to a question that you think is relevant to you. So anyway, so finders is interesting because, you know, there’s actually no federal rule that involves finders. And so finders is more defined by what they cannot do versus what they can do. And so similar to what I’ve done in the past, I’m going to do things you can do, things you cannot do, and then things that are kind of in the middle. And this all goes back to this idea, just before I even get into that, that you cannot pay people to raise money for you, right? We’ve talked about that before. You’ve got to have a licensed broker dealer if you’re going to try and refer people over and get compensated for that person to come into your deal. And so where finders are a little bit different, and let’s get right into what you can do. What’s different with finders is that you are making merely an introduction to the sponsor without further negotiations or without further discussions of the topic. You’re just basically, not basically, you are making an introduction only with nothing else. And the compensation that you are receiving, the compensation is not based on whether that person ends up investing in your deal or not. It’s based exclusively on making that introduction, right? So the example, I actually, I came up with this example. So I’ve got a list here. I think you see that. I have a list of 10 names, really, really important. And all these 10 names have $100,000 that are available to invest, and they’re looking to invest it this month. They’re literally looking to place their money. And I’ve got this list of these 10 people. Who’s interested in this list, right? There’s probably a lot of sponsors on here that are going to be interested in this list. And if I were to give you this list and their name and their phone number and their email address, you can pay me $5,000, $10,000, $100,000, whatever you think we agree on for me to give you this list, right? Because all I’m doing is literally not even making an introduction. I’m literally just providing this list for you, and I’m making the representation that they’re ready to invest. A step further would be, hey, I’ll even make an introduction. So I’ve got Mary here at the top of my list. I’ll send out an email introducing you guys. Hey, Mary, I know you’re looking to invest. Let me introduce you to Kevin here. I’ll let the two of you guys connect. And you can pay me some kind of flat fee for making that introduction. It can’t be based on whether Mary ends up investing in your deal. And there’s a lot of things I cannot do. And I wanted to go through those. It’s about, what did I do? Seven, I think I came up with. There’s a lot more than seven, but the seven that I came up with, the things you cannot do are really specific to what we do in our industries, right? Nobody’s here doing mergers and acquisitions. Nobody’s doing anything institutional. So the things you cannot do is you obviously cannot provide investment advice or make recommendations. I mean, that’s what a broker-dealer generally does. So again, you’re just making the introduction. You’re not providing any investment advice. You’re not participating in the discussions, negotiations, or participating in any of the meetings. Again, I’m just literally handing off the information. Let the two of you then take it from there. If you end up facilitating a three-way Zoom call or even in a physical meeting and you’re sort of involved in that process, that’s going to start crossing over the line. Cannot receive transaction-based compensation. You’ve heard me say this over and over again. Transaction-based compensation, which basically means the compensation is tied to that person investing in the deal. Well, that’s the hallmark of broker-dealer. So if you look at a lot of my content, anytime you come across transaction-based compensation, I usually say you’re done, game over. Like that is the hallmark of broker-dealer activity. So if anybody’s paying you a commission, if anybody’s paying you, even if it isn’t a commission, but it’s just literally, I will pay you $1,000 only if that person invests in the deal. That’s going to be transaction-based compensation. The finders cannot pre-screen people to see if they’re eligible for the investment. That’s another thing that a finder cannot do. And you certainly don’t, not certainly, you cannot solicit investors. So you generally have to have an already existing relationship. Again, my idea is like, hey, I know Mary from my list and I’m happy to make an introduction because I know Joey over here has a deal. So I’ll make that intro. I can’t go do some Facebook marketing or go on a podcast or try and recruit people here to get on my list, so to speak, so that I can then make an introduction that way. I kind of already have to have a sort of a pre-existing substantive relationship, if that makes sense. Handle PPMs. You don’t want to be handling any documents and forwarding those kinds of things. Again, you’re out of it. You’re literally just making that introduction. And you certainly don’t want to be handling any funds, right? There are situations where, hey, when the person’s ready to invest, they’ll actually make it through an escrow account that they’re handling or something. So we don’t want to have to do that. Interestingly enough, and I thought this would be helpful, there’s only two states in the entire country that actually has specific finder rules. And those are not going to apply to most of you, not because, but the two states are California and Texas. You may have heard this. So California and Texas both have finder rules, meaning you can actually go get a license to become a finder and receive some sort of compensation. However, it’s A, limited to obviously residents of those states. So you’ve got to either live in California or live in New York. I’m sorry, California or live in Texas. You also, the deals that are involved have to be like an intrastate deal, meaning they’re raising money only in California or only in Texas. They’re relying on the intrastate exemption to the federal rules. So if that very limited scenario applies to you, you’re in California, there’s a California sponsor, and the California sponsor is only limiting their activities to people in California and the properties in California, everything’s in California, then these rules may apply to you. But I thought it would be instructive to go through them because then you’ll sort of see the pattern of what it is that they cannot do as well. And I think that’ll help a little bit, even though we’ve gone through seven and you’ll see a lot of sort of, what’s the word? You’ll see some recurring themes. I’m just going to read these off because I certainly haven’t memorized them. Again, there’s probably 20 of them or 25. I’m just going to rattle them off really quick. In California, for example, the finder needs to be a natural person, which I thought was interesting. They can only introduce accredited investors in California. And if you remember that proposed rule that came out from the SEC, which we may or may not get into it, but there was a proposed rule to maybe allow officially finders or getting some compensation. One of those limitations under the proposed rule was that you could only make introductions to accredited investors. And that’s the rule in California as well. Again, the issuer and the transaction all has to be in California. The securities that are being offered or transacted cannot exceed $15 million in the aggregate. And the finder can only disclose, I got my little list again, they can only disclose the name, address, and contact information of the sponsor, name, address, contact information of the sponsor, and the name, type, price, and aggregate amount of any securities being issued. So again, very, very limited information. I think that scenario is even more, is really when you’re making sort of email introductions. Because again, you’re typically, you know, when it’s just an in-person introduction is probably, hey, Bob, meet Jane. And that’s pretty much it. You again, cannot participate in negotiating any of the terms of the securities, cannot advise, you know, of the value of the securities, cannot conduct any due diligence on behalf of the deal, cannot receive the possession of the funds, it can no custody of the funds. And you must disclose, and this is both in California and Texas, and the proposed rule that had come out, you’ve got to have this all in writing. You’ve got to disclose this to your prospective investor. You want to make sure that they understand that you’re getting compensated for making the introduction, how much you’re getting compensated. And that was in the proposals, California and Texas. I’m not going through the Texas law, because it’s very, very similar to the California one. They also limit you to accredited investors only. But again, the idea here is that you’re literally getting compensated for the introduction, which is why most of the time it doesn’t really apply to our scenarios. Every scenario I hear about what they want to do or not do, it just doesn’t work. I’ll give you a very specific example. And then I’ll wrap it up and I’ll open it up to questions here. But there’s a client of ours, and I’m not going to name names, but there’s a client of ours who, and a great client, one of our very, very special clients. But they had a booth at an event, at a conference. And the booth actually, the conference happened to be their own conference too. But what they were trying to do is they were trying to get people to usher attendees to their booth where they were talking about their investment. It was a 506C, so they were totally within the rights of the client. Totally within the right to have a booth and pitch the deal and talk to people and do all that stuff. But they were trying to get people to specifically come to that booth in order to make sort of that introduction. And they wanted to pay those people if the person invested in the deal. Hey, if this person invests, I want to give this person $50 or $100 or whatever the number was, because they made an effort to actually get people that, I don’t know how many people were at this event, 5,000 people at this event, get them to the booth. What we told the client was, hey, you can get paid for the transaction. So if you want to get a runner or somebody at a conference and get them to your booth and say, hey, here’s somebody and you want to pay that person $10 or $50 or $5 for every person they bring to the booth, knock yourself out. But you cannot tie that to the success of that person actually investing in the deal. So that’s a very, very important distinction. And then the last thing I’ll say, and I’ve got another client, a well-known client, which I’m also not going to name. But again, the issue with the finder is that we always get creative and say, hey, what about this? What about that? And one of the grayer areas, which I still would recommend not doing, but what if the finder, you’re paying them, not whether they invest in the deal, but what if they actually book a call with you or something? It’s really more of a lead, because then you know, hey, if I talk to this person, my closing rate is 30% or 50% or it’s a much higher rate. And so, hey, can I compensate them for everybody, not only that they bring to me, but that they actually schedule a call with me or with my people, because then I know I can kind of reverse engineer it. And I would still stay away from that, because again, the SEC has known, in many of the things we’ve discussed before, that they don’t really care about the structure or how it actually works. They’re going to look right by that. And they’re going to look at, is ultimately this person getting transaction-based compensation? And I think trying to get compensated through sort of a, what’s the word, like a proxy for the investment itself, I think that also runs you into some issues. So I would stay away from that. So anyway, I already see a question from my good friend, Justin. So anyway, I’m going to open it for questions. If you’re watching this on video, I’ll put the timestamps below and appreciate a subscribe or a like if you’re getting value from this particular episode. Jared says like a brand ambassador. I’m not sure you mean the finder is like a… Look, the finder, by the way, that just triggered something. The finder is not something that you do sort of for a living, right? Like if you’re in the business of doing this all the time and you’re like, hey, I can make a good living by referring all these people that I know and you just do it over and over and over again, at some point you’re going to be considered somebody that’s helping effectuate securities transactions. This is really meant for the sort of the one-off or the two-off where you literally say, hey, my fellow investor or somebody else knows somebody, if they make that introduction to me, can I pay them? Yes, as long as they don’t get involved in any of this stuff, which to me has been always almost the impossible thing, right? It’s almost impossible in the real world to just say, hey, Johnny, let me make the introduction. There’s always something that accompanies that, hey, the sponsors got a really good deal, for example. I’ll have you cross the line now because now you’re giving some advice or some opinions as to the quality of the investment. So it’s very, very difficult for you to literally say, John, I want you to meet Mary and I’ll let the two of you connect or, hey, I’ve got a list of people and I’ll share that or I’ll make an email introduction that’s very simple. I would make an email introduction probably just because then you have a written record of what you actually told them. And it’s just very, I think from a practical standpoint, it’s very, very difficult to make an introduction only without some accompanying statements because obviously you want to make sure that they end up investing in the deal because you’re going to get compensated more and more for these referrals or these introductions, so to speak. So anyway, just be super, super careful with the finders, especially if you’re not in California or Texas. And by the way, both California and Texas require some sort of registration, of course. You’re getting a license. It’s not a crazy license. You’re paying $300. It’s just kind of a regular, almost like a driver’s license or something. But you do actually register with the state of California and let them know, hey, I’m getting compensated this much and this is the issuer and this is the person. And so there is some annual fee that you’re paying. So there’s a registration process in those states. And again, the only reason I bring up those states is just so you can have some kind of an idea of what those states are looking for. And I think it is instructive, by the way, and I haven’t memorized, it’s been a while now, the proposed rule that came from the SEC. You can look at some of the things that they were really focused on in seeing whether they like something being a finder. A credit investor was an interesting one. And if I remember off the top of my head, you had to be an accredited investor, you had to have a pre-existing relationship. You couldn’t go out and advertise for people and then make introductions. And you certainly could not be involved in the transaction. Very, very similar to all of these other things and couldn’t handle funds, couldn’t do any of all that stuff. But the nice thing about the finder rule, which is still out there, it’s a proposed rule. Who knows? Actually, I do think at some point it’ll pass, but not anytime soon. But the nice thing about the proposed SEC finder rule is that you could get paid transaction-based compensation which was a big one. So I think that was kind of a cool thing. Richard, would it be beneficial to get a broker-deal license? It’s such a pain to get a broker-deal. I don’t know if anybody’s tried it or not, but back in the day when I was working as general counsel for the Realistic guys, we actually looked at getting a broker-dealer and it ends up being cheaper to just acquire one. But the regulations are just, it’s expensive to acquire or expensive to go through. It’s a nightmare when it comes to regulatory issues. Regulatory compliance, audit financials, and it just becomes a nightmare with that. Unless you really are gonna do this as a business and you just are really, really good at grabbing people together and adding value to them and then introducing people. And obviously with a broker-dealer license, you’re gonna be much more involved in the transaction and providing advice and all that stuff. Then sure, I think for the rest of us, I think what I typically, if you’re, let me put it this way. If you’re really good at attracting individuals and making introductions to people and wanna get paid to do that, and you wanna go down a license route, I would get a investment advisory license. Because if you become a registered investment advisor, which is a little bit of a pain, but not the end of the world. And then you hang that license under a broker-dealer and there are more and more broker-dealers out there that I know of and spoken to that are willing to let investment advisors who are selling their own things, their own syndications or whatever, hang their license under their brokerage. But to me, I know a few people have done that route. And I think that’s the easier route than getting a broker-dealer license. Get your registered investment advisory license, find a broker-dealer you can hang that license under. And now the transaction-based compensation happens with the broker-dealer who then shares that commission with you as the investment advisor. I think that’s a cleaner way to do it than actually go and get getting a full-blown broker-dealer license. But hey, Richard, if you’re in the business of that and you think you’re gonna be able to do this and make some good, good, good money out of it, and it may be worth spending three, four, five, $600,000 to get it up and running and whatever the annual regulatory BS is. But I think I’d go the RIA route unless you’re all in. Mustafa, what if you are an employee of the issuing company? Do you fall under covered persons and can sell the investment opportunities given it’s a 506C Reg D? I’m not sure that’s a finder question, but let’s just, let me go with that. What if you are an employee of the issuing company? Do you fall under covered persons and can sell the investment opportunity given it’s a 506C Reg D? So the exemption to, the main exemption that we rely on for not having to register as a broker-dealer ourselves as syndicators is what we call the issuer exemption, which is 3A4-1, if you want to look at it. It’s under the Securities Exchange Act, 3A4-1. And that covers all of the, anybody who’s associated with the issuer. So the issuer is just the LLC, think of the syndication LLC. So all the managers, general partners, basically all the co-GPs, all of the agents, all of the employees, they are covered as well. All of the employees are covered under the issuer exemption. However, you’ve got to go through those three things where we talk about, cannot get transaction-based compensation, must be involved in substantial duties in the syndication. They can’t just be there raising money. And number three, of course, your primary role needs to be something other than just raising money. So there’s no specific employee exemption to that broker-dealer. If you look at the rule that includes, like I said, managers and our world managers, manager of managers, all those individuals would fall under that. And so the employee would have to make sure that they are performing substantial duties and that their primary role is something other than those substantial duties. Brady, if a finder introduces us to an investor, a friend of theirs, okay, in a 506B deal, fine, since we did not solicit the, oh, okay. Since we did not solicit the investor, can we allow them into the deal or do we need to wait for the substantial relationship? So I’ve talked a lot about this, but having a preexisting substantive relationship is one, but not the only way that you can show that you did not generally solicit and advertise. Because if you look at the rule, if you look at rule 506B specifically, you’ll see no reference to having a preexisting substantive relationship. It just says you cannot generally solicit and advertise. It has been, the SEC has been very clear and they’ve given guidance that if you can show that you have a preexisting substantive relationship, then almost by definition, you didn’t advertise or generally solicited to them. However, your specific example, if there’s an investor and there’s sort of a referral, especially if it’s an investor, you don’t have a preexisting relationship with them, but you also did not generally solicit or advertise to them. So I’m okay with that person. In fact, I think that’s a great way to get more people in is have your investors, next time you have a webinar or something, have your investors invite their friends. Now, you cannot pay them for that referral, but if somebody wants to make an introduction or invite them to your seminar or webinar or whatever, that’s gonna be fine. You’re still required to make sure that the investment is suitable for them. So you’re still gonna wanna go through and establish that substantive relationship because the whole point of, really the main reason of going through those eight steps and getting that substantive relationship is so that you can determine whether this is a, one of the reasons is to make sure that they’re sophisticated, that this is a suitable investment for them. So you still wanna go through that exercise so that you’re comfortable, that you can document that this is suitable. This is not some 90 year old widow that needs their cashflow and this is a ground up development deal. So you still wanna go through that, but not for the purposes of making sure you didn’t advertise or generally solicit under 506B. That would be a scenario where it would just be one of those scenarios where you don’t have a pre-existing substantive relationship and that’s okay. Cause that’s, when I say it’s one way, it’s 99.9% of the time that you use that, but that’s not the exclusive way. And that’s been very clear from the SEC. What if it’s a salary not tied to trans? Yeah, so this comes up again. So if you’re an employee of an issuer and you’re on the phones and you’re raising money, you cannot pay them transaction-based comment. You can’t compensate them either unless they’re performing substantial duties other than raising money. So what else are they doing? If they’re just on the phones dialing for dollars, then they’re not gonna fit under the issuer exemption cause their primary role is raising capital. Right? So if it’s incidental to their role, if they’re your executive assistant and they spend 80% of the time doing executive assistant work and then every so often they’re on the phones calling and they’re just getting a salary, then that’s gonna be fine. But if 50% plus one of their time is on the phones dialing for dollars, you’re gonna run into issues with that issuer exemption cause you’re not gonna qualify. And now you’ve got to figure out, what’s my exemption. And if you don’t have one, you’ve got to register as a broker dealer. This is a great question. I’m gonna reread it cause I butchered it. But somebody wants to give you $50 million. They wanna charge a 2% acquisition fee or asset management fee and then wants to give them a seven or 8% return. You were suggesting a fund of funds. Yeah. To me, a fund of funds is a great idea cause that person can then go raise the money into their own fund, do a syndication, do a PPM, do everything by the book. And then at that point, they’ve got to be adding value. So there’s still, what are they getting compensated for? The due diligence, the vetting the sponsors, the due diligence on the properties. But if they can show all of that stuff, then they can charge, they’re an investment advisor. So we’re gonna have to look at the States. We always talk about that. So anytime you do a fund of funds, the SEC looks at you as the person. So this person is advising their own fund, essentially. You’re the manager, you’re advising your fund as to the purchase of securities cause now you’re actually buying some shares in somebody’s company. So that makes you an investment advisor. And one of the things we have to worry about, in addition to all the other things we have to worry about is whether you have to register as an investment advisor and that’s a state by state issue. So depending on what state this person is, I think almost every state has some form of an exemption. It just depends on how onerous it is. Is it like they don’t really care and as long as you’re not doing more than five of your fund of funds, or is it, are they limiting you to accredited only? Are they limiting you to $2 million accredited only? I mean, it’s a state issue, but I think fund of funds is probably the only way they can make that happen unless they get, unless they register as an investment advisor and then hang their license with a broker dealer and then you could pay the broker dealer a commission. Right, so, excuse me. So, but that’s not what they want to do. They want to charge their own fees and give investors and that means that they’re going to have to put together their own fund and we can obviously help them with that. Is the state where they registering the fund? No, it’s the state where you, generally where the state where, so this has to do with the state law. So when you’re an investor, you’re doing a fund of funds, you’re an investment advisor, right? So the question becomes, do you need to register? Well, that’s a state issue. So what state do I look at? The state where you are advising your fund, which is generally your home or your office, wherever that is, is usually your residence. The only quirky exemption, I did have one client many, many years ago that lived, I think they lived in Delaware, Wilmington, Delaware, and right on the border of the state, since the states on the East Coast are a little small. And so they literally lived in one state, but their office was on the other side of the border. So theoretically, if you live in one state and you’re crossing the border every day to your office, and that’s where you’re doing all the work, then maybe it’s the other state. But generally it’s where are you advising your fund as to the purchase of security? And that’s usually going to be your state of residence. So yes, where they live.

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