Real Estate Syndication Legal Mistakes: How to Raise Capital Without Breaking SEC Rules

Mark Roderick (00:00)
you now start hiring people to manage your investors. You might just hire one person at first when you call that person an investor, vice president of investor relations. Okay. This is a critical step. It, it is definitely fuel for the growth fire to hire someone specifically.

to keep your investors happy. But it’s also a critical crossroads because when you have that person, the VP of investor relations, lots of new rules come into play. And when you asked about mistakes syndicators make, I would say almost invariably.

when a syndicator grows to have an investor relations person, and then beyond that, an investor relations department, they start inadvertently doing things that they’re not allowed to do.

Scott Bursey (02:34)
Welcome back to the Real Estate Pros Podcast powered by Investor Fuel. I’m your host, Scott Bursey. And today we have an absolute industry titan joining us. Our guest is Mark Roderick of Lex Nova Law. And the fuel he brings is the strategic rock solid legal clarity that allows pros to raise capital and scale their business without ever stumbling into compliance traps.

Mark is the authority on the high octane topic of real estate securities law, the foundation of all sophisticated investing. Get ready to download some serious wisdom pros because we’re diving deep into the legal structure that protects and propels your wealth. Mark, welcome to the show.

Mark Roderick (03:15)
Thank you very much. am delighted to be here.

Scott Bursey (03:18)
We are thrilled to have you here, Mark, and for our listeners who may not be familiar with your journey, please tell us, how did your career begin and what is your main focus now?

Mark Roderick (03:28)
Well, as I told you before we started recording, I began practicing law in 1840, which was a very different time. And I say that partly as a joke, but I’ve been practicing law a long time. And I actually started as a tax lawyer back in the heyday of tax shelters. We don’t have tax shelters anymore, but they were once a really big deal. And that was when I started practicing law.

But I now describe myself as a boring corporate lawyer, which is pretty accurate. I’ve, you know, I’ve been the chair of a mergers and acquisitions group at a larger firm and the chair of a corporate law group at a larger firm. So I’ve, I’ve done all kinds of business deals and, and continue to do all kinds of business deals as my background. And then.

Crowdfunding ⁓ became a thing in 2012 with the Jobs Act signed into law by Barack Obama. ⁓ And it promised to change the world in really good ways. And so I’ve been doing Crowdfunding ever since. ⁓ And in some ways it has changed the world not as much as

We had hoped, so now I’m a boring corporate insecurities lawyer.

Scott Bursey (04:52)
That is an incredible path. And what really caught my attention about you, Mark, was the way you’ve been able to simplify complex securities and syndication laws for everyday real estate investors, know, turning compliance from a regulatory threat into a competitive advantage.

Mark Roderick (05:57)
Well, yeah, mean, the things I do, okay, if I had to describe the changes, it’s the internet. So ⁓ American securities laws were written in the 1930s by Franklin Roosevelt was president and Sam Rayburn, a Democrat from Texas was… ⁓

The two of them collaborated, as you all know, you and your listeners know, the 1920s was a ⁓ disaster for the American securities markets. They were rife with fraud. No one would invest for very good reason. so ⁓ Roosevelt and Raver and got together and they cleaned up the American securities markets. ⁓

know, interesting historical note, Joe Kennedy, know, the father of John F. Kennedy and Robert Kennedy was the first commissioner of the SEC. And those laws did exactly what they were supposed to do. And they provided transparency. And as a result, you know, for the last going on almost a hundred years, America has the strongest, most transparent, most active capital markets in the world.

Those laws still apply today. ⁓ But as the internet began to be used for everything in our lives, you know, in the first decade of this century, from dating to car repair to anything else, ⁓ it was only a matter of time before finally the laws were changed to allow people to raise capital.

On the internet and that is really what Crowdfunding is all about. it it’s why it’s, it’s so powerful. You know, it just makes a lot of sense. you’re a syndicator and you want to reach the greatest number of potential investors possible. Well, today legally you can reach every potential investor on earth. that, that

is kind of the simple explanation of what I do and why it has been transformed.

Scott Bursey (08:21)
Mark, let’s flow some fuel specifically focused on the legal framework that protects and powers capital raising. What is the biggest legal strength a syndicator can leverage today?

Mark Roderick (08:34)
Well, you know, it depends on the size of the deal, ⁓ type of deal, size of deal. So very quickly, and I know you’re going to go to sleep if I start talking too long, much less your listeners, but there are three flavors of Crowdfunding. ⁓ The most popular by far is what we call rule 506C. It’s an SEC rule. And that allows…

a syndicator to advertise in any way he or she wants to everyone, newspaper advertisements, Facebook advertisements, flying a plane at the beach, you know, those planes that fly along with the ads, ⁓ to raise money for your deal. And the only constraint is that all your investors have to be accredited. You can tell me why they want me to explain that word. ⁓

meaning, it used to mean wealthy, it doesn’t mean wealthy anymore. ⁓ But that’s the only constraint. And that is by far the most widely used kind of offering. And you can use that to raise a million dollars, you can use it to raise $50 million. At the other extreme, there’s a new kind of, well, new since 2012.

Called reg CF and this is the kind of Crowdfunding that we’ll see on ⁓ Websites like we funder and start engine ⁓ Where You can raise money from everyone not just accredited investors ⁓ But there’s a maximum how much you can raise only five million dollars per year for syndicator

And restrictions on how much each person can invest. ⁓ and you have to pay a fee to the website. So that’s called Reg CF. ⁓ it has been used in real estate successfully by one of my clients called it’s a website called small change, which I really would recommend your listeners take a look at small change. If they’re interested in,

raising money for real estate using this Reg CF vehicle. But it has not grown. Many of us, myself included, hoped Reg CF would become really, really big. know, everyone can invest. Your hairdresser can invest. Everyone can invest. Democratizing capital, great thing. It hasn’t, for reasons I won’t go into right now unless you want me to, it really hasn’t been.

successful. finally, and I see your eyes are drooping, but I’m almost done with the third time. There’s something called regulation A, and it’s a kind of offering. It’s very similar to a full blown public offering. You have to get it approved by the SEC. It’s much more expensive than the other types of offerings, but you can raise up to $75 million per year per deal.

Scott Bursey (11:23)
you

Mark Roderick (11:45)
from accredited and non-accredited investors. So now I’ll stop.

Scott Bursey (12:24)
I believe if I heard you correctly, we could boil it down to something along these lines. When your legal foundation is airtight, that certainty attracts larger capital pools. Would that be a fair assessment, counselor?

Mark Roderick (12:39)
It is. And that is indeed the foundation of American securities laws. Now, you know, it’s a little skewed today. So, you know, a company, let’s say a company like OpenAI, right?

OpenEI, a company like OpenEI wasn’t contemplated in the 1930s. And I’m not sure it was contemplated 10 years ago. My point is that that company, I mean, their most recent raise was $110 billion. Billion dollars. They’re not a public company. These are all completely unregulated raises. So what you said,

has always been true. It’s just not quite as true today when these completely private, unregulated companies, not only raising tons of money, but actually sucking all the capital, available capital from the American securities markets.

Scott Bursey (13:38)
Understood, So let’s shift gears here and rev up the engines a little bit. What is the most common yet avoidable regulatory mistake new syndicators make?

Mark Roderick (13:49)
boy, they just make a lot. ⁓

Most syndicators, when they start out, are completely unaware that there are things called securities laws. Like there’s this whole huge body of securities laws out there, but most syndicators begin their career unaware that those things exist. And so they, they just start asking people for money and they accept the money. Good for them, but.

They accept the money in ways that are usually illegal, know? Meaning they take money from non-accredited investors because, know, most of the people, most people know are non-accredited. They make less than $200,000 a year. And that may be your family, your friends, whatever. And raising money from non-accredited investors is regulated.

And you can’t just go do it without complying with the law. So that’s the mistake most syndicators make. But those people probably aren’t listening to your show because they’re not aware that there’s anything that they have to comply with. I mean, fortunately, ⁓ very few of them go to jail and

even fewer are executed for their crimes. yeah, so that’s the most common mistake.

Scott Bursey (15:22)
Okay, we’ve revved up the engines. Now let’s apply some pressure to the pedal. Compliance isn’t ⁓ a suggestion. It’s the non-negotiable cost of doing business at scale. What change in securities or Crowdfunding rules presents the biggest untapped opportunity for raising capital now?

Mark Roderick (15:42)
Well, yeah, the, the, biggest opportunity remains. It’s not, it’s not reg CF. It is rule five, six C. So if, if your listeners are syndicators or sort of starting up syndicators, that’s rule five, six C. say, unfortunately, cause I was so evangelical about reg CF, but fortunately for them, ⁓

Rule 506C is easy to comply with. You’re, you’re absolutely right to say compliance is not an option. It’s a requirement, but in rule 506C, it’s really easy to comply. And the main thing you have to do is verify. That’s what the law requires. Verify that all your investors are accredited and that.

does not mean, as it once did, that you just ask them and they promise that they’re accredited. The best way to do it, and it’s cheap and easy, is to use a third party verification service. There are several, one is called Verify Investor. You hire them, and then when you get an investor, the investor goes through their online process and they get verified.

And that’s all you have to do to comply with the law. Now, to protect yourself from being sued, you know, you should also have good legal documents, good disclosure documents where you tell people about the deal and all the risks and all the reasons they shouldn’t invest. But compliance wise, it’s very easy to do and inexpensive and they should do it.

Scott Bursey (18:06)
SmartPros should always be optimizing their capital stack by understanding the latest rules of engagement.

Mark Roderick (18:13)
That’s right, yeah. And yeah, go ahead.

Scott Bursey (18:16)
Mark.

Must ask you this, beyond SEC review, what legal or regulatory risk should real estate investors be most vigilant about?

Mark Roderick (18:28)
⁓ real estate investors. ⁓ well, yeah, the investors. It’s interesting to ask that question because, you know, I speak at a lot of conferences, Crowdfunding conferences and so forth. And everyone in the room is on the selling side. They’re syndicators, they’re real estate platforms.

There’s no one in the room talking about investors. And I always say, guys, without investors, we don’t have an industry. And so from an investor’s point of view, ⁓ you know, the best, the best thing is

The necessary thing is you have to work, you have to invest with a sponsor that you trust. Now that can be a first time sponsor if you know the person, have a relationship with them. It’s easier with sponsors who have a track record and who share their track record. There have been in the Crowdfunding industry,

and of course outside the Crowdfunding industry, but there was a notorious case where ⁓ on a platform called CrowdStreet, investors put in like $25 million of equity for a deal. So it was substantial deal and the sponsor ran away with the money, just stole it.

Unfortunately, there’s no way to, to know, you know, whether your sponsor is a crook, except his or her reputation and, and his or her track record. Now, from my perspective, if I’m representing investor and the sponsor sends the investor legal documents and they’re crap.

And they often are crap. I say don’t invest because you’re dealing with someone who doesn’t take this seriously. If they don’t take this seriously, they’re not going to take anything seriously. So that’s a good indication ⁓ from a legal documentation point of view. But ultimately, you have to have some reason as an investor to trust the sponsor.

Scott Bursey (20:57)
If a deal is structured perfectly, Mark, what is the most important legal document to audit before accepting investor funds?

Mark Roderick (21:07)
Well, I mean, there are three documents.

One is the sort of, let’s say you do the deal in a limited liability company. So the LLC agreement that governs the internal operations, that has to be airtight. And the document, the LLC agreement that you use for a real estate syndication is very different, you know, than an LLC agreement, let’s say among four doctors who are

who are practicing together. So you see a lot of LLC agreements that are not airtight. And when I say airtight, I mean from the sponsor’s point of view that make everything clear, leave no ambiguity or as little as possible. ⁓ So it is a super important document. Even more important document, well, equally at least, from the perspective of

protecting the sponsor from potential investor lawsuits is the disclosure document, also called the private placement memorandum. That’s the document that tells investors about the deal and tells investors the good news, the bad news, ⁓ and also tells investors about the risks. So it is a super important document to protect the sponsor.

And the third document is called the subscription agreement. It’s important, probably not as important as the first two documents. really, the legal work that I and other securities lawyers do is about protecting the sponsor. ⁓ It’s like insurance for the sponsor. of course, from my perspective, the legal documents are very important.

Scott Bursey (23:03)
Precision in those three legal documents is paramount, just paramount protection that everybody needs.

Mark Roderick (23:11)
Yes? Yes it is? Well, yeah, I mean, okay, the mic.

Scott Bursey (23:12)
All right, Mark, it’s time for the money question where you supply

the high octane fuel for a pro looking to grow their syndication business from local deals to nationally recognized funds. What is the most critical strategy they must adapt to consistently manage and maintain investor relations and quite frankly, legal transparency after the capital has been raised?

Mark Roderick (23:18)
Okay.

So that’s a great question. ⁓ As you know, syndicators often start out as a one person shop. And if you’re fortunate enough to know some people with money, you do some deals, you’re successful. You start to advertise, you start to get more investors and you start to do bigger deals and possibly even safer deals. Cause you know, now you have capital so you can get the deals.

Et cetera. ⁓ you now start hiring people to manage your investors. You might just hire one person at first when you call that person an investor, vice president of investor relations. Okay. This is a critical step. It, it is definitely fuel for the growth fire to hire someone specifically.

to keep your investors happy. But it’s also a critical crossroads because when you have that person, the VP of investor relations, lots of new rules come into play. And when you asked about mistakes syndicators make, I would say almost invariably.

when a syndicator grows to have an investor relations person, and then beyond that, an investor relations department, they start inadvertently doing things that they’re not allowed to do. So, for example, they start cold calling investors. The IR person gets a list of potential investors, starts making phone calls. Hey, we have this great deal.

You can’t do that. So, and when I say that, you know, I just scratched my head, but my clients scratch, what do mean I can’t do that? If an investor, that’s why I hired the guy, you know, to make those cold calls. So it is both the fuel for growth, you know, all large syndicators have IR departments, investor relations, but it is one of the easiest.

areas to slip into serious non-compliance. Just opens another box and it’s possible to deal with it legally, fine, but it’s very easy to make mistakes.

Scott Bursey (26:04)
Counselor, this has been an explosive, pure, high-octane fuel session. For those of our listeners that want to follow your journey or collaborate with you, what’s the best way for them to reach you?

Mark Roderick (26:16)
You know, probably the best way, kills two birds with one stone, is to go to my blog website, crowdfundingattorney.com And they’ll see all my contact information, but they also get a big picture of sort of, you know, what I do. If you just Google my name, Mark Roderick Crowdfunding, it’ll take you to the same place. I’ve had people tell me, Mark,

You know, I, I wanted to do Crowdfunding and I thought, let’s look for a lawyer. And the problem is I, there’s nothing I type into my Google search that doesn’t lead to you. So it’s pretty, pretty easy to find me.

Scott Bursey (26:54)
Mark, thank you so much for joining us here today.

Mark Roderick (26:57)
Thank you so much, Scott. It’s been a pleasure. You asked excellent questions.

Scott Bursey (27:02)
This has been a very valuable session for our listeners. And to our listeners, we appreciate each and every one of you. If you got value from today’s episode, please subscribe. We’ve got a lineup of exceptional guests, just like Mark Roderick, who are making huge moves in the market. Until next time, keep your standards high and your vision clear. We’ll see you in the next episode, everyone.