How to industry sign banking kansas memorandum of understanding
[Music] oh oh hi good morning you let me go there's a lot of gesturing going on a lot of panicking behind the camera that you don't see thank you very much for joining us for our webinar I'm Jillian Sidoti I'm Nancy tiger and Jillian's letting me tag along with her today so yes well I'm very generous person as we all know so today what we're talking about is the anatomy of a private placement memorandum and we're going to tell you all about what should be in that private placement memorandum what you should be putting in your private placement memorandum if you're a passive investor what you should be looking for in a private placement memorandum now we're trying a whole new camera setup here and I told Timmy that he better not make the camera setup make me look fat and he informed me that fat makes you look fat so I would like you all to say farewell to Timmy he's fired after this webinar anyhow ten years down the drain Timmy that's how it goes and another thing Tim's my brother kind of sucked to see him and my nephew homeless anyhow so swell here we go let's get going baby sue oh my god oh my god right we're diverse quickly we're we're getting going all right Trowbridge Sidoti anatomy of a ppm let's let's get this on all right the first thing you want to know is that a ppm is a legal document and so we're gonna talk about what those legal documents are what to look for and and what should be in it okay so this is both from a perspective of an investor and from a person who's putting an issuer so yeah I think there's two sides of the document and so if you are someone who wants to try and raise money then you will need to hire sick we need to draft the PPM if you're an investor and you want to give someone your money they definitely should be providing you with a ppm yeah and a ppm is basically you know all of the things that could happen during the course of the investment also the things that you want to happen during the course of the investment so you should be basically answering all those questions on the screen there and and and and completely and almost in a depressing way I like the picture you have with that skeleton really it's all your Scouts and you want them out because that's what we tell all our clients that put everything in upfront because you don't want some secret or something that you should have disclosed that you didn't I'm always hearing in the office disclose disclose disclose yeah yeah all your skills when in doubt just disclose it and and it's probably not gonna be a big deal like a frequent question I always get is like should I disclose that I filed for bankruptcy several years ago and the answer is yes I actually had a client who had some very vicious investors or potential investors who called the SEC and the FBI on him because he did not disclose that he had filed for bankruptcy it turned into an FBI subpoena believe it or not nothing came of it but it cost my client a lot of money to defend that subpoena yeah other clients that have filed for bankruptcy which happens all the time especially with the crash few years back yeah we put it in the document the investors see it and no no as a matter of fact it kind of shows that you've had your stripes you've got some experience you know what's going on yeah and you probably won't let that happen again hopefully so I don't I mean whatever you think about the president is he's filed for bankruptcy his businesses have filed his businesses have filed for bankruptcy several time and he's president so I'll just leave that one there I won't bring up any more politics go out and vote today so I vote by ballot I don't I don't stand in line for anywhere I'm way too important for that so we fill it all out and then drop it off on my way home did you do the same thing to me however you vote yeah just get your boat son I voted for somebody who wasn't even running I'm just sad and weird all right so what should be in a ppm so the who what where why what could happen how much like how much money are you looking for I mean honestly we're not writing when we're writing a ppm we're not writing your marketing piece you're gonna use this information as a basis for a marketing piece perhaps but this is not a marketing piece this is a legal document that it's disclosing this is this for you issuers is the get out of jail free card I told you this and it's in writing right here and for you investors it's so you can be fully informed so you know one thing I hate when I get a ppm is when they are totally Camille did something you're not my my own PPM's are amazing and we all know that so no but and maybe you've seen this ones that art overly confusing yes yeah yeah and I think that's something with our ppm I like they're easy to read easy for the investors to understand right I think you'd get some with a lot of legalese it isn't necessary you still can get that legal language yeah I fear the ppm that's too difficult to read I really do I think there's always a secret in there and I'll tell you right now I've been doing this I've been in the syndication you know private equity space since 2005 so about 15 years I've been practicing law since the big since January 26 2007 that's when I opened my law firm and and I will tell you even I go cross-eyed when reading an overly difficult ppm so the thing I can say to you issuers out there to attorneys who are looking for new ideas on how to run your practice to our competitors to new investors out there fear the PPM that's too difficult to read because if it it just creates mass confusion brain damage you don't know what secrets are in there I I don't I do not like difficult ppm so but but what you do want to do is make sure you're thoroughly answering the questions we have here oh yeah look forgot to mention at the beginning we will be taking questions at the end so if you want to ask us something put it in the Q&A section and then we'll go back to all of those at the end and go through them excellent so okay so who who okay who's the hoop who is the bios of the company the bios of the principals of the company so who's in charge over there who the company is how long is the company been around what is what is it done where was it formed who the management company might be and then who are the investors what kind of investors are allowed to invest like there's all kinds of different types of investors under the law we have three different types of investors unaccredited sophisticated and accredited and so you want your offering to tell people and foreign people who are the types of people who can be investors I'll let you take this next slide Nancy okay so what so that's the big one what are we investing in there's different types of in the document you want to put is it a specific property is it fun is it applying pool you want to know where your money's going as an investor and if you're the sponsor you need to tell them where they're gonna put their money right and then yeah what your money will be doing are you development are you just gonna be doing renovation so you need to let your investors know what you want to do with that money or I'm gonna take it out of the real estate space for a second because a lot of times what I get is people who say you know we're gonna start a private equity I'm doing one right now it's a private equity fund and the guy wants to invest not just in real estate but also in stocks of other companies like opportunities that might exist in other companies so we have to not the challenge with that is to make sure that you're not entering into like an investment advisor position and making sure that you're dividing up the allocation of assets appropriately there's certain rules around that and then also investors want to know like I get all the time is like could I do a fund that invests in single-family and self-storage and mobile home parks and the answer is yes but you have to be straightforward with your investors like sure you can do all those things but what if one of your investors hears mobile home parks and the other one here single family fund and then you only invest in one of them you better make sure that you're disclosing that that's a possibility they need to know even if you think there's a chance we put it in again we disclose and just some that we there's lots of different ways so whatever you're doing with that money just let them know and then the other big one is as an investor they're going to want to know what type of returns to expect right that's a huge thing they're looking for in there so you need to figure that out and on the sponsor side what types of returns you think you can give to those investors and then disclose that and again keeping it simple a lot of times our clients want to get into these really complicated waterfalls and inevitably they return and simplify that down because we may get into that more so so then next is the where where is the money going you know this is what we call the use of proceeds so that's that's not the not so obvious where but we do we do not need to know where is the money going and then where is the money coming from oftentimes people think I mean where I mean location of the company or where the local company is going to operate and that that is true but really more importantly where is the money going and where is it coming from yeah the one yeah so I mean but there's a lot of wins Sara there are so many when so when first investors are going to expect what I don't save it one is when can they start expecting distributions so you want to put in the time frame for that they want to know how long the term of your offering is whether it will be thank you Tim for my old life you know how long can they expect to keep their money in this offering before they'll get paid back they want to know a timeline of when development might happen when you expect to be cash flowing I'm so lots of different timelines need to be put into the PPM to let them know it's not just that like so okay here's a here's a couple of good examples of this like let's just talk about the when of like a investment term is supposed to end this happened to one of my clients there they went past there when when the term was gonna end and they got a phone call like I need my money back I was gonna use that money to send my kid to college and he's going this year like so you have to really be thoughtful about your when's what I always like especially when it comes to well actually when it comes to anyone's to give a range of time you know yeah so you say this is our target but it may be a little earlier if a really good opportunity comes along a little later right sell the property at that point right right right and then also when distributions are gonna start I can't tell you how many times I'm investing in our property to be told that distributions are gonna start you know X date and they don't start on that date or you know there's nothing worse you can do to an investor than to set their expectation and not meet that target so you always want to drop in I we strongly encourage people to say you're not going to pay distributions for at least a year no matter what the property is especially if it's value-add and we're seeing you know I don't want to be too obtuse or mysterious but we're seeing issues with that now or people promised distributions you know oh we're gonna pay distributions the next month and they either don't miss make it or they do something even worse which is they pay when they shouldn't and what they're doing is they're using other investors money essentially to pay a distribution because it's not be their money's not being made from the company so where's that money coming from it's either coming from a loan or from other investors neither which is good so just be a realistic with your investors don't think you have to do something I think that's a good point why you put this timeframe in there so if you say hey we expect to start making distribution right away you're going to attract an investor who wants a return on their money right away I've been doing some opportunities on funds this is much more of a long-term investment ten years in ours so you're going to attract a different set of investors those who don't need that paycheck every quarter right maybe can wait five ten years before they start seeing that return so your investor is going to read your document and know is this the type of offering I would want to get in and what type of return am I looking for so that's why this is so important that you get the right people in your fund that you're not going to upset because yeah I don't know I I just I just I one of my famous sayings and this applies to this this when in a lot of ways one of my favorite savings says people don't get up in the morning and go I'm going to start a Ponzi scheme today it kind of just happens and this is how it happens right here is miscalculating the when or being overly optimistic about the when right when are we gonna get paid back Oh a year from now where's my money you told me I get paid back in a year okay I'll get you your money back you you rob Peter to pay Paul to pay back or you told me I was going to get a distribution this month and I haven't gotten my distribution okay I'll give you a distribution just to get you to shut up and leave me alone and I'll figure it out later I'll I'll make up for it later or whatever these things always start the same and then sometimes you know then there's also the issue of issuers who get accustomed to a certain lifestyle and don't know how to stop either so don't set yourself up for failure is basically what I'm trying to say you don't get up in the morning and go I'm going to start a Ponzi scheme today it usually starts off promising one thing not being able to perform and to scramble to to keep my promise or keep your word you end up ripping somebody else off on accident so okay so the why the why is your story yeah you got to have a good story we just were in Vegas and we saw a bunch of amazing speakers at the 10x conference in Vegas Grant Cardone Stein X conference and every single person who was up there giving us advice didn't just give advice they told an amazing story I say the majority of them started in obscurity right and now there's mega famous there on the stage we've been hugely successful and it was how did we get to this point right and they were all amazing stories they were all of me which was your favorite I don't really like scooter oh I love Scooter Braun he was awesome he's the guy who manages Justin Bieber found Justin Bieber manages him manages ariana grande he just had such great life advice which I think applies to a lot of working parents you understand like one thing he talked about one term I've always hated is balance yeah and he said you don't balance you harmonize because you feel like as well whatever you're trying to bounce right kids or school or whatever it is you're working on you feel like you're doing this juggling act you're gonna drop everything right no you integrate them and/or you harmonize them and that just made me feel so much better but no you know what's Story I loved if we're gonna talk about you know that's that's like more of a life lesson right but if we're gonna talk about a business lesson and he was probably the worst speaker but this story really resonated with me oh I shouldn't say resource man but it was Magic Johnson okay so Magic Johnson told this story about you know Grant Cardone later on asked him how was the transition from basketball to the business world and he said it was a very difficult transition because people didn't take him very seriously but the story he told he started you know investing in the ghetto essentially and into in urban neighborhoods and he said he was doing all this investing and investing in these businesses investing in real estate and he decided to go to Seattle and he talked to Howard Schultz and said to Howard Schultz you know you have all these Starbucks but you are not building any in any urban neighborhoods and you know black people like coffee - that's what he said and and so he said allow me to build Starbucks in urban neighborhoods but he didn't just build the Starbucks in urban neighborhoods he s
oke to the to the customer he learned I mean it sounds so simple know your customer right but he took it to a different level if you go into a Starbucks in any Starbucks here in Temecula you're gonna find scones and breakfast sandwiches and and you're gonna hear like yeah you're gonna hear like acoustic type music so he got these Starbucks but instead of putting in scones he put in pea camp I like things that food that was familiar to the community and then he put in music that was familiar to that community he didn't play you know the acoustic Sunday type of music instead he played soul music and R&B and things like that he said the reason what ended up happening was the per average customer at his Starbucks was spending I think it was like 40 or 4 cents more than the average Starbucks overall so like the average Starbucks customer spends $4 and 51 cents and his customers were spending $4 and 59 cents that's how successful it was and then he sold them all back to Starbucks but I thought that was really important I thought the Y was really important and and that was that was interesting so you got to think about your why because at the end of the day yeah we want you to get legally safe we want you to follow the law but if you just follow the law and don't have a good story you're not going to raise any money so spalling the law means nothing and none of us do that because we don't know anything about them but when you come across someone you know yeah buddy whose story resonates with you yep then honestly don't care as much about the distribution so you were in it I mean oh yeah part of it but really the trust and that story that gets you that's what's going to get you to invest at the end of the day not absolutely or a 10% return yeah the why so you guys you guys have to really kind of give that's that great story but then then you got to give them all the terrible things that could happen as well so all the risk so let's take a look at how we do this we're gonna talk about a private placement memorandum and and I can't see I know what's in a private place we're basically gonna start off with you know just giving them the the amount of money we're raising the minimum amount and the type of investor who can invest and then followed by all of that is going to be a bunch of what are called securities legends which is basically legal mumbo-jumbo that's passed down from both the state and the SEC that you're gonna see in almost every ppm and followed by that we're gonna see who's the investors that can invest in what does that mean and you have to like this seems like oh so much paperwork and it is a lot of people required but it's okay to do it yeah and you really have to be able to tell people what an accredited investor is what a non accredited investor is a sophisticated investor and who can invest not all deals are the same not all deals are written under the same rule so and that's something we help with we talk you through what your situation is what how much you're trying to raise who your contacts are and then deciding which type of offering to do and which type of investors to allow exactly so followed by that we're going we're gonna have a summary and that summary is going to basically give that look the best PPM's I think have a nice little summary up front those are great yeah because honestly it gives the investor an opportunity to say okay I understand what's going on without reading the rest of this document because I hate to break this to you but only some really good investors are gonna spend the time to read the entire document and quite frankly as somebody who occasionally agrees to review PPM's for passive investors I will tell you if if there's a good summary I can usually tell right away if an investor should invest or not as mine first I went to page one the other day a couple of weeks ago on a ppm and I was like no don't invest knew right away page one yeah so you know what you want to do is to really help your investor make a quick fast decision have a nice summary that tells them exactly what's in the right the rest of the document because then the following parts of the document are going to extrapolate from that and then we're gonna see the risk factor yeah and and by the way I can't emphasize this enough not a marketing piece don't be afraid of the risk factors it's better to tell them than to not tell them and have the Hat bite you in the butt later so I often get like Oh whose roots are so hard who cares yeah don't you want them to know all the risk because there are risks and if you don't give them the risk then you're in trouble later this is a protection for you to let them know all the things that could go wrong and most of them know it anyway right they're accredited or sophisticated they're going to be aware if they don't know that there's risks involved with investing you're not good and that shouldn't be it shouldn't be investing so yeah so then we have on the use of proceeds this tells people how that where that money's going remember you know where that's the weird question where is your money going and you also want to make sure you're disclosing to the investors are you the man as the manager making any you know anything off of the use of proceeds as well now it's something we don't see a lot in private placement memorandum is that are specific to real estate or LLC's is dilution because our our clients who are doing real estate offerings generally speaking don't suffer from delusion because their capital account balance is their capital account balance if it sounds like I just spoke Greek don't worry about it dilation just makes basically means like something when when an investor invests a dollar it's worth less than a dollar the minute they invest because the company has like a negative net worth or it has so much stock already outstanding that's not the case with the limited liability company because limited liability companies work on a capital account balance basis and not on a price per share basis so and then and then one comes after dilutions okay so the company so you just want to give information about who's managing the company who the players are involved that's one of the first thing we tell investors to ask about is who's the manager what's our back-up plan they're partners what's their history their experience because you want somebody if you're investing you want somebody who knows what they're doing who has a good track record yeah exactly basic information about how to contact them because I want to provide an email phone number some way that if the investors want to talk to you they need to be able to get ahold of you you don't want to hide no and you really want it and again we were talking earlier about milestones and timelines and things like that this is really where all that information is now going so yeah so you give a snapshot upfront in the summary and then you're gonna come back and in this company slash management section now actually in our private placement memorandum we don't even put this in the private placement memorandum we believe that your business plan is a living document and your private placement memorandum is not so much so instead of disrupting your entire ppm to to make these descriptions we put this in what we call exhibit for our visit summary or investment summary and that's where we describe the company that management and that way if you need to make some minor changes like obviously you can't go from being like a trucking company to a real estate company and call it a day and everything's gonna be fine but like let's just say there's a member of your management team on that job or you change like you were like I had this happen recently where a client was like we're gonna invest in Texas Florida Georgia Tennessee right those were the four states or whatever and then they said but we found this really great deal in Maryland so we want to add Maryland so we had to add that to the business plan as well right so you don't have to touch the PPM with those minor changes right yeah yeah and with that was another thing so we always want to include the BIOS of the management team but we don't put those in our ppm because that could yeah change so we include that again and exhibit four in the investment and that way if you need to make a change for instead of changing you know the ppm this big huge document we're changing your investment summary which is usually you know anywhere from four to ten pages long that's your marketing piece yeah and you can also work as a marketing piece as well yeah yeah and most of time what I see though is that they use the exhibit for zip it for that's the details the dirty details the stark reality of the situation usually what we see later also is another separate marketing piece that's like in the form of a PowerPoint or PDF that's pretty and things like that although I'm starting to do I don't know if you're doing this for any of your clients but I'm starting to get a graphic designer to graphically design I already have some graphic designers on board or they hire their own that yeah and there's some really nice presented yeah they're not great I and I think that's important right the way the way you present yourself is important but it's not so much important for your private placement memorandum or for your marketing pieces but I will I see some who kind of throw something together and then some who really put a lot of effort in to make it look nice and I agree I think that makes a huge impression on your potential investors this last part is like really boring stuff this is where we get into the tax and legal and then maybe we talk about the exit strategies your exit strategies can also be in your business plan as well you don't necessarily have to have a separate substances but the text and legal it's actually really important but super boring the thing that I find interesting especially for real estate entrepreneurs for the from the tax perspective is phantom income yeah that's a big one yeah phantom incomes a big big big thing especially if you're doing any kind of reinvestment model so if you guys don't know what phantom income is phantom income is when distributions are present profit is present but it doesn't necessarily get distributed and if it doesn't get distributed guess what somebody has to pay taxes on it and so is everything okay so you have to pay taxes on it and even though you don't actually pay the money yeah and so that's that is a real risk and a real disclosure that has to be made to me that's the biggest thing in the tax and legal if you're dealing with a partnership structure with the limited liability yes if you have other tax structures then that doesn't become a problem or if you distribute all your profits that doesn't come up right so so what do you need at the end of the day oh and this actually gives us a great opportunity to about genes upcoming webinar geez anyone next to me yeah okay so okay we're here talking about your private placement memorandum our second bullet point another thing you might want to have is what's called an investor questionnaire which does what when you have an investor coming in they need to provide information with you to you one how they're investing whether it's an individual or is an entity you also need to make sure that they are qualified to invest accredited or it sophisticated so there's information you need to gather from your investor before allowing that money to come I have a great couple of stories about investor questionnaires yeah I can't tell you how many times an investor questionnaire has saved a clients but these are every single one of these documents all these things were talking about are your get-out-of-jail-free cards and so you're just collecting get-out-of-jail-free cards and so the investor questionnaire we had several years ago a client who was threatened to be sued by an investor and the investors lawyer you know is beating on the table you didn't qualify them to be a proper investor they're not a property investor they should have never invested they're not sophisticated enough to invest and this and so you should give them their money back yeah and so all they did was just go but here's the investor questionnaire your client felt out yeah and we never heard from them again yeah and now at the end of it it is it's your protection yeah so when you're thinking like I don't want to bother my investor with this I don't want to like I am telling you these are your get out of jail even if you know them even if they're friends even if they're family sometimes can turn into the worst story right have everybody fill one out exactly so then okay so we talked about the private placement memorandum we just went to the anatomy of that but let's talk about that operating agreement for a second that operating agreement believe it or not so the private placement memorandum again well discloses all this stuff to your investors you want them to attest to the fact that they read and understood it not actually a contract write the contract between you and the investor well there's two contracts between you and the investors the first contract the real contract the one that actually counts the most is the operating agreement the operating agreement for an LLC is it tells you exactly how the company runs it is the legal document that binds you all together so when I go to read something for a client when somebody says a passive investor says will you read the PPM to me and they only provide me with the PPM i won't i won't even read the PPA people I'll tell them I need the operating agreement I go to the operating agreement first I read that and again issuers companies private equity people and if you attorneys who are trying to steal all our stuff [Laughter] someday you could take it make sure make sure they match that's all that's her advice make sure if you're stealing your documents that they make sure they match but not only make sure they match make sure they get the operating agreements is is is easy to read as well why are you making overly complicated operating agreements are you trying to make yourself look smart or are you trying to confuse the living daylights out of investor for investors because you are confusing the living daylights out of investors but I'm not really sure how smart and make yourself look yeah and a lot of the information is the same - you'll see from the ppm you know that you still talk about distributions in the operating agreement you still provide company information there's just more on how the company is run exactly exactly okay and then just read everything investors should read everything every investor should read everything but if you're relying on a counselor to help you through this such as an attorney or CPA and first and foremost I recommend an attorney over a CPA for these purposes because a CPA is not going to necessarily know what to look for from a legal perspective in it an attorney will tell you to consult with a CPA after you've consulted with them so the order of operations on this should probably be attorney CPA so so but let's get back to that operating agreement which is the document the actual legal document you want to read that first if it's easy enough to read and you're satisfied with that then go on to the ppm and before you start critically analyzing the ppm go to key sections from the operating agreements to the private placement memorandum and make sure they match I cannot tell you how many times I read an operating agreement that has a distribution section that if it's something totally different than what was promised in the ppm yep on that operating agreement it's the document that rules not the ppm so you could say all you want but what they said in the ppm was this doesn't matter you know it's an operating agreement that counts I read an operating agreement that had a definition of oh what was the definition the definition was required interest okay so required interest could control the entire company okay and required interest was like sixty percent of the bike sixty percent of them they so like if if sixty percent of the boat was or it might have even been less than that I don't remember but it
was like if this amount of the vote comes through then all of these things can happen like it was just a defined term right and then it said so-and-so will say John Smith John Smith has the required interest alone oh hold on I haven't even gotten to the best part right so now one person has trolly we didn't trumps everything John Smith wasn't even at the company it was like an outside guy who had nothing to do with the company and he could control everything I don't know if John so you told them to invest you told them wow that's bad yeah thanks read your documents read your documents issues read your documents and you know what that was that was a finalized document it was sent out no one had read it no one had read it the attorney he wouldn't even read it clearly Bob Smith hadn't read it and then the issuer didn't read it either so we did either read your document yeah and investors have documents yeah and investors have documents yeah so then finally we have a subscription agreement that glues everything together form that's what you're gonna sign as an investor before you turn your money over yeah and let them know how much you want to purchase and do you want tell them about form these and you I mean you choose our consent to service a process in States you don't necessarily need to know what that is your securities attorney will help you out with that but why don't you talk about the form d4 so form D's on the backend this happened so once you've closed your deal and you've raised your money you have to do something with on the back end so for investors that have put money in you are required to file a Form D in whatever state that investors located in if you have five investors from one state then you just filed in the Wednesday if you have five investors from five different states then you need to file five different form T's and so you just do that on the back end you have fifteen days from your closing or from receiving that money or there's some gray areas in there but generally you have the fifteen days from once you get that money to file the form D with the state some states have penalties that you could incur if you don't get that form filed it just depends on the state and where your investors are located so we walk you through that whole process but that is required even though it's federal law you still need to let the states know where these investors are coming from exactly exactly so let's I'm expecting the slide to magically move and it's all up to me okay so the other two big documents like we said at the operating agreement in the subscription agreement these are actually the legal documents that you're ensuring to the subscription agreement is you saying I'm willing to invest and I read everything and I understand everything and I am who I say and that's what the investor is saying to the company and then the company's agreeing to accept your investment accept but then you're all accountable under the operating agreement that tells us how the company runs know speaking of operating agreements it's I believe it's next week gene Trowbridge and Jonathan knee are going to do a webinar on operating agreements and create a leg is not a legacy plan I can't think of the word continuity continuity yeah and you're a limited liability company which I think it's really important for you guys out there who are you know one man or two man shows you really want to figure out what's gonna happen in the event that and whatever the event that might be and doesn't always have to be deaf no you may just want to get out yeah and what do you how do you do that yeah all right so what's our call to action to you today we want you to figure out all those remember that first slide the where what lens wise what ifs etcetera get some tax advice decide what's best for you call a securities attorney all right and now we are ready to take your questions I honestly I say kala but even if you don't call us call somebody yeah you need to have somebody who understands securities walk you through this don't try it on your own no please don't please don't try it on your own I really see you know we laugh and it's funny and haha call us because we're the best is that if that neuro-linguistic programming I just stood there where I just like threw that in there got it ha ha were the best so no but seriously call a securities attorney don't take the chance with somebody who is not a securities attorney who's gonna try it out yeah for sure even if they are an attorney make sure they are familiar with securities but there's even programs online where you can go get kind of a form ppm and those scare me oh they have some basic things in there but honestly even clients return clients we have they say oh it's just like my other deal it'll be super easy it is never necessity there's a always questions that kind of there's always some little nuance that you really need somebody who understands this to be able to walk you through is your investors $10,000 the same $10,000 they invested with you before no it's not it's a different $10,000 so you know you got it you got to think about that each deal has to stand on its own you still has its own details each deal has its own nuances otherwise you wouldn't be doing it that deals gonna make money just like the other dealer you hope it's gonna make money just like the other deal so you have to evaluate each deal appropriately you're not going to just go out and buy deals without underwriting why would you want to write your ppm without having it properly vetted and under it and I think people are trying to save a little money sometime but really if you don't do it this way it's going to cost you so much more money on the back I am the cheapest person on the planet this isn't where you want to cheap out on if I could do my own appendectomy I would bad idea that right I'll even give in you're probably I think in the same boat it says I used to do estate planning when I used to live in Arizona when I moved to California I hired an estate planning attorney in this state mm-hm and paid them a good chunk of money to drop my documents I've done it before but it's a new state a new law and I wanted somebody who understood that and that investment is going to be worth it to me when everything works out when that estate plan kicks into place right it's the same kind of deal right that's someone who knows what they're doing absolutely and then the other thing I also want to point out is you had mentioned something about like services that provide documents for you yeah oh my god what a terrible idea like would I always say to people when they go to use one of these services and I don't care how good and beautiful their documents look or what they can offer you and how long they've been doing it for the reality is is that they're not lawyers and they don't have a malpractice insurance to back them up you know they don't have attorney-client privilege you cannot stay reliance on counsel if something does go wrong I'm gonna tell you right now I have certainly in my time made plenty of screw-ups I was a young attorney once I wasn't always as awesome as I am now and I'm pretty awesome now so I wanted to join you today yeah get all your juice so you know and sorry I've made plenty of screw-ups in the past but the thing is is that if I screw up and I'm a licensed attorney and and you go but Jilly and I relied on you that is a defense and I haven't turns to back that up and and so do a lot of other securities attorneys out there and then the other thing I always say when somebody says well why can't I just go to this service and it only costs me half of what you cost you and and then I can say and then you can pay me twice what you paid them to fix and what they screwed up because you will be doing it will they will screw it up and I'm and as a matter of fact there's there's a couple of services out there we won't even look at their documents they're so bad I won't even fix them yeah you don't know I will not even look at them because I'm not wasting my time and I'm not gonna waste your money I'm bothering that so alright we have some questions and we got about eleven minutes so let's get going I'll read it and Nancy you can answer it if I intend to raise money from both the US and non-us residents can I use a ready reg D ppm with reg s language legends added to it so that I can provide a unified document to both categories or investors or should I use a separate R I guess prospectus for raising money from the non-us investors it's like you're doing a sales pitch for us I write that because the answer is yeah you can put them all into one document we one document we didn't mention on the previous list there's just an additional subscription agreement that foreign investors would need to fill out but it can all come in under the same document and you just put information in your ppm that you're accepting for investors as part of the deal this is a great question does the time when return of money starts have to be a calendar date or can it be based on events here's the thing you're setting your own timelines you just want to set reasonable timelines based on your project so for example you would say like let's just use a single family for example we are going to take your money we're gonna rehab this single family residence then we're going to sell the property and at that time we're going to return your money to you so that's an event right when we sell the property we're gonna return your money to but an investor's gonna want to know generally speaking when is that event too hot going to happen well we expect the construction to take about four to six months and then at least another two months for sale so you should expect to have your into the steel for at least eight months so that that's how you want to some word they say some sample language I would see is one year after closing on the property yeah one year after accepting inventor the first investment where an investor or you know you you can set it or three at the end of the third quarter following the close of whatever there's lots of different ways you can put it and usually that kind of language is followed by some expected in that event right for example when the cat the when the property starts to cash flow which we expect to be in about a year so investors shouldn't expect to receive any industry but not walking you in but ever promised never luck in this is what we expect or anticipate hoping you can discuss ppm best practices and pitfalls of language around investors wanting to exit investment before expected maturity so we have added provisions for that I think we actually did another webinar on that whole exit strategy so at the end of this there's going to be a survey that pops up and it will have a link to our YouTube station so you want to go on there there's a way more in-depth webinar about that type of exit strategy prior to the end of the offering yes you do want you could include language in there if you have some withdrawal provisions or somehow if an investor needs to take it out early they definitely go check that out and get some more information on what that exactly which would be but yeah definitely put that in a ppm Karin's asking who pays in six to see you Karen who pays the taxes on phantom income didn't catch that thanks so actually well it's your your investors liability right they're gonna pay their taxes on their income so they're supposed to pay taxes on phantom income now what I see some clients do is that in the event that there's a tax liability for an investor on phantom income the issuer will make what's called a tax distribution specifically for the purposes of covering any potential tax liabilities just so that they can pay the taxes so for example let's just say they they say everybody's in a thirty we're we're assuming everybody's in getting this as investment income I don't know which that would be at like twenty percent perhaps so instead of a hundred percent of the distributions they distribute twenty percent just so the investors can cover their taxes and then reinvest the remaining yeah can we attract interstate investors I'm thinking you might have an interest rate maybe not so with the Reg D PPM's that is a federal offering so you can have investors from every type of state if you meant in trust eight and you're just having investors from within one state and your property's in one state everything is contained within a single state that's an intrastate offering and that's a different type of document a lot of this similar information goes into it but this ppm is specific for the Reg D federal offerings all the offerings under and I'm getting technical now but all the offerings under Rule if you think about the law as a tree you have the Securities Act of 1933 that's the big federal law under that is Regulation D that's a federal exemption from securities registration under that or rules there's two rules 506 B and 506 C those are the rules we focus on rule 506 B and rule 506 C are both what are called federally covered securities so that means that the states can't really make any rules that are like harsh they can only go by what the feds have set out so that's why we like to use 506 B and 506 C because we're really under the auspices of one big Federal Rule so any recommendations on timing issues should you have all of your investors lined up and ready to go and then get the PPM if you get a ppm first what if it takes a while to get the investors okay both good questions so we usually recommend our time frame we put our contract is it's a plan on 30 days to get all your documents I would say usually we can do within a week to two weeks it's a quick turnaround the reason we have a little bit longer of a timeframe is we're often waiting on the sponsors on there and to get their information together but once you have a property identified and you usually we recommend if you have a letter of intent at that point would be a good time to reach out and start getting things in place to get your ppm put together um you definitely can be talking to people you already know one thing to caution about is if you are plan on advertising that's one type of rule and I would recommend not doing any advertising until you clarify with the Securities attorney what type of offering you're doing because that may not be allowed under one of the type of offerings you want to do and it would if you do that advertising before talking anyone it might already prohibit you from doing a certain type of offer yeah so they kind of go hand-in-hand definitely if you have people that you know and already talking to you that's fine you don't firm in well for me I don't want you to run out of runway right because you you can talk to investors all you want till you're blue in the face but you can't take their money until you have documents in which to take their money right so so if you have a time crunch on your hand with the property and you got to get your money in assuming that that's what you're doing then you should probably get your documents together sooner rather than later yeah including the date of when the asset for example real estate will be sold may trigger the IRS to treat the investment as inventory or warehousing the real property for the purpose of purposes of reselling it this yeah this way this will be no depreciation allowed meanwhile investors sometimes insist on having a time to sell the properties how can we balance up okay that's a great question I think it depends on how long you hold the property and if you're a dealer and and honestly that won't necessarily run through to your particular syndication or your particular funds it will run to you the manager as the dealer and your passive investors will still be considered passive investors for IRS purposes and that I know what you're talking about Samuel and you're talking about the difference between ordinary income and app gains or investment income and so if your investors are truly passive they're not going to be taxed at an ordinary income rate I'm laughing at the next question okay what is fastest indication or a fund we get that question um it depends that's always a good lawyer answer so if you
ave a specific property that you know you want to invest in and this is your first time I would recommend doing this indication yeah it really helps with if you're it's your first time doing it your investors want to see an actual property that their money is tied to if you've never done it before you just have this fun and you're not sure where you're investing yet that might be a little bit harder for them to put their money in I'll disagree to a certain extent when like in dealing with single family or smaller multifamily or if it's someone who's very experienced in real estate already and knows what they're doing they're ready to take their business to the next level then at that point I would recommend a fund so yeah I mean we have I'm gonna I'm gonna defer you to our YouTube page as well Albert because we have too hectic I already sent these to you we have two videos on YouTube one is called how to start a real estate fund and the other one's called how to do your first real estate syndication so watch both of those and then hopefully that will help ya that's why I say it depends on your particular situation and experience what you're trying to do oh this next one has your name on it Oh Jillian how much does it usually cost for the whole set of documents well it just depends on how much money you're gonna raise but honestly I'll be just straight with you guys you want to expect to spend about $15,000 that's a very average number if you're spending what if you're raising less than a million dollars it goes way down but for the most part you want to spect around $15,000 how would a passive investor go about locating an attorney to review the PPM on their behalf it seems most attorneys are focused on preparing PPM's not reviewing them any tips for finding attorneys willing to review a ppm I don't know I feel like we got to start the service I think Georgia has actually reached out to me to review and because our policy is affirmed again she's right we do focus more on the primary we steer away from reviewing other attorneys fees they always turned out bad for me and I every time I go back into doing it I end up hurting somebody's feelings and a very major way so how do you find somebody I actually have somebody that I've been recommending so Georgia you're welcome to contact us and we'll send you off to that I'm okay if that hasn't worked let us know oh yeah we help you find someone else please do anything else are we good that's it looking right on time well thank you guys everybody for coming out today we appreciate it you have a wonderful day and don't forget to come see jeans webinar on LLC continuity programs and take the survey at the end please we want to know what kind of content you want in the future and what you're looking for thank you so much for joining us I'm Jillian Sidoti and I'm Nancy Taylor we'll see you soon bye [Music]
