Avoid Investor Mistakes: Essential Strategies for Syndicators and Real Estate Fund Managers

Darin Mangum (00:00)
It’s kinda like getting going to the doctor, right? Better to go do preventative medicine than, “Hey, I’ve got a cancer tumor gr— growing on my neck,” you know. Okay. You know, obviously the earlier… I’d say, you know, I always tell clients, hey, if you’re within 30 days of actually wanting to pitch an pitch an investor— actually, and I say when I say pitch, I don’t mean float— floating an idea. I mean like, “Hey, we’re— we’re— we’re actually gonna re— we’re willing to take your money for this deal,” right? If you’re within thirty days of doing that kind of activity, you should really talk to a securities lawyer about getting all of your your your documentation together, right? So that way you’re— you are fully compliant, you know.

Dylan Silver (02:14)
Hey folks, welcome back to the show. Today we’re joined by Darin Mangum, managing partner of Mangum and Associates PC and one of the nation’s leading securities attorneys, specializing in capital raising for real estate syndicators, private funds, and investment companies. He’s also a bestselling author of Raising Capital with Confidence. Darin, thanks for joining us today.

Darin Mangum (02:36)
Hey, thanks for having me, Dylan.

Dylan Silver (02:37)
We’ve certainly seen a boom in syndications over the last six some odd years or so. What are some things that people should think about before starting a syndication?

Darin Mangum (02:50)
Yeah, I think that’s— that’s a great question. I mean, you definitely wanna think about… well, and whenever you’re obviously taking other people’s money, right? OPM, right? That’s the— that’s the name of the game, how you leverage. I mean, unless you’re just doing it all yourself, you’re at some point you’re probably gonna be taking on other people’s money, right? And so, anytime OPM is involved, then you— the securities laws apply, right? ‘Cause you know, you’re— that— that— that’s what triggers securities laws. And so, when you’re raising capital, obviously, you know, you need to keep in mind what— what is the scope, right? Are you… because you can, you know, you can raise capital for one particular exact property. “Hey, we’re gonna buy this hotel on one, two, three Main Street, and that’s what the deal’s all about,” right? And then we’ve got other clients, obviously, who are more, you know, broader— have a broader scope, you know. “Hey, we’re gonna do a real estate opportunity fund, and anything that’s tied to real estate, you know, in the state of Texas, we’re gonna go after.” Or maybe it’s a— it’s more sector-focused, like, “Hey, anything multifamily that fits these parameters, we’re gonna go after those,” right? So yeah, just kind of keep in mind the— the scope of, you know, what— what— what are you raising capital for, right? That’s— that’s the— and that’ll obviously dictate you know, what kind of documentation’s needed, what type of exemptions from registration you’re gonna acqu— apply for, all those factors, right? So I think just looking at that scope, and— and then you know, obviously the other thing is, you know, what kind of investors are you wanting to have in on your deal? Are you trying to bring in a lot of— a lot of small investors, mom-and-pop investors that are throwing in a couple thousand bucks, right? Like— like— like is common under Regulation Crowdfunding, right? You know, it’s designed for s— lot of small investors, right? Or are you looking for, you know, a handful of kind of big, big fish kind of investors that are just putting in, you know, a couple of million dollars a pop? You know, so those are some factors that, you know, anytime you’re looking to raise capital, you kind of wanna think through those things, right?

Dylan Silver (04:54)
Now, for syndicators who are looking at strategies to find, you know, new investors as part of their syndication, I understand from prior guests there’s two types of syndications. One where you can maybe be a little bit more publicly facing and one less so, but I haven’t had an attorney break this down for us. Can you help our audience and myself better understand the types of syndications?

Darin Mangum (06:04)
Yeah, absolutely. Yeah. Most— most syndications, I’d say 99% of syndications these days are done under Regulation D. Either there’s— there’s two subsections of Rule 506, right? You’ll s— you’ll hear people talk about 506B Bravo or 506C Charlie, right? Those are the two subsections. 506B is a— an exemption that is your traditional old-school private placement, right? Where you’re not advertising, you know, you’re not— you’re, you’re just pooling capital from private investors. It’s all done on a private basis. And so, and we can get into the details of that, but that’s— that’s what you primarily use if, you know, again, you already know who your investors are, you’re not doing any public advertisement, you’re just putting the deal together, right? So 506B is— is— is— is that exemption, right? When we say exemption, we mean exemption from registration with the SEC and— and state securities regulators. And so— so 506B is— is that exemption, right? And— and so that means like, can I put it out on social media? No. Can I advertise on my website? Well, no, it’s a private placement, right? That’s the whole idea of it, right? And so 506C, Charlie, that— that— that one’s a— a relatively newer exemption, which is super popular now because it— it allows for public advertisement. It allows for you to throw it out there on social media, “Hey, I’m raising capital,” or “I’m raising investors,” right? “Hey, check, you know, here is on my website, here’s the deal,” right? You’re looking for investors, right? So the only limitation is that I can— I can, under 506C, I can only accept accredited investors, right? And I have to verify that they are accredited, right? So, so that— that— that takes a lot of investors like mom-and-pop off the table, right? I can’t have my Uncle Joe, who’s not accredited— I can’t him just throw in some money, right? I have to verify that he is accredited. And you know, but you know, okay, that’s kind of a trade-off, right? I’ve got to exclude my little smaller investors, what we call non-accredited investors, right? But I can advertise. So, and maybe that’s all you— if that’s all you want to deal with anyway, then a cr— you know, okay, that’s fine. Accredited investors, right?

506B is my— usually my recommendation for people just starting out, because you know, you can take up to 35 non-accredited investors, right? Which, you know, I mean again, when you’re just starting out, when you’re just trying to get some capital together, I mean, you know, you’re gonna have a handful of people that you already know that may not be accredited, right? The nice thing about 506B Bravo is that you can— you can, just the investors self-certify, right? They just check a box, say, “Yes, I’m accredited,” or “No, I’m not,” and that’s it. I don’t have to verify them in some way, right? When we talk about verification of accredited investors, I’m— that means I have to either I have to do it or I have to hire a third party to do it. I have to get, you know, verify that they are accredited, meaning that they have to provide me maybe a letter from their CPA, they have to provide me or— or a copy of their tax return showing me that they have that level of income, right? Or they have to give me copies of their financial statements showing that they have a net worth of a million dollars, right? So these are some… it’s— it’s a— it’s a little bit of a trade-off, right? Like, I— it’s not— and it’s not a huge deal, right? A lot of investors are accustomed to, “Okay, well, great. You have to verify that I’m accredited. Okay, well, here’s a letter from my CPA,” or, “Here’s this additional information,” right? But for the syndicator, it’s a little bit of an additional regulatory burden that, you know, it’s kind of a pain in the butt, right? I— I can— I can’t just take your money and— and check the box and be done. No, I’ve gotta— I gotta do this verification. And if I can’t verify you in some way, if I don’t have a file in my— in my… if I don’t have a piece of paper in my d— in my file for you verifying you, then, you know, okay, maybe I’m not in full compliance, right? So, and five, you know, and you know, people say, “Well, you know, what’s the tr—” you know, obviously the advantage to advertising under 506 far outweighs that, right? That’s a— it’s a little bit of a burden. But yeah, honestly, most people don’t— I mean, most investors don’t— aren’t like surfing the internet or Instagram or and— and see your ad and they’re, “I’ll just send you money.” You know, they’re gonna want to get to know you first, you know.

What— and so f— under— under 506B, you can do what I usually recommend is people do what I call two-step marketing, where you’re doing, you know, the— whatever is public facing, right? Like a website or social media, you know, that’s like, you know, that’s not, “Hey, invest today, here’s the deal.” No, that— you’re— you’re putting out marketing material building your credibility. Maybe you’re talking about, you know, your— your real estate, you know, you have a real estate newsletter, or you have a podcast, or you have something other than, “Hey, I’m, you know, I’m Darin and I’m selling you this investment today.” You know, ca— you know what I mean? They’re gonna get to know you anyway. So 506B is a more of a natural way to do it, but it’s more like… I so you know, you get obviously establish those relationships through other means, you know— they’re— we connected on Instagram, or we connected on LinkedIn, or we, you know, you subscribe for my newsletter or you’re a podcast. You know, and so that— so I’ve established a relationship— that’s step one. Then step two is, “Hey, by the way, I’ve got a real estate deal,” you know, because you again, we already— it’s a one-on-one relationship. Then they become fair game to pitch the investment under 506B, right? And so, I think that may be a long answer to your question, but— but that’s really… that, you know, if you’re weighing 506B versus 506C, right, those are the sort of the things you would wanna think about, right? What is your— what is your marketing strategy?

Dylan Silver (12:36)
Now, for a lot of investors, their capital stack is their biggest bottleneck, right? And I can’t tell you how many times I’ve heard folks say, you know, “If I can have access to, you know, greater capital, then I would be able to buy more deals,” and that’s currently a bottleneck in acquisitions. But on the flip side of that, of course, it comes with increased scrutiny and liability and— and legal consequences if you mismanage other people’s money, right? So when folks are reaching out to you, most of the time, is it in the part of the process where they’re thinking about getting started, or is it in part of the process where maybe they’ve run into some bottlenecks or some hurdles?

Darin Mangum (13:15)
I mean, ideally, it’s kinda like— it’s kinda like getting going to the doctor, right? Better to go do preventative medicine than, “Hey, I’ve got a cancer tumor gr— growing on my neck,” you know. Okay. You know, obviously the earlier… I’d say, you know, I always tell clients, hey, if you’re within 30 days of actually wanting to pitch an pitch an investor— actually, and I say when I say pitch, I don’t mean float— floating an idea. I mean like, “Hey, we’re— we’re— we’re actually gonna re— we’re willing to take your money for this deal,” right? If you’re within thirty days of doing that kind of activity, you should really talk to a securities lawyer about getting all of your your your documentation together, right? So that way you’re— you are fully compliant, you know.

Dylan Silver (13:57)
Yeah, and I think the compliance element of it— it adds a whole other spectrum, right? Because a lot of times the folks who are great real estate investors who maybe have built a sizable portfolio but haven’t scaled at the volume that, you know, a family office or a syndication might, it requires a different type of systems— almost a different type of mindset and mentality. You can’t take, necessarily, a cowboy who might be great at fixing and flipping, right? And that cowboy mentality, and then immediately put them in the realm of compliance and regulation and expect that person to, you know, operate business as usual.

Darin Mangum (14:33)
Well, that’s why— I mean, again, that’s why, you know, they— you just outsource it, right? It’s like, “Hey, I— I don’t—” you— you don’t have to know all the legal ins and outs of it. You just know, okay, well look, I’ve— I gotta— kinda like accounting or any other thing. I mean, if you— if you’re not naturally doing it yourself or you don’t have a— somebody on your team doing it, you know, you should look at, “Okay, we gotta outsource that,” whether it’s again banking, whether it’s accounting or legal, right? “Okay, I’m gonna make sure— I’m gonna hire a securities lawyer, make sure our backside’s covered,” and that way I don’t have to worry about it. I could just focus on the deal side and getting the deal done and all that. And then you know, you know, l— let the lawyers handle— handle the legal side, right? So I don’t have to lose sleep at night, right?

Dylan Silver (16:00)
When— when folks are raising capital, how much of the compliance portion of it, you know, can they give to their lawyer? Like, does the lawyer have to be present with them in— in certain meetings? What does that look like? Or can they basically send them the cliff notes? What does that interaction look like?

Darin Mangum (16:17)
Yeah, I mean, we— we do have clients who— who do have us like engaged not just for setting up their real estate fund or getting in the— the paperwork. I mean, that’s obviously important, but we have clients who have us engaged on an ongoing basis because, you know, sometimes they— they run into issues not during the, you know, the setup phase or the, you know, getting all the paperwork together and the SEC filings done. You know, they run into issues when they’re actually dealing with investors, you know, when the rubber’s hitting the road and they’re getting, you know, investors that want— maybe want to do a sidecar letter or something, you know, out of the box, you know, then obviously that— that’s where, you know, they— they want us involved. And so really, you know, again, we could be as— we could do as much or as little as a client needs. But— but yeah, I mean, we— we usually set— we— I set a client up where, look, you don’t have to— no, we don’t have to be present. You know, look, you— you make— we make it very clear, right? Here— here’s here’s the documentation you need. Here’s exactly… we spell it out. You know, “Hey, here’s how you accept investors’ funds.” And as long as they’ve, you know, checked the— checked all the boxes on these— on— on this checklist, then you’re good to go. You know, you don’t need us to micromanage or, you know… I mean, sometimes it depends on, you know, some people have, “Man, I’ve got a hundred investors.” That’s a little bit hard to deal with. And so, you know, certainly, you know, you would at that point, you’d probably want to hire like a— maybe an investor relations person just to so you know, so your— your investors aren’t blowing up your phone all the time, you know, asking about this or that. You know, you could defer them to somebody that, you know, maybe in your office that knows, or, you know, “Hey, maybe, hey, to call our securities lawyer if it’s a legal issue,” whatever, right? But— but yeah, that’s all manageable, you know. Usually on like— on you know, I always tell clients, hey, set your— set the expectations on communications with your investors early and say, “Hey, look, we’re gonna do maybe like a quarterly investor call, right?” And yeah, I mean, if it’s an emergency, you can get a hold of us. But normally, you know, hey, look, we’re gonna jump on a Zoom call like maybe once a quarter and give everybody an update on how things are going, you know. And then, you know, that’s always an opportunity for people maybe to invest more money, possibly, right? So you know, say, “Hey, we’re gonna do this once a quarter, you know, unless it’s a burning question or some er— thing,” then you know, the— just— just set that expectation early and that way investors are— are— are pretty happy, you know.

Dylan Silver (18:42)
Is there a— a mistake that you see syndicators commonly making, either when they’re starting the syndication or or somewhere else along their deal where they’re coming to you and you’ve seen this, you know, not once, not twice, but more than a handful of times?

Darin Mangum (18:57)
Well, yeah, I mean, on that— on that last point, you know, I think investor communication is really critical. That’s usually where complaints come from. Is like, if the deal’s not going well— which happens, you know— we— you know, we had clients during the 2008 financial crisis who had lots of real estate syndications going and then, of course, the world came to an end, and and everybody, you know, all the capital dried up and the banks foreclosed and it was, you know, a bloodbath, right? So even if they did everything right, you know, they were, you know, getting— you know, i— it was bad, right? You know, deals were just collapsing left and right. And so, the— the clients who kept communication going, right? And that’s like a worst-case scenario, right? I mean, you know, i— even if the big news is bad, at least keep that communication going. “Hey guys, you know, h— things aren’t going so well, the economy’s tanking,” whatever it is, you know, or— or, “Hey, this property has some problems with it.” Well, you know, just be honest and tell them, right? Most investor complaints come from, “Hey, I’m trying to get a hold of the syndicator to get an update and I’m not hearing anything.” Or that, you know, again, if you— if you— if you have a problem breaking bad news, I mean, assign it to someone else, right? We’ve had— we’ve even had clients who say, “Hey, we need you to kind of run— write interference for us.” And not interference, necessarily, but you know, “Hey, can you help… we— we can’t talk to our investors. Can you help us?” Right. So we’re like, “Okay, well, you know, yeah, we— we can do that, but that’s, you know, usually that’s, you know, you don’t want to get a lawyer involved because then they get their lawyers involved, you know, so you know, all of that stuff, right?” But so yeah, just be— hey, be— be spe— hey, open communication. That’s really the biggest, I guess, pitfall. Like, hey, you know, investors stop hearing from you. Okay, they’re gonna get concerned, even if things are going well and you’re just too busy to talk to this guy or this gal who… you know, I mean to you, to you, I mean to them… okay. I mean, maybe to you that hundred thousand they put in is not a big deal. But, you know, to them it may be a big deal, right? And you’re not getting it back to them, you know, then okay, then— then that’s where SEC complaint comes in out of the blue. You know, that— that— that’s the probably the biggest thing. I mean, good— or good news or bad news, right? So just— that’s why I said about communication is critical. Good— you know, whether it’s good or bad news, whatever, just— just communicate, right? Most investors understand, hey, if they’re— if— if it’s bad news and they understand it, right? At least you’re talking to them. Right. They know— they know what’s going on, right? That’s the biggest thing, right? I would say.

Dylan Silver (21:27)
You know, for the situations where things go terribly wrong, and you’ve seen, you know, other syndicators, you know, mishandle things and it— it spirals out of control… I tend to think that most people start these things with good intent and then, you know, one bad thing happens and it, you know, communication isn’t had and then it’s a domino effect, and then you’re— you’re r— borrowing money from here to— to allocate to over here, and that’s when these things start to— to fall, right? When— when you’re looking at these, you know, worst-case scenarios where syndicators are finding themselves in trouble, is it because of, you know, minor errors that become big problems?

Darin Mangum (22:07)
Yeah, I mean, mo— most issues can be addressed or fixed. You know, yeah, again, even the deals that didn’t— don’t— don’t do so well, they can be handled and wound up in just a very orderly manner, right? And say, “Hey, look, we’re actually working on two or three deals right now where we’re having to— we do a call it a wind-up where, hey, this— this project didn’t go so well, so you know, we’re— we’re, you know, we’re winding it up, right? Hey, you know, this— yeah, we’re putting out— we’re helping the client put out communication and say, ‘Hey, look, this deal didn’t work out, right? Nobody— nobody did anything wrong. It’s just not working, right? And we’re gonna, you know, we sold the asset and we’re returning 50 cents on the dollar.'” And, you know, but, you know, and okay, yeah, investors are, you know… so they’re not gonna be happy, but— but, you know, again, especially investors that have been around the block, they know the— every deal’s not gonna be a home run, you know. They totally get that. And okay, good new— hey, good news, got a tax write-off. You know, you know, that’s right. That’s— you can spin it, “Hey, good news. We gotta, you know, we’re— we’re gonna give you your— your tax documents so that you can give to your accountant so you could take this write-off, right? Of this loss that we’re— we incurred, right?” And so, you know, and then, “Hey, you know, may— hey, we’re gonna do another deal next year because now we know…” I mean, I’ve seen totally deals where investors they’ll— they’ll— if you’re honest with the investor and ke— they’ll stick with you, right? And you say, “Hey, look, this didn’t pan out, but…” and then, you know, you know, that investor will invest with you again because they know that you’re— you’re just being straight with them, you know, and they understand that not every deal is gonna pan out, right? So, you know.

Dylan Silver (23:47)
Pivoting here, you’re— you’re a bestselling author, Raising Capital with Confidence, right? What was the inspiration behind that book?

Darin Mangum (23:54)
Yeah, you know, this book is— this has been super fun for me to— to do. I— I— I get— the— I get— I get a lot of the same questions over and over again. I’ve been practicing for over twenty-six years now, and it’s been— I get, you know, you— you see again, the same— same, whether it’s up— up or down market cycles, you see the same issues, right? So, I do have a YouTube channel that I— I hop on now and again just to talk about, you know, different things happening in the market, you know, different— different things people should be aware about. And I— so I thought, you know what? It’s— it’s— I thought about, you know, “I’ll take a lot of these topics that— that are common and I’ll just kind of put them in a little book,” you know. And I— I’ve been really happy with— the— I didn’t really sell it to make a lot of money, I just thought, “Hey, maybe this would be a helpful, helpful kind of you know, basic level.” I mean, I tried, you know, basically it— it’s not a— it’s not a hard read. It’s not super thick. It’s like, you know, you could read it in a weekend, you know. But it’s also— I— I, you know, it’s also a reference as well. Like, “Yeah, what— that— remember that 506B, 506C, this thing we talked…” Okay, well I can— I can flip this. I can kind of go, there’s an overview of that again. So yeah, so I’ve been— yeah, I’m really happy. Even clients that have been with me for a long time— ten years or longer— you know, they called me, “Hey, I bought your book,” you know. I’m like, “What— why do you— why did you buy my book? You already know this stuff, right?” And he’s like, “Well, actually, no. I— it’s— I— you are— now I understand why— why you’re always telling me this and now I get it, right?” So— so it’s been— it’s been rewarding that way. But it’s kind— it was kind of fun to— to put together and I’m glad it’s been well received, you know.

Dylan Silver (25:42)
We— we are coming up on time here, Darin. Anything you’d like to mention directly to our audience?

Darin Mangum (25:47)
Yeah, I’d— I’d say, you know, again, it— I mean, it doesn’t have to be me, but I would say, you know, having a— a securities lawyer look at your— look at your syndication, or, you know, even if it’s just a like a PPM review of your documents… I mean, that’s— I mean, it— to me, to me, what— what we do is more, you know, we provide peace of mind to the— to the real estate syndicator. Say, “Look, that— that way they don’t have to worry about it, lose sleep at night.” And so, I would say, you know, again, if that’s something that, you know, if you don’t have legal counsel, you should totally to, you know, again, we always do— I always do a free consultation with people just to see because may— maybe, maybe, maybe it’s not for you, right? The real estate syndication is not the way you want to go. And I would say if you— if you could, if you’ve got— if you could fund it yourself or get, you know, get all the money you want from a bank, then okay, more power to you. But if you’re again— if you’re using other people’s money, then yeah, we should definitely talk. So—

Dylan Silver (26:49)
Darin, thank you so much for your time today. Thanks for joining us.