Money Raising Myths – TBD with TLG #8

Myths Syndicators and Investors NEED to know about.

In this TBD with TLG, syndication attorneys Gene Trowbridge and Jonathan Nieh discuss the biggest money raising myths that both syndicators and investors should know about.

Transcript

GT Welcome to today's episode of TBD with TLG, I'm Gene Trowbridge. And this is my partner, Jonathan Nieh. And Jonathan today our TBD topic is, are you ready?
JNWhat is it?
GT Money raising myths. Now why this is important is when you're selling a security the way most of our clients do it under regulation D you're raising money from investors you're putting it in a common enterprise, you are telling the people we're gonna expect a profit and you're making it happen. You've entered into the securities world. And so in the security's world under regulation D there are two ways you can raise money. One is advertising and another is without advertising. So a lot of our clients Jonathan want to raise money without advertising because that allows them to take sophisticated investors not be limited to just taking accredited investors which is what happens if they take advertising. 506 says, if you advertise you can only take accredited investors 506b says, no advertising. You can take sophisticated investors. So Jonathan, what they do, they come to us and say, well, I'm not gonna advertise because I know that if I do any one of these things we're gonna talk about today, it's not advertising. That's basically the idea of it, right Jonathan? . Yeah. Yeah, they hear these things online.
GT So I'm gonna kind of hit you out of the TBD world. Jonathan, what's the number one thing they tell you that's a myth that really could be advertising but they don't think it is. I'm trying to think of what you're trying at get out Gene. They don't think it's advertising, maybe posting on Facebook.
JNThat'd be a good one.
GTYeah.
JN That might, is that advertising?
GT Yeah. I mean, it doesn't matter what the medium is as long as you're broadcasting it to people that you don't know that could be advertising.
JN Okay. Yeah, absolutely. And I think some of the other things we're getting at are the myths that we hear about when people say, "Well, no, I'm gonna to I'll throw one out there, I talk to the person three times."
GTThe three touch rules.
JN The three touch rule, okay. I hear that all the time. And the three touch rule is kind of interesting because what you need as a syndicator with the relationship with your investor to defend an argument about advertising is that you have a pre
GT Another one I hear a bit is the 30 day rule. So there's the idea if you meet someone and then you wait 30 days, after that period now you have a substantive relationship with them. And now you can take them into your 506b offering. And I think that also comes from a no action letter too, right?
JN Well, it does come from a no
JNYeah. I think we're giving away free copies of the book. As long as they subscribe to our YouTube channel. Click the subscribe button down there.
GT Good. Good. And then we'll get to you on how, we we probably need an address, a name and an address and we'll send you a copy of the book. We're gonna be happy to do that. So we've talked about the three touch rule. We've talked about the 30 day rule. What's another myth that people talk to us about.
JN So, one that I see a bit often is doing a friends and family offering. If you only raise money from friends and family, you don't have to do a a full
GT Those people must think that if it's friends and family, it's not a security.
JNYeah. Yeah. That's what they think.
GT But it is a security. You're still raising money for a competent enterprise and people are investing because they think it's a profit and you're gonna make it happen. Right? Unless you make it a member managed and we won't get into that too much. But if there's, if you're like me I only have two family members. The three of us could go together and do something but I'm not gonna run it. We'll all make all the decisions unanimously and on and on and on. So that might not be a security. But if it's a manager managed LLC it's a security and friends, and family I don't believe get any special protection in the law. Do they, Jonathan?
JN No. I think the logic behind it is, your friends and family, people that are closest to you, something goes wrong, they're not gonna sue you or go after you, right. But, it happens all the time where friends and family break up because money is involved, so,
GTSure.
JNYou never know.
GT I hadn't thought about this in my preparation for this but there's two other things that there's more to talk about, but there's two things that just come to mind money raising myths. The under the radar myth. Under the radar myth is that your offering is so small, no, one's gonna care about it. No, one's gonna hear about it. And then everything's gonna be fine. Okay. That's great that won't help you as a defense against advertising. And the other one, Jonathan is the good deal exemption, right? If you're sure it's gonna be a good deal, who cares if you advertise or not because everyone's gonna make a lot of money and they're not gonna go after you. I wouldn't count on that one. I wouldn't count on either of those two. So we've done three touch, 30 days, friends and family. Jonathan, somewhere along the line I think I've had people say, "Well, I'm gonna raise less than a million dollars." So it's not a security, so I can advertise. I can do whatever I want. Is there any, any substance to that exception?
JN No. I mean, if you're doing a reg D offering there's no minimum amount. You could raise a dollar from investors and you're still selling security, so it doesn't matter.
GTAnd that's another myth. Any other ones?
JNOne I've heard before is self
GT So you, so you actually think some people come to you and talk to you about the fact that as long as everyone's accredited I don't have to worry about the advertising rule regardless of whether I do a B or a C?
JN No, it's more of people doing a B. And they think that all they need to do to, make sure that they're, they have a good group of investors, it just give their investors a form that says, 'Are you accredited investor?'
GTOh.
JN Check the box saying that, right?
GT So you're explaining, you're saying in a B, some people say if the investors are accredited, I don't have to have a pre
JN Yeah. And all they're relying on is that. All they're relying on, is that investor just checking a box.
GTYeah. That's wrong. That's wrong. That's nasty. The other one I've heard is less than 10 people.