Sec Attorney Interview
Great information covered in this Google Hangout to discuss some of the basic overviews of the SEC and raising private money for Single Family Real Estate Deals.
We cover many of the “Do’s & Don’ts” that every real estate investor should know.
If you would like to contact Jillian to help you with structuring your deals, her contact info is below:
Attorney, Author, Public Speaker, Teacher
Brant: Get going. Hey guys, my name is Brant Phillips. As many of you know, I’m a full-time real estate entrepreneur and do a lot of my investing with the use of private capital and private money to do my residential real estate investing, flip properties, rental properties, all that kind of stuff. I’ve invited with me Jillian Sidoti who is an SEC attorney who’s going to go over some of the basics of the SEC and things that you can do and things that you should not do as well to avoid getting yourself into trouble. Without further ado, I’d like to introduce Jillian with me this morning.
Jillian: Hi. Hi everyone. Thanks for having me today Brant.
Brant: Thank you for joining. I know that you have told me like you’ve got I believe two kids, another on the way and a couple of dogs.
Brant: I’m the same way. My wife is sleeping because the baby didn’t sleep last night. We’ve got three kids. Hopefully they’re going to corporate during this interview. I’ve promised them some sugar treats and other things later today if they can corporate for the next half hour. We’ll see how that goes.
Jillian: [inaudible 00:01:08].
Brant: Yeah. Let’s get started. Let’s just dive into this. Tell a little bit about yourself and your background I guess is a good way to get started.
Jillian: I actually started out, before I was a practicing lawyer, I was full-time in real estate investing. We did condo conversions down in San Diego. We would take an entire apartment building and bring it down to the studs and refurbish the entire thing. Then sell off the individual units. It was the greatest way to learn how to get into real estate business because it literally touched every aspect of real estate investing. Apartment building, flips, rentals, it touched everything. It also taught me how to deal with government inefficiency in a major way. Two, because we have to remap every property and rezone every property that we purchased. It wasn’t any easy fit but it was very profitable at the time.
Then in 2006/2007, I had my license, my law license at that point. The market basically just fell apart. Also the laws changed regarding condo conversions so there wasn’t any point to continue on doing that. I started practicing law and where I saw a real need was people weren’t able to get bank financing the way they used to. When I was doing condo conversions, we could leverage a property three times before a bank would stop lending us money. We would have 125% financing on some properties, because that’s just what we could do back in 2004/2005. We all know that stopped.
People had to start finding a different way to raise money and I saw a lot of real estate investors specifically not doing it the right way and violating securities laws. I saw a real need to assist real estate investors with raising money, doing it the right way, doing it successfully. I’ve learned a lot from my clients. I’ve seen what works and what doesn’t work and hopefully I can share some of that today.
Brant: Awesome. Thank you for that awesome intro and background. I’ve found whenever I’m working with whether it be, it could be attorneys, it could be accountants, whatever in the investing industry, whenever I’ve build a team, I’ve found it so much more valuable the relationship whenever the person I’m working with has some investing background in investing and experience. It just makes the depth and the realness of the conversation so much better because they can see it through my eyes and my perspective. That’s to me a big advantage that you have that experience.
Jillian: Thank you.
Brant: Big advantage.
Jillian: Yeah. It has helped a lot because I do understand the struggle of a real estate investor trying to get the deal done while at the same time not breaking any laws and being able to get the money together in an efficient and inexpensive way.
Brant: Yeah absolutely. The audience today, we’re probably going to have real estate investors of all different experienced levels but for the new guys out there, the newbies that are just getting started up, could you give them just a general just the Cliffs notes version of the SEC and just defining what a security is and what it is not?
Jillian: Absolutely. That is probably one of the most misunderstood things out there that if I do this then this doesn’t count. If I do this, then this doesn’t count. There’s definitely exemptions from the rule. An exemption only means you don’t have to register. It doesn’t mean that you’re exempt from following the other rules that allow you to be exempt.
First, let’s define what a security is. A security is and if you are watching this and you’re taking notes, this is the thing you want to definitely write down. There’s four steps that you want to look at. Number one, is there an investment of money? Number one, investment of money. Number two, is the investor who’s investing the money expecting profits? Are they expecting profits? A lot of times what I hear is, “Well, I’m paying my note holder interest not profit and therefore it’s not a security.” No, no, no, no, no, it’s a profit to the investor. An interest is a profit to investor.
Is the investor making money on the deal? Is a better way to maybe word it. If the answer is yes then you move on to the third one. The third one is in a common enterprise. A lot of times what people say to me or potential clients say to me is, “I only have one investor per property so I get out of the common enterprise element. I only have investor.” If you only have one investor period, then you don’t have a common enterprise. You’re good to go, but if you have one investor over here, one investor over there and one investor somewhere else, then you’ve created a common enterprise. The commonality is you even though they’re not all on the same property.
Finally, the fourth one is are you doing all the work? It’s called through the efforts of a promoter. In other words, let’s just say we’ll talk about single family flips. Let’s say you do single family flips and you have an investor who invests in a promissory note and secured by a deed of trust or mortgage. You start doing the rehab. You don’t say to your investor, “Now pick up a hammer and come do the rehab with me.” No, you do the work. Because you have control and ultimately that’s what it comes down to, because you have control, you have control over the investment opportunity and the investor’s money, then that’s through the efforts of a promoter. If you answered yes to all four of those then you’re in the world of securities and there are some rules you have to follow.
Brant: Excellent. Let’s talk about some of the major rules that they will have to follow. I know one of the big ones is when or if I need to register and if you don’t need to register. What I always teach and preach in the way I run my business is to make sure that I am raising capital with some of the exceptions so I don’t put myself into the position where I have to file, which I may at some point in time in the future but I always look for the exceptions meaning high net worth individuals, people within your relationships, make sure there’s no deed of trust disclosure statements and all that kind of stuff.
Jillian: Exactly. That is a great point. You don’t have to register if you don’t use the means of general solicitation. What does that mean? That you don’t advertise for investors. If you’re advertising for investors then you are subjecting yourself to a lot of liability. I know a lot of securities boards that just look for general solicitations and then go after those people because they don’t have a registered security in their state. Going on Facebook and saying you’re looking for investors is a big no, no. Going on Craigslist and saying you’re looking for investors, big no, no, pulling ads in the newspaper, anything like that is not a good idea.
There’s many ways that you can get investors through the door without saying I’m looking for investors. We don’t have time to go into all that right now but there are ways to do it for sure. I would say that’s the number one thing that gets people in trouble is general solicitation. Even your website, your website cannot say, “I’m looking for investors or let me help you earn a return on your investments. Actually, it’s hard to get many clients out of cease and desist order because they had that kind of language like, “Let me put your IRA to work in real estate investing or something like that.” That’s when you need to have a registered security.
If you don’t do general solicitation, if you have a substantive pre-existing relationship with the investor, then your obligations start to go down in terms of what you’re obligated to do in the eyes of the law. Let me really quick just say what a substantive pre-existing relationship means. It doesn’t mean the guy you live next door to for 20 years and it doesn’t even mean the guy you’ve been going to REIA meetings with for the last year. It means somebody you’re intimately aware of their financial ability to invest. You’re intimately aware of their financial ability to invest.
If you have that awareness, you can get that awareness pretty quickly with what’s called an investor qualification form. If you have that awareness then you have a pre-existing relationship. Those are the two big things I want you to look out for. Do you have a pre-existing relationship with the investor and have you used any general solicitation? If the answer is yes to the pre-existing relationship and no to the general solicitation then you’re good to go with an exemption.
You still have to make proper discloser, something you had mentioned Brant. That means you have to tell your investor all the risks. You have to tell them what they’re getting to. What I tell people to do is write down the who, what, where, when, how, how much and why? Just do it like a reporter. Anything an investor would want to know is what you want to disclose to your investor.
Brant: Absolutely, yeah. Another thing that I see in the marketing because I’ve seen this a lot in the REIA Clubs and things like that is where people are and I know that they’re not registered and they’re doing just what you said. They’re going out and they’re promoting the returns that they can provide and they use the word guarantee a lot. As we all know, nothing in this world is guaranteed.
Jillian: No, no.
Brant: You can’t guarantee tomorrow, how are you going to guarantee these returns that may or may not come? I know that’s a huge red flag.
Jillian: Oh gosh, I shatter at that word guarantee. It actually makes my heart race [inaudible 00:11:56].
Jillian: There’s four words again, if you’re writing notes down, this is something I want you to write down. There’s four words I want you to never ever use. That is low risk, safe, secure and guarantee, low risk, safe, secure and guarantee. Now, people always call me out on the secure but, “What if I’m offering a deed of trust or mortgage?” In that case, it is secured. I’m going to tell you right now, I always see those four words coupled together in SEC and State Securities Board documents. Please, as far as State Securities Boards are concerned, as far as the SEC is concerned, your deal is not low risk, it is not. I know you think it is because you’ve been in real estate for a while and yada, yada, yada, but it is not low risk. Take that word out. Guaranteed, oh my God, death and taxes are the only two guarantees in life. Please don’t use the word guarantee. That is a massive red flag.
The other thing is too, I would love to take a survey of how many people who have done that type of advertising at REIA groups have been successful in raising money. I would almost promise you that 90% of them have not been successful or maybe even more. I often do this thing when I give a speech in a live situation, in front of a live audience where I’ll say to people, “How many of you have seen an ad on Craigslist that says something like this? Invest in real estate today offering 18% low risk guaranteed, safe and secured by deed of trust or mortgage.” However it’s written. Pretty much half the room will put their hand up. Like, “Yes, I’ve seen an ad like that before.”
Then I’ll say, “Okay, keep your hands up. Now, of you that you have your hands up, how many of you have actually invested in a deal like that?” Every single person puts their hand down, not one single person has ever … I don’t know why not. That sounds like a great deal. It’s not only totally illegal and going to get you in tons of trouble, it’s completely and effective so why do it.
Brant: Yeah absolutely. I’ve seen those guys and they get up to make the pitch and they promote these big high returns. The funny thing is like after a lot of all the Wall Street scandals and the made off stuff going on, what we found is like some of these guys were talking about 12%, 15%, 18%. Then I was making a point like I never pitch in front of the room. I never talk about interest rates unless I have that relationship already established.
The funny thing was like whenever, especially when all the made up stuff was going on, it was almost like if you were throwing out like 12%, 15%, 18%, people didn’t trust you. Then you start to have a private conversation, you’re talking about 6% to 8% and like, “Okay, now let’s talk,” because that really seemed like something that was more reasonable. Yeah, I totally agree. First off, it doesn’t pass the sniff test. Something doesn’t even smell right when guys are putting those kind of numbers out.
One thing that you did say that raised a lot in my mind was like for sure, you can’t say guaranteed, safe, low risk and all that kind of stuff. I’d spoken to another SEC attorney. I thought it was okay to be honest with you that you could say it was secured by the real estate with a note and deed of trust. You’re saying like …
Jillian: No. I’m saying if it is. I can’t [inaudible 00:15:44].
Brant: Okay, I got you.
Jillian: Yeah. It’s absolutely, I was just saying like I see those words coupled together all the time.
Brant: Safe and secure and all that, just generally speaking?
Brant: Yeah, I got you.
Jillian: Sometimes people will do JV agreements or they’ll do promissory notes that are not necessarily secured. They don’t actually record the deed of trust or mortgage or something like that. Or I’ve heard people who’ve started funds and have tried to use that word. A fund is definitely not secured by the state. I want you to use that word with caution only if you’re actually securing it with a deed of trust or mortgage.
Brant: Right. Awesome. Then I mean it’s kind of an obvious thing. In the world of internet nowadays, there’s tons of forms and paperwork out there you can just download forms. Should an investor ever either prepare paperwork for one of their private lenders by themselves or accept money directly from a private lender?
Jillian: It’s such a great question. Here is the thing. The way I say this is that I’m a very cheap person. I buy my kids toys for Christmas at the used kids’ store. I’m extremely cheap. If I could do my own appendectomy I would but I can’t. I can’t do my own appendectomy.
Brant: Likewise, yeah.
Jillian: That would be foolish, right?
Jillian: I can’t take my own tonsils out. I have to go to a doctor and I have to pay money to do that. Somebody has to pay money for that to happen. I need to use a professional. That’s what I normally say to people is like, “You really want to use a professional when it comes to these things.” That investment of money will do with an attorney not a service, please. People come to me all the time and go, “I went to this person who wasn’t an attorney but they do this all the time and they wrote my private placement or they wrote my disclosure doc.” Oh my God, the things, I won’t even touch them anymore. Our firm actually has a policy that we won’t correct somebody else’s work because it turns out to be harder for me to correct their work than it is to write it from scratch.
That being said, if you don’t even know what you’re doing and you haven’t even had any experience doing this, then to me it’s absolutely foolishness. I will tell you, I’ve had this happen with a client on more than one occasion who is doing it themselves and going in on their own. Then they came to me and they decided to have me write their documents. They actually raised more money after I wrote their documents for them because the documents were so much more professional and it showed they really cared and spent the time to get it together. For those reasons alone, I think you should always use a professional.
I’m not trying to sell our services here but really quick, one of the things we try to pride ourselves on is helping the little guy who’s never done this before, making it affordable. We don’t have a big chandelier in the middle of our lobby that we have to maintain. We really want to take inexpensive ship around here with the highest quality. This is all we do. All we do is write securities transaction documents. We don’t do any litigation. We don’t do any of the transactions, securities transactions only and 85% of our business is real estate related. You can’t get more specialized than that for what you’re looking for. We really try to make it affordable for the little entrepreneur.
I really want you to, even if you don’t call us, I want to encourage you guys out there, just call an attorney, ask them what you need. You don’t want to have a mistake in there that could be the end of your business. The other thing is too, when an attorney does the work for you and something goes wrong, you can always rely most of the time if they carry it, you can always rely on the attorney’s insurance, malpractice insurance. You’re buying into the better quality document. You’re buying into the malpractice insurance. You’re buying into a lot of different things that are going to totally just put your business in a different category.
Brant: Yeah absolutely. One of the things that I’ve found, something that you hit on is you had a client who actually raised more money after he had the documents professionally prepared. That’s one of the things that I think that private lenders, they just pick up on the more polished professional investors. That’s how we’re able to raise money. Often times at much, much lower rates even than other investors or some of my competitors because I’ve had lenders who’ve worked with other guys and they’ve gotten burned. They’ve had deals that weren’t put together properly and things like that.
We can speak from a position of authority and security meaning that we feel secure with the way that our business is run, everything is put together the way that we’ve built our team. That’s one thing that I highly, highly encourage people when I do events and things like, “Never do your own paperwork.” I’m speaking just for single family residential homes. Never accept money from a private lender. We’ve literally had lenders just want to cut us a check like, “No, everything is done at the title company.” No deed of trust. Everything is recorded. Everything is prepared by an attorney. I will not be doing any paperwork. I won’t touch any of your money directly. It will all go through the title company.
Just be above board in everything that you do. Then that’s what I found will help your business grow. Your lenders will pick up on that, on your professionalism, on your team, who you’re surrounding yourself with versus you download some form of 99centforms.com or whatever and just like come on now, we’re not going to LegalZoom this either. Nothing gets LegalZoom. No, just don’t it. It will cost you so much more money in the long run when you don’t do things the right way.
I always like to say that the difficult things become easy and easy becomes difficult. I know in the beginning, especially you mentioned that you’re cheap as am I. We want to cut corners. That’s just our natural inclination. All the times that I’ve cut corners like in renovations and things like that, in doing a lot of work myself and things that I shouldn’t be doing, it almost always cost me money in the long run. It cost me time or it will cost me money.
Jillian: Absolutely. I’ve had people who’ve done their own documents who have had, I’ve had three scenarios. They’ve done their own documents. Actually four scenarios. They’ve had no documents, they’ve done their own documents, they paid a non-attorney or non-attorney service to prepare documents or they paid an attorney that was no specialized in securities. For example, a small business attorney who gave them a cutthroat rate because they’d never really done it before. Instead of charging them what a private placement for a disclosure document should cost they charge $1,500 or 500 bucks or something ridiculously low.
What ends up happening is then a lawsuit happens or the State Securities Board gets involved or something happens where they didn’t get the proper advice. With that, they end up spending more money on a real securities attorney to get them out of trouble. What I always say to my potential clients is, “You can pay me a little money now or you can pay me a lot of money later.” Those are really your choices.
It’s happened. It’s happened a lot. I don’t want it to happen. I hate getting calls where, “Oh, the State Securities Board contacted me” or “Oh, I just got a subpoena.” I hate those calls. As a matter of fact, I usually try to move it over to another more experienced securities litigation attorneys to handle it because my stomach, on behalf of my clients, my stomach can’t handle it. I can’t imagine how the client feels and if their stomach can even handle it.
Brant: Yeah, absolutely.
Jillian: I am telling you, you can’t. You will lose sleep. Don’t lose sleep. Just do it right the first time.
Brant: Absolutely. I agree 100%, 100%. The last thing I wanted to share with everyone is, you’re probably saying, you might be like oh no, there are so many things like it’s impossible at this point because I can’t say this or I can’t do this. I wanted to give a little strategy suggestion in the way that we go about raising private money. It’s all through private personal networks that we establish with people.
Then the other thing that we do is rather than promote safe returns, guaranteed things, we do none of that. We take an education role. That we’ll just educate people on, “Hey, there’s this opportunity in the market. This is what it looks like.” Just provide general information just to educate people. What happens and I found this on just by going to meetings and watching other people and see what was working or what wasn’t working. The funny thing that happened was I saw a lot of other investors, they were getting up, pitching a deal, talking about rates of return and all that kind of stuff. It didn’t really seem like they were putting out a good vibe and they weren’t getting a lot of attention when they were going back to the back of the room and that kind of stuff.
What I found that works is just like during these meetings and during networking, REIA meetings, just to offer some suggestions or strategies, describe what you’re doing in your business that’s working and just ask the sophisticated questions whenever you go to networking meetings. What I found was the more I just shared just general information, the more that I shared perhaps a case study of a deal that we did that went well. That began to attract people coming up to me that wanted to know more about my business. They were opening the door rather than me knocking on their door and going after them, just taking the role of an educator and advocate of an opportunity that exists in the market and just letting him know, “Hey, this is out there. This is what it is. I’m not offering anything. I’m not guaranteeing anything. I’m just letting you know about some information that exists in the marketplace. I’ve found that has been a great way just to open the door.
Jillian: No, that’s perfect because here’s the thing. What I always tell people is like, “You could share until you’re blue in the face. No one’s going to steal your ideas, no one’s going to steal your deal.” Inherently, I always use this analogy. Most people are Homer Simpson. They don’t want to go out and look for deals and they don’t want to go out and do the rehab. It’s so much easier for them to write a check. Heck, that’s what I do. I have a ton of real estate investments around the country. The ones that do the best are the ones that I don’t own, are the ones that I’m not responsible for.
I’m a full-time attorney not a full-time real estate investor. I trust people who are full-time real estate investors who are daily taking care of the investment opportunity. I’m my own Homer Simpson. Even though I do own my own rental properties and things like that, I hate it. I wish I could get rid of them, because that’s work for me. Whereas other investment opportunities I have has not worked for me. If you just show people that you know what you’re doing and you’re an expert … I find it’s a couple of different things. It’s telling people, giving information, giving value to the potential investor number one, which you’ve already talked about as the education.
Number two, positioning yourself as an expert in that market or that field whatever it might be at which by virtue of the education happens. Third, and I think this is equally important is showing enthusiasm for your own business. If you don’t show enthusiasm for your own business, how is anybody else going to show enthusiasm for your business? One of the best fundraisers I know is somebody online who is on Facebook. He never asks for money. He always talks about, “I am so excited to go and start this rehab project. We just bought it for this price, may ever exist I’m going to put this much money into it. I can’t wait. I’m so excited to get started because I’d like to get this done before Christmas,” or something like that.
Then he tags before and afters. If you’re taking before and afters, and it’s not bragging. Literally it’s not because a lot of people say to me, “I don’t want to do that because I don’t want to look like I’m bragging and da, da, da, da.” It’s like, “No, it’s not bragging. It’s being enthusiastic about your business.” You’re a little enthusiastic about your business. You don’t have to talk about how awesome you are and great. Just talk about how excited you are about your own business. That’s it.
Brant: Yeah, that’s it in a nutshell. I used to almost want to downplay some of my success and things like that in the beginning because I was almost like I didn’t want the lender to know how much money I was making. I was like almost wanting to hide that. Then it clicked on it. I was like, “Wait a second, I’m pretty sure.” After some discussions with lenders like they feel better when I’m making a lot of money. They want me to make a lot of money. That was like a thing. It’s like, okay, you don’t brag about it, you don’t boast about it but it’s okay to share that when you have successes.
I’ve had deals that have gone bad. My lenders still get paid. I’ve never not paid a lender. It hurts me financially out of pocket. This deal went bad. Being open and honest and sharing that with them, and it’s converse thinking but there’s one particular lender I know and he has a general rule that he won’t lend money to an investor unless he knows that they’ve lost money on a deal. Because he knows that if you’re an active investor, you’re going to lose money at some point in time. It’s just a part of the business. If someone’s talking about they’ve never lost money on a deal, either things, one, that they’re lying or two, they haven’t been in the game long enough.
Brant: It’s just converse thinking. You would never think about that but share your successes, don’t brag or boast. That makes your lenders feel good that you know what you’re doing. That you can structure deal to be very profitable. When a deal goes bad, be open and honest about it. Honor your agreement making sure that they get paid. You take loss, they don’t take the loss. That open transparency is what just fosters more relationships and lending.
Jillian: Absolutely. No, couldn’t be more true. That’s a perfect scenario. It’s so funny because right before I logged on to do this interview today, I was on Facebook. Somebody had posted something about Kevin O’Leary who’s one of the sharks in Shark Tank. He had posted this video about how important failure is to the entrepreneur. You must fail in order to be wildly successful, period. That way, for example, if you’re getting rejected from Shark Tank, that’s not a mark of absolutely death. It’s a mark of failure which is only going to help you with ultimate success.
Brant: Yeah, awesome. Jillian, I really appreciate you taking time out of your weekend morning today away from the family. Would you like to just give your general contact information? I’ll put it on the YouTube page as well.
Jillian: Sure. Everybody can, they can call me at 323-799-1342. I’m on the West Coast. We have three offices, two in California and one in Florida. We have three attorneys. When you’re calling, just keep that in mind. I’m on the West Coast. My email address, which you can reach at any time is Jillian@SyndicationLawyers.com, that’s SyndicationLawyers.com. I want to encourage everybody to go to that website because we have a ton of free content, almost too much. If you have a question and you’re up late at night at 3 AM and you need to have it answered right away, go there because we might have already answered it for you.
Brant: Awesome. Love it. Appreciate you taking the time.
Jillian: No problem.
Brant: Helping educating everybody, keeping them out of trouble. Like I said, I’ll post all of Jillian’s information here. You guys watching this at a later date will be able to find that. Jillian, when I do my live interviews, I like to end with a fist bump. We’ll do a little virtual fist bump on helping the people out, boom. There it is.
Jillian: Perfect, thanks.
Brant: All right. Thank you. Enjoy the rest of your weekend.
Jillian: You too. Have a great day.
Brant: You too, bye.