What you don’t know CAN hurt you, particularly when you’re using other people’s money for your real estate investments. In this episode, Kim Lisa Taylor discusses the difference between joint ventures and securities and why you need to know which you’re dealing with.
Click below for related content:
Joint Ventures or Securities – What’s the Difference?
Contact via: email
Syndication Attorneys Website
What you don’t know CAN hurt you, particularly when you’re using other people’s money for your real estate investments. In this episode, Kim Lisa Taylor discusses the difference between joint ventures and securities and why you need to know which you’re dealing with.
Click below for related content:
Joint Ventures or Securities – What’s the Difference?
Contact via: email
Syndication Attorneys Website
Edited transcript from the teleseminar, “Joint Ventures or Securities; What’s the Difference?”
Kim Lisa Taylor:
This is Kim Lisa Taylor with syndicationattorneys.com. I want to thank everybody for joining our free monthly teleconference. Today's call is being recorded on May 18th, 2017. And our topic for the day is "Joint Ventures or Securities: What's the Difference?" So I think is going to be really important for all of our listeners to understand. Some of you, it would make sense for you to do securities, and some of you, it won't. And you should be selling... have some investment interests in the form of securities.
So we're going to just tell you what the difference is between joint ventures, what's the difference between securities, how you can stay out of trouble if you're doing joint ventures, and what kind of trouble you can get in if you do it wrong.
All right. So what is it that sets joint ventures and securities apart? Well, before we can actually cover that, we have to talk about what is a security. The Securities Act of 1933 is where the first definition of a security came from. And in that Securities Act of 1933, which you can look up on the internet, you'll see that there's a whole big section, and it takes up about a half a page, that just defines all the different terms that the SEC considers to be securities.
Most state regulatory agencies have adopted a very similar set of terms. And so if you look in any state's securities laws, you'll find almost an identical list. And if you'll notice, in the Securities Act of 1933 list of definitions, the very first thing is a note. So everybody who's out there selling promissory notes and borrowing money from people over and over again, thinking that they're not selling securities, you're wrong, okay?
And the second thing that pertains to people who are dealing with real estate are called investment contracts. So those two terms appear in the definition of securities for the SEC in all 50 states of the United States.
So what's an investment? We all know what a note is, so I'm not going to explain that. What is an investment contract? Well, an investment contract was actually defined in 1946 by the U.S. Supreme Court. There was a legal case that was brought by the SEC against the company called W.J. Howey Company. And W.J. Howey had an orange grove in Florida, not too far from where my office is located. And it was a place called Howey-in-the-Hills. And in that orange grove, the orange grove operator decided they were going to start selling off interests in the orange grove to private investors, with the understanding that they would continue to harvest the oranges and sell them and distribute them, on behalf of the investors, and then share profits with the investors.
And I guess it got a little crazy. At one point, they were reportedly selling off individual trees. So for some reason, they decided they didn't want to do it anymore. They weren't making enough money for themselves, or they wanted to retire or something. So they just kind of said, "Hey, well we'll just tell everybody, 'Here's your tree, come get your oranges.' " And of course, the investors didn't like that, and they complained to the regulatory agencies. And then the regulatory agencies brought suit.
And the outcome of that case was what they had engaged in constituted an investment contract, which really hadn't been defined by the regulators up until that point. So out of that SEC vs. W.J. Howey case came what we call the Howey Test. The Howey Test is comprised of four things. So if you want to write something down in this call, this is the thing to write down.
It's an investment of money in a common enterprise, with an expectation of profit, based solely on the efforts of the promoter. So investment of money in a common enterprise, with an expectation of profit, based solely on the efforts of the promoter. All right. So a lot of you are thinking, “Okay, that makes sense.” You're looking for investors who are going to invest money in a common enterprise, whatever you're proposing they make the investment in. And they are expecting a profit. But it's the fourth prong that is the one that will determine whether what you're selling are securities or joint ventures. So it's that "based solely on the efforts of the promoter."
In layman's terms, that really translates to, "Are you selling active investment opportunities or passive investment opportunities?" Well, by ir very nature, when you're trying to bring in a number of investors into a deal, if you're going to have 30 or 40 investors, you don't want everybody to be actively involved. You'll go crazy, and you'll never be able to accomplish anything or agree on anything. It's just going to become a mad mess.
So you're probably, in that situation, going to be looking for not a joint venture partner. You're going to be looking for passive investors. By the Howey definition, you've now created that investment contract, because you have an investment of money in a common enterprise, there is an expectation of profit, and it’s based solely on your qualification and your ability to generate a profit for those investors.
So when would you use a joint venture? Well, what is a joint venture? Okay, so we've covered what's a security, what's an investment contract. Now, what is a joint venture? Well, a joint venture ... this came out of Investopedia, which is a website that I use frequently when I'm looking up financial terms … Investopedia says, "A joint venture is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project for any other business activity." There you go. And you can look that up yourself, if you like.
So what distinguishes a JV from a security? Well, again, in a joint venture, all of the partners have to be actively involved in management of their own resources. If you have four people, and they're all going to contribute money to a deal, they all have to stay involved, and they all have to stay in control of their own money. They're not handing over the money to one of the partners, who's going to handle all the financials and make all the decisions, because if they did that, then they would have created a security in the form of an investment contract.
One of the things that people always think is, "Well, if I only just have one person, then it must be a joint venture." Well, that's only true if that one person is actively involved in your transaction. The Howey Test doesn't say, "Except that if there's only one person that's not a security." It doesn't say that. It just says, "If it meets this definition, it's an investment contract. If it's an investment contract, it's a security."
So now that you know, "Well, hey, maybe what I'm selling doesn't meet the definition of a joint venture, maybe it is a security." Well, in that case, then what does that mean? All right, so what?
So it means that you have to now either register the offering of those securities before you start selling them (or qualify for an exemption). And that's going through a regulatory pre-approval process, and registering your company as if it... Becoming, basically, a public company, a registered securities offering, or registered company. And that process would be like what Facebook or Google went through when they did their initial public offering. They had to file a pile of paperwork. They had to go back and forth with regulators who looked at all their financials, looked at their business plan, decided that what they were doing was fair and reasonable, and then said, "Okay, it's all right. You can go ahead and sell those securities to the general public."
Well, you're not going to do that for real estate. It's never going to make any sense. I mean, if you've been doing a lot of syndications, and you now want to take a company public, then you might look at doing a Regulation A or A+ offering. But that's going to be something that you wouldn't consider doing until you're pretty far down the road in your syndication career.
So how do you start? How do you start if you don't want to register your company, if you’re you're not ready to go to Regulation A, then you would just have to qualify for an exemption from registration. So again, if you're selling securities, you either have to register the offering or qualify for an exemption. All right, so there are exemptions. But none of them are do-nothing exemptions. They all have a specific set of rules that you have to follow.
So in order to qualify for an exemption, you first have to know which exemption you're going to follow, pick it, figure out what the rules are, and then stick to those rules. These exemptions are self-executing, because by their very nature, you don't have to submit documents to a regulatory agency and get pre-approved, like you would in a registered offering. You're just going to follow the rules. But it's incumbent on you to make sure that you follow the rules, and to document how you followed the rules in case you're ever audited.
So think about this like an IRS audit. If IRS comes to you and wants to look at the deductions that you've claimed, you have to produce documentation to show that you qualify for those deductions. And if you're not able to produce the documentation, then they're going to take those deductions away, and you're going to have to pay the tax and some penalties.
So the securities exemptions are very much like that. You have to keep records to show how you followed those rules for that specific exemption. And if you can't produce them, then they're going to take that exemption away. And then they're going to say, “Well, you sold securities that were not registered, and you sold them without a license, and you didn't qualify for any exemption. Therefore, what you did is illegal.” Now you're in trouble. All right?
So what is the legal structure would you use for a joint venture? Typically, you're going to use a member-managed LLC or a general partnership. By its very nature, in a member-managed LLC, all of the members are considered to be managing members. And in a general partnership, all of the partners are equally responsible for the acts of each other.
Now, in the syndication context, you will use joint ventures. You're going to usually use them at the management level of your syndicate. So where you typically would create a syndicate that would have an LLC for investors, where you're actually selling investment contracts, and then that LCC would be manager-managed. It would have its own manager LLC. That manager LLC is probably going to consist of two to four people who are putting the deal together. And that LLC is probably where your joint venture is going to occur.
The other place a joint venture might occur is if you have a syndicate. And then your syndicate, maybe it's going to raise $8 million or $10 million, and you don't think you can raise the whole thing, or maybe even $4 million or $5 million. So you're going to come in with the half the money, and you're going to joint venture with another company that might bring in half the money. And then the two of you join forces with a joint venture to acquire the property. Your syndicate acquires part of the ownership interest in the property; the joint venture partner acquires part of the ownership interest in the property.
So the difference here is the structure for a JV is member-managed. Everybody's actively involved. And the structure that you would use for your securities offering, for your syndicate, would be a manager-managed LLC. Or you could use a limited partnership. Even some corporations, where the shareholders are contributing money and the company is being run by officers or directors, those are also securities.
So a lot of people try to do things as joint ventures. They will call what they're doing joint ventures so that they don't have to follow the securities laws, or think they don't have to. But what they're really looking for are passive investors. So it doesn't matter what you say, it's what you do. Because if you're ever audited by the SEC, they're going to look at your documents, they're going to interview your investors, your partners. They're going to ask them what kind of a role they had. And if those people can't say that they were actively involved and in control of their own money, then the SEC or the regulator would deem that you were selling securities, and that you didn't do it properly.
All right, so now you want to qualify for an exemption. What kind of rules might you be looking at? Well, the most typical rules that people use for real estate ventures are Regulation D, Rule 506. This is by far the most common exemption that's out there being used for real estate securities offerings.
So in 506(b), the rules are that you can have an unlimited number of accredited investors, and up to 35 sophisticated investors. The investors can self-certify that they meet the definition of an accredited investor or a sophisticated investor. And if you want to know those definitions, you could look them up on Investopedia, or you could look them up on the SEC's website as well. So that's the financial qualifications.
But then you also, in the 506(b) offering, you cannot offer any securities by any means of general advertising or solicitation. And so in order to prove that, you have to be able to prove that you had a pre-existing relationship with the investors before you made them an offer. And the pre-existing relationship that you have to have is defined as knowing, in advance of making them an offer, whether they were accredited or sophisticated and allowing some passage of time before you start making offers to them. So you can't meet somebody, pre-qualify them, make them an offer right then. It's not appropriate. That doesn't constitute a pre-existing relationship.
The reason for this is that 506(b), is really designed for private securities offerings to small groups of people that you already know. People who know, like, and trust you already. All right.
After the JOBS Act, the standards got changed a little bit. So a new regulation rule came into play, and that's Regulation D, Rule 506(c). Okay, and that's the one that now allows you to advertise. But you can only sell to accredited investors that have been verified. So they can't self-certify anymore. Somebody's got to look at their financial records and make sure that they meet those qualifications.
Just because we are talking about accredited investors a lot, I will just kind of spit out the definition. Accredited investor is someone who has over a million dollars' net worth, including any equity in their primary residence. Or they make over $200,000 a year if they're an individual, $300,000 a year if they're a married couple who files joint income tax return. So that's an accredited investor.
A sophisticated investor is someone who, by themselves or with the help of their investment advisor, has the ability to determine whether the offering is appropriate for their portfolio. And they usually have to have some kind of a business, financial, or investing experience that can demonstrate that they are indeed sophisticated. So it's usually more than somebody with just a job. They have had to have had some training, some other experience, some other real estate investing experience, or some kind of a degree in finance business or economics, or something that would make them qualify. All right.
So if you were doing a JV, you wouldn't have to worry about any of those rules, right? There's no registration. You don't have to qualify for an exemption. You just have to make sure everybody's actively involved, and that they stay in control of their own money. All right? So there's no disclosures required in a joint venture. Everybody takes on their own risk.
Just jumping back to the 506(b) exemption again, one of the other requirements is that if you are going to have any sophisticated investors in your deal, you have to provide a disclosure document that describes all the risks of the investment, and all the way they could lose their money. That's the thing called a private placement memorandum.
All right, so we have... I've talked for about 20 minutes, and I'd like to open up the call to other people who have questions. And you can ask any question about a securities matter that you want. So I'm going to go ahead and do that. The way that you will get in the queue to ask a question is to press star six on your phone as soon as I open up the call.
I do want to point out that these calls are recorded and used for promotional purposes. So if you don't want to ask a question that's going to be out in the public world, then you would be better off to schedule an appointment with me or one of my staff, so that we could answer your question privately.
So I will go ahead and turn on the call. So press star six if you want to get on the call. So while we're waiting for people to get in line to be on the call, let’s just talk for a minute about the penalties. So what if you do it wrong? Well, you could be forced to give everybody's money back within 30 days, or face prosecution. Disgorgement of any financial gains that you have made from the investment. You could be fined daily, or ... They impose fines of $5,000 a day for every day that you're not in compliance with the law. And in the worst case scenario, you could go to jail, but that's ... You're going to have to be pretty egregious, where you're actually stealing people's money, before that’s likely to happen.
All right. So I'm going to go ahead and jump to the first caller. Hi. State your first name, and let me know what your question is.
Nicole:
I guess it's me. My name's Nicole.
Kim Lisa Taylor:
Hi, Nicole.
Nicole:
I have a question. It's probably fairly basic, but if you have ... if you're dealing with a very small ... for a single house, what is the difference between a note and a loan? So is there a way to set this up for using private money for a single house where it is not a security? Is it a loan? Can you do it in your own private name? Or is there any way to do this?
Kim Lisa Taylor:
Now, a loan and a note are the exact same thing, all right? A loan is what you get when you issue a promissory note to somebody in exchange for their money. So there's no distinction. If you're giving someone a promissory note in exchange for your money, it's still a note.
If you just have the single investor on that property, then you might want to do just a joint venture with that person. But let them keep control of their own money. Don't have them give it to you and put it in your bank account so you can go to Home Depot. Get them to go to Home Depot with you, and let them use their own credit card or their own check to pay for that investment. So that's one way, is to actually do it as a joint venture.
Or if you're just doing an isolated transaction, there are exemptions in pretty much every state, and certainly in the SEC, for loans, where ... you have a short-term loan and you're just doing a one-time thing, all right? It's when your business starts to depend on raising money from private investors, whether they're lenders or whether they're actively involved in your securities offering, it's ... wWhen your business starts to depend on those private lenders, you are now what's called a “serial borrower.” And you have to comply with securities laws if you're ... now you have to pick an exemption. You have to decide what financial qualifications your investors are going to have, whether you need to advertise. And then you have to follow those rules. And you'd probably have to provide some kind of a disclosure document to those investors, as well.
So you'd be better off to set that up one time, and then continue to use that disclosure document again and again, just using a different promissory note with each investor, and protecting yourself that way. Okay?
Nicole:
Okay. Yeah … because I use a lot of IRA, people lending money from the IRA, it's going to be tough to have them do joint ventures, or an IRA do a joint venture.
Kim Lisa Taylor:
Yeah, so you would be better off to set up a single-family securities offering, where you set up a private placement memorandum that explains to all those investors what you're doing with their money, and all the different things that could go wrong.
The other reason that you want to have this disclosure document is because it will shift the risk of loss from you to the investor. As long as you don't have that disclosure document, you bear all the risk, because they are uninformed. When you're selling securities, you have an obligation to make sure that investors have all of the information they need to make informed consent. And so unless you've provided them with some kind of a disclosure document explaining the risks of investing in real estate, then they don't have all that information. So all the risk is with you.
You really need to do a securities offering.
Nicole:
Okay. Thank you.
Kim Lisa Taylor:
And if you're doing everything all in one state, all the properties you're buying and all your investors are all in one state, then you may be able to qualify for a state securities exemption that might be a little less onerous than the federal rules. But we'd have to talk about that, look it up and see if there is such a thing in your state.
Nicole: All right, thank you.
Kim Lisa Taylor:
All right, thank you. I'm going to go on to the next caller. State your name and your question.
George Townsend:
All right. Hey, this is George Townsend, calling from San Diego.
Kim Lisa Taylor:
Hi, George.
George Townsend:
Hello. Thanks for this opportunity to participate in this Q&A.
Kim Lisa Taylor:
Sure.
George Townsend:
So my question is, on a joint venture, if we're using one investor, and they are basically putting up the down payment for the acquisition ... this is on a multi-family property, and they'll be putting down the down payment. We'll be managing the property. They'll have an active role with making any improvements to the property.
Kim Lisa Taylor:
Okay.
George Townsend:
Would this constitute a JV?
Kim Lisa Taylor:
Yeah, I like the fact that they're going to have an active role in making improvements to the property. I think that you should be ... definitely don't set it up as a manager-managed LLC, because then you'll just kind of push it over into the realm of securities. So it should be a member-managed LLC, where they have just as much say as you in everything that happens at that property, and that they're staying in control of their own destiny.
George Townsend:
Okay. Now, as far as the down payment on the loan, how would that work coming from different ... if they're putting up a portion, and perhaps I might be putting up a portion of it, would that be sufficient? Because they are controlling…
Kim Lisa Taylor:
That's certainly helpful. That's certainly helpful. And again, everyone stays in control of their own money. Everyone stays actively involved. So you're involved, regardless of whether you're contributing cash, or contributing cash and services. They're involved. They're contributing cash, but it also sounds like they're going to be contributing services. That's really what it comes down to. Everybody is pooling all of their resources, cash and services.
George Townsend:
Okay. That answers my question.
Kim Lisa Taylor:
Thank you. Let’s gao on to the next caller.
Frenchie:
Yes, good afternoon. This is Frenchie from Ellis Partners. How are you?
Kim Lisa Taylor:
I'm good. Hi, Frenchie.
Frenchie:
Hi. I didn't get your name.
Kim Lisa Taylor:
Kim Lisa Taylor.
Frenchie:
Okay. All right, Kim. I have a question for you regarding the PPM for a big commercial syndication. Sort of a compound question. In regards to the PPM, the first part is, when is the appropriate time to present it? At what stage? And then the other part is, what is the average cost? And do you provide that?
Kim Lisa Taylor:
Okay. So let's just flesh out your first question a little bit. What do you mean by "present it?" Presenting it to investors?
Frenchie:
Well, yeah, yeah. When is the right time? I know they said... A lot of times, I hear where it's not good to go into a PPM until you've established a number of investors, or have them lined up. And then I think the rule says once you collect the funds, there's a certain amount of time between that point and the time you should file the PPM.
Kim Lisa Taylor:
Okay. So let's just talk about timing in general. Those are really good questions. I'm sure a lot of people have the same kind of a question.
All right. So on a commercial property, what I usually say is the time to start drafting your private placement memorandum is when you have a signed purchase and sale agreement.
Frenchie:
Okay.
Kim Lisa Taylor:
Someone from your team has physically been to the property.
Frenchie:
Mm-hmm (affirmative).
Kim Lisa Taylor:
And you've reviewed the last two or three years of financial statements from the seller.
Frenchie:
Okay.
Kim Lisa Taylor:
And so that's when you need to hire a securities attorney and start drafting your documents. It takes three to four weeks to draft your securities offering documents. And so that process should be occurring during the time that you are doing the rest of your due diligence on the property.
In my experience as a syndicator, and as a purchaser ... My husband and I are managers of a syndicated multi-family property … In my experience, you are 90% likely to go forward with a deal when you've done those three things. Been to the property, reviewed the financials, have a signed purchase and sale agreement. Before that, it's a toss-up, whether you're going to forward or not. If you find other things during due diligence, those are usually going to become deal negotiation points versus deal killers. So there's not a whole lot of risk in paying up front for your securities offering documents and getting that process going.
The three to four weeks is drafting the documents, and then going back and forth, making sure that they're accurate and correct, incorporating your comments, and getting final. So ideally, you should be finishing the securities offering documents at the same time you're done with your due diligence on the property, so that you can now have the rest of the period of timing and escrow to go out and raise the money while the bank is continuing to process the loan.
Should you start a syndication before you know a single investor? Absolutely not, okay? You should be meeting investors all the time. Your job, before you ever do a syndication, is to meet as many people and potential investors, and develop pre-existing relationships with them as you possibly can. So that when you have that deal under contract, and you have those securities offering documents in hand, you can immediately go out to your pre-existing database of investors and say, "Okay, I've been talking to you about what we're doing for a while, and now we have a deal. So I'm here to tell you that ... Here's the documents. If you're interested in investing, here's the process."
Frenchie:
Right. Okay. So have them on call, in other words?
Kim Lisa Taylor:
Yeah. You need to develop your database before you become a syndicator. If you don't have that database and you want to be a syndicator, then you're going to have to team with somebody else who has those kinds of relationships with investors. And you're going to have to bring them into your management team so that they can help you sell those securities.
And then as far as the cost to do it, the costs are varied. We have joint venture agreements that start at $2,500 or $3,500, depending on complexity. We have private placement memorandums and offering packages that start at around $12,500 and go up from there, depending again on the complexity and if it's a single-property offering, multiple-property offering, and what other services you might need.
But our fees are very comprehensive. They're all lump sums. They include forming the appropriate entities, drafting the operating agreements for those entities, drafting the private placement memorandum subscription agreement, and doing the securities notice filings. So in addition to having the right documentation in place, and picking an exemption, these exemptions also require that there are some filings that get done, telling the SEC that you're selling securities, and telling them which exemption you're claiming. And then also some notices that have to filed in the states where your investors live, telling them that you've sold securities to someone in their jurisdiction.
Good question, Frenchie. That was very ... I'm sure everybody wanted to know that.
Frenchie:
No, that was great. No, thank you. And just to clarify, the time frame between when you should file ... I think there's a rule that says you have to file in a certain time frame. Is it four days after you collect funds? Or before? I'm not sure. I would like find out, and I can't clarify that.
Kim Lisa Taylor:
Yeah, those are the filings we're talking about, with the securities... the SEC.
Frenchie:
Right.
Kim Lisa Taylor:
So you have 15 days from when an investor's money becomes irrevocably committed to your deal, to be able to file your notice with the SEC.
Frenchie:
Okay. And what do you ... And can you clarify "committed?" When they say that they're ... Or you have a letter from them or something, saying that they're going to get the funds?
Kim Lisa Taylor:
No, no. It's when you have their funds. Okay, so if you have a commercial property under contract, that commitment day is going to come on the day of closing. Because at that point, there's no way you could give their money back. You've used it. Okay? Prior to that, if someone came to you a week before and said, "Ah, I changed my mind. I'd like to get my money back out of the deal." You're not going to want to force them to stay in a deal. You're going to find another investor and take their place.
Frenchie:
Sure, without a penalty. Of course, yeah.
Kim Lisa Taylor:
Sure, sure. You're going to let them out. And people's situations change. You want to be understanding. And plus, maybe they'll invest with you for a future deal. So yeah. So that's 15 days.
And then in the state securities notices, we have to file the notices within 15 days of when you bring in your first investor from that state. So that's either going to happen on the date that you close on the property, or if you're continuing to raise money after the property has closed, then it would start immediately on the dates that they gave you money. Because once you've closed on the property, you will be able to immediately deploy those funds, if you're continuing to raise money.
Frenchie:
Okay, excellent. Okay, great. Thank you very much.
Kim Lisa Taylor:
Thank you.
Frenchie:
Thank you.
Kim Lisa Taylor:
Okay. All right, we're going to go on to our next question. State your name and your question.
Joseph:
Yeah, this is Joseph, and I think my question has been answered, and I appreciate it.
Kim Lisa Taylor:
Okay, great. Thanks, Joesph. All right, we’ll go on to the next caller.
Doug:
Hi, Kim. My name's Doug in Tacoma, Washington. And I serve as a private lender, but I quickly grew beyond my ability to fund deals with my own money. And my list of projects, or people that were contacting me for money, grew into the multiple millions. So my focus has been on establishing connections to those organizations that lend money to both real estate and business projects, and would be interested in partnering with an equity position.
So my question is ... I'm now serving primarily as a finder or introducer, and I'm wondering if there's anything I need to do, if I'm strictly the connector, introducing someone with the money to someone who needs the money.
Kim Lisa Taylor:
Okay, well that's a really good question, Doug. So the question is really, "Can you receive a finder's fee? And are there any issues that you should be aware of with respect to that?"
And the answer is yes. There are some issues. If you're referring private investors to somebody's deal, you can't be paid a commission for finding those investors unless you have a securities license. It's the same thing as a real estate broker, right? If I want to sell ... or for sale by owner.
If I want to sell my own house, I can sell my house. I don't have to have a real estate broker’s license, right? But if I want to sell my neighbor's house and get paid a commission for doing it, I'm required to have a real estate broker’s license in order to be able to collect a commission on doing that. If I wanted to do it for free, nobody cares, right? So it's when do you want to get paid. And if you're trying to get paid something related to the amount of money that you're raising, then you're earning commission. And you can't do that unless you have a securities license.
So the risk of doing that, and getting paid for referring private investors to deals, is that you would get charged with selling unlicensed securities, unregistered securities, and selling securities without a license. And also, you maintain some liability, in that those investors could say, "Hey, I thought this guy was my broker. And he told me this was a good deal, and I invested in it. It went bad." And now they could sue you. Then that's for referring private investors.
The other thing is, then, if you're ... Whoever's deal you're referring those people to, they could get in trouble for having ... If they pay you, or you're somehow compensated by them in a way that looks like a commission, then you could get in trouble, because they would lose their exemption, as well. All right.
But as far as institutional investors go, if you're referring other institutions, whether people who are holding themselves out to be lenders or other joint venture partners, then the laws are a little looser there, all right? Because it’s a joint venture, or because it's an institutional lender, they're not going to look at you as selling securities in order to put individual investors into a deal. So you might be able to take some kind of a fee for that.
Doug:
Okay. And that's the example that I'm probably dealing with most, rather than the individual. Not going to my next-door neighbor and saying, "Hey, I found a good deal you might be interested in putting your money in." I'm not soliciting. It's generally, they've come to me in some way and said, "Yes, I'm interested in investing." But generally, I'm staying away from that individual, and dealing primarily with institutions or hard-money lenders that also take equity positions on certain kinds of deal, and introducing that way.
Kim Lisa Taylor:
Yeah. I don't think that you have much of as much of a problem doing it that way. You'd still want to be cautious, but stay away from referring individuals to a deal and expecting to get paid for it. Because it can just cause a lot of problems for everybody. All right?
Doug:
And I'm not providing advice. I'm just saying, “Based on the criteria that you've said, you might want to take a look at this deal. It seems to fit your criteria. Take a look.”
Kim Lisa Taylor:
Yeah, right. And you want to be careful of actually pitching the deal, right?
Doug:
Yeah. Excellent. Okay. Thank you so much.
Kim Lisa Taylor:
Okay. Hey, we've got a couple more callers on the line, and I will get to you. But I just want to say, in case anybody has to drop off, I know some of you are on your lunch hour. If you want to hear more about us, you can go to our website at syndicationattorneys.com, and you can email me at kim@syndicationattorneys.com. Or you can email my law clerk, charlene@syndicationattorneys.com, if you'd like to schedule an appointment. You can call me at (904) 584-4055. Or you can just go directly to our website, and there's a button you can click on to schedule an appointment with an attorney.
All right? So we'll go on to the next couple of callers, and then we'll wrap up.
Okay. Next question.
Tricia Houseman:
Hi. Hi, Kim. This is Tricia Houseman, over in Orlando, Florida. And I just want to say, thank you for providing this service. We know some people in common … I'm a real estate instructor, as well as a broker.
Yeah, so super format I want to be a part of more. I've got some people that I'm bringing together, and want to clarify on joint venture. When they are managing, in control of their own money, does that mean as they... We put the LLC together, and the LLP together... And it's member-managed. I got that. In control of their own money.
So is it going to function like an escrow, where money comes in, it's accounted for, and each member needs to sign off on the check? Or they just authorize approval? Can you clarify that?
Kim Lisa Taylor:
Well, you might have a joint bank account that everybody's a signer on, okay, is one way to do it. And nobody takes any money out until everybody agrees. And again, you get too many people in a joint venture, it's not going to work. A joint venture is going to be good for three or four people, at most. If you have any more than that, you're not going to be able to call it a joint venture. You're going to have to structure it as a security and follow securities laws. Because you'll just never be able to do what you need to accomplish, having to get consents and approvals and everybody writing checks.
The best way to protect yourself would be don't set up a joint bank account. Have a meeting and say, "Okay, here's how much money we need. Everybody send in your checks for $50,000." It's just going to be hard to collect. It's going to be hard to get ahold of people. And you're not going to want to use that, if what you truly should be doing are passive investments.
And people that have other jobs and don't know a thing about what you're doing, they don't want to be joint venture partners. They don't want that responsibility. They want to be a passive investor. So you're doing them a disservice, or you could be doing them a disservice, by trying to set it up and forcing them to stay actively involved in something that they don't know anything about, when you're the one that's invested all the time, effort, and money to learn how to do it.
Tricia Houseman:
Mm-hmm (affirmative). Got you. Well, that essentially answers it. And I'm going to be following up with you on various different projects to... "Now, which is the best method?" So I appreciate your time.
Kim Lisa Taylor:
Very good. Well thanks, Tricia.
All right. So that wraps up our calls for today. Thank you so much, everybody, for joining. And glad we didn't have a snafu this time, like we did last time. Hopefully we'll have it together from now on. We are getting more and more technologically advanced as we go.
But I appreciate all of you reading our newsletters and hopping on the calls. I really think this is valuable for everybody. And we look forward to working with you or talking to you more in the future. Thanks a lot.