Syndication with foreign nationals

Multi-Family and Apartment Investing
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Syndication with foreign nationals

Michael Le
Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes

I potentially have access to a network of affluent, high net worth people in China. Does the SEC Rule 506 Regulation D have any special rules relating foreign national investors? I've heard on the Old Capital Lending podcast mention of requiring foreign nationals to have double the amount of net worth and liquidity (and I'm not sure if that's just for general partners or even a requirement for limited partners). But does the SEC treat foreign nationals differently like lenders do?

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Carlos Flores
Commercial Real Estate Lender / Syndicator · Dallas, TX · Member since 2011 · 888 posts · 309 votes
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@Michael Le Thanks for listening to our Podcasts! The requirement of a foreign national having double the net worth and liquidity was in relation to lending and specific to those signing on the loan. If your raise is exclusive to non-US-resident foreigners and exclusively conducted offshore then you'd only need to comply with Reg S (for the most part - Rules 901-905) and laws of the foreign nation where you're making the offering. Give me a call if you'd like to chat. Number is in my signature. 

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  • Joel OwensBusiness Member
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    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
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    You might want to talk to Roland at http://rpwlegal.com/

    He is a securities attorney in your state.

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  • Carlos Flores
    Commercial Real Estate Lender / Syndicator · Dallas, TX · Member since 2011 · 888 posts · 309 votes
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    @Michael Le Thanks for listening to our Podcasts! The requirement of a foreign national having double the net worth and liquidity was in relation to lending and specific to those signing on the loan. If your raise is exclusive to non-US-resident foreigners and exclusively conducted offshore then you'd only need to comply with Reg S (for the most part - Rules 901-905) and laws of the foreign nation where you're making the offering. Give me a call if you'd like to chat. Number is in my signature. 

    4Reply
  • David Thompson
    Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes
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    Michael,

    No problem.  The investor will need a social security number on file w/the partnership or a ITIN.  I have a CPA contact in AZ who has helped w/a few China based investors we have in our partnerships file for the ITIN as it can be a bit tricky but doable. This is not an issue.  Btw, this is a great market to mine.  My investor base includes a significant number of Chinese (my wife is Chinese so that helps of course) that are living here in the U.S. but also a few who reside in China.  They tend to relate well to real estate and are good savers.  It's a smart way to go to find niches that play to your strengths.

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  • Michael Le
    OP
    Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
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    Thanks, @Carlos Flores. It's already in the plan to eventually call you when my plans are a little more solid

    @David Thompson, my wife is Chinese too and my sister-in-law and her group of friends do very well. My SIL and her husband have already told me they're looking to invest in the US and I'm hoping to get tied into their network. So it's good to see it's not only possible but not overly complicated.

    China has a $50k/yr limit on moving money out of the country. How did your investors get around that? Did they do it through by spinning up a company and moving it that way?

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  • David Thompson
    Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes
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    Michael, 

    Be fun to have a chat and discuss experiences and what you are hearing as my info may be different and the info is dynamic, often changing.  My investors from China already had some money moved here.  You are correct, there is continually more restrictive limits as I understand per person and its on the China side.

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  • Sam Van Horebeek
    Hong Kong, Hong Kong · Member since 2015 · 140 posts · 89 votes
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    @Michael Le We indeed see that the $50K limit of money transfer per year for Chinese is indeed being enforced much more strict since January this year. However, It is interesting to see that many Chinese nationals continue to find new ways to move money out of China.  I guess that new challenges do create new opportunities in this area as well.  

    These are two articles that are relevant for this Chinese money discussion:

    http://www.marketwatch.com/story/billions-in-capital-moved-out-of-china-right-under-the-governments-nose-2016-03-01

    http://www.smh.com.au/business/china/suitcases-of-cash-chinese-travel-figures-hint-at-capital-exodus-20160922-grlttn.html

    As we continue to see Chinese putting $1-2mm offers on apartments and houses in San Francisco, Los Angeles, Seattle, Chicago and Dallas over the last few months, I am sure that there are other ways as well. 

    1Reply
  • Michael Le
    OP
    Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
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    Thanks, Sam. Very interesting articles. I had seen others mentioning the same, including buying $1m life insurance policies via credit card... swiped 2000 times because of a $5000 limit per transaction. Crazy stuff.

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  • Al Wilson
    Investor · Daphne, AL · Member since 2014 · 1k+ posts · 242 votes
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    Call your securities attorney.
    1Reply
  • Gene Chen
    Los Angeles, CA · Member since 2015 · 12 posts · 0 votes
    10y

    Interesting topic - thanks @Michael Le for raising it.

    I'm seeking to connect with Chinese investors for development projects in Los Angeles.

    Does anyone know of a contact (either company or individual) that facilitates this?

    0Reply
  • Ying Suo
    Real Estate Agent · Newport Beach, CA · Member since 2016 · 4 posts · 1 vote
    10y

    I recently was asked (by a Chinese national) that if she could purchase a property in California using her Chinese ATM card. My guess is no. But swiping a card 20x to make a $1M life insurance policy definitely makes me wonder if my guess was wrong...

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  • Sam Van Horebeek
    Hong Kong, Hong Kong · Member since 2015 · 140 posts · 89 votes
    10y

    We are dealing with hundreds of Chinese investors looking to acquire American homes so we have seen tons of these stories so a very interesting topic.

    Here is an article around the use of a Chinese ATM card to buy insurance policies. It is indeed possible to buy insurance policies in a foreign currency by using an ATM card (although it seems that there are challenges to deal with too)

    http://www.bloomberg.com/news/articles/2016-04-07/...

    Using a Chinese ATM card to buy a property in California is not something that will work.  Also, I do not believe that an American who lives in California would be able to buy a house in California using his ATM card simply because there are daily limits that the bank imposes and the fact that closing happens at a certain day and time and funds must be transferred then.

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  • Michael Le
    OP
    Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
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    Well, I think it is possible in a roundabout way. I don't think they're buying insurance policies for the sake of the insurance policies. It just happens to be a way for them to funnel their money out. I think the type of policies they buy can be converted to cash after a few years, with some conversion losses.

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  • Shawn Tang
    Irvine, CA · Member since 2016 · 1 post · 0 votes
    10y

    Money laundering won't work in life insurance and have to report to authority. Any agent knows that.

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  • Michael Le
    OP
    Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
    10y

    This is Hong Kong so I'm not sure what will or won't work. It's happening so I assume it does.

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  • Matt Hernandez
    Austin, TX · Member since 2015 · 13 posts · 7 votes
    10y

    @Michael Le I work with JoCo Partners here in Austin, and we just closed a deal using the securities attorney mentioned above, and with someone who does exactly what you're asking about.  If you want to message me, I can put you in contact with her, and maybe she can answer some of your questions.  

    1Reply
  • Account Closed
    Investor · Pasadena, CA · Member since 2016 · 18 posts · 19 votes
    10y

    I have expat friends that work in China that need to move their salary out. The same 50k applies to them as well. They told me bitcoins is the answer. You lose a few percent in bitcoin fees, but you can essentially take out unlimited amounts of money in cryptocurrency. 

    1Reply
  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    10y

    Lots of familiar names in this thread!  Roland Wiederaenders is my partner and I referred him to Juan at Joco above.  Small world.  

    @Carlos Flores has some great advice above.  Long time no chat Carlos. 

    We offer software to maintain compliance for the standard money concerns listed above.  AML, OFAC, Patriot Act, KYC, etc. all become a greater concern when accepting money from sources that you don't know well.  This is a common issue in the crowdfunding industry and I would suggest you open escrow with a broker-dealer that can handle foreign money like this.  Make sure your offering complies with Regulation S too.

    I'll ask Roland to create an account and send this thread to him to see if he wishes to respond.  

    1Reply
  • Thomas RutkowskiPro Member
    Financial Advisor · Boynton Beach, FL · Member since 2015 · 833 posts · 798 votes
    10y
    Originally posted by @Shawn Tang:

    Money laundering won't work in life insurance and have to report to authority. Any agent knows that.

    This isn't money laundering. Money laundering assumes that the source of funds is from criminal activities. 

    Lots of foreign nationals - from many different countries - use high cash value life insurance policies to store their wealth in stronger currencies. There are many reasons for this: punitive taxes, inflation, political changes, corruption, exchange rates, lawsuits/predators, etc.

    An offshore carrier with a policy denominated in US dollars would likely be a great vehicle for financing US investment... if you could get a loan in the US that is secured by an assignment of collateral against a cash value policy held offshore. The money would never truly enter the US economy.

    2Reply
  • Roland Wiederaenders
    Investor · Austin, TX · Member since 2016 · 12 posts · 10 votes
    10y

    Thanks to Joel, Matt, and Bryan for the mentions.

    The exemption we would rely on for the offer, sale, and issue of securities to foreign nationals is Regulation S under the Securities Act of 1933. If your selling efforts are directed solely outside the United States, you are subject to the rules of the securities regulators in the jurisdiction where the investors reside (i.e., China), but a US issuer can sell securities to a foreign national investor under Regulation S almost easier than under Regulation D (i.e., Rule 506). There is no requirement under Regulation S, for example, that the foreign investors be accredited. (Note, however, that if you have a group of foreign investors investing together in the United States through a single business entity (formed in the US, for instance, a Texas LLC), and that entity in turn invests in private securities, if the entity is saying it is accredited because all of its investors are accredited (Rule 501(a)(8)), its foreign investors will have to be accredited for those purposes -- that is a Regulation D rule and not Regulation S, however.) There are some specific provisions that you need to include in your subscription agreement or company agreement, the most noteworthy of which is that the foreign investor has to agree not to enter into any shorting transactions with respect to the private securities they are purchasing (how they could do that, I'm not sure, but it is a technical requirement of Reg S). I'm not sure about the laws of China, but as mentioned above, they have limitations on the amount you can take out of the country. The same level of disclosure in the Regulation S offering is required, of course, since you are still bound by the anti-fraud rules. The rule here is you are bound to disclose all material facts related to the investment, and not fail to disclose any fact where the failure is material. This is the case because the foreign investor still could sue you in a United States court for securities fraud.

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  • Michael Le
    OP
    Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
    10y

    Thank you, @Roland Wiederaenders. Are you saying that we'd have to put in disclosures in our agreement relating to the China anti-fraud laws regarding the monetary limits on the cash outflows?

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  • Roland Wiederaenders
    Investor · Austin, TX · Member since 2016 · 12 posts · 10 votes
    10y

    @Michael Le, if you are concerned about issues with Chinese securities regulators, then yes.  That would be the Chinese equivalent of the SEC saying that you violated laws of China in connection with your sale of private securities in a US company to Chinese residents. I can only help you comply with US federal and (US) state securities laws. But, I would say that unless you knowingly included false information about China law that was a material inducement to an investor to invest and the investor sustained losses because of your statement, I think that it would be unlikely for a US court to enforce a Chinese anti-fraud law.  Unless there were something like that, I have to limit my representation to US law, so if you were fined by the Chinese SEC for failing to file some pre-sale notice, for example, the advice I provide you wouldn't extend to compliance with Chinese securities laws.  I may be able to find someone, and considering the massive influx of Chinese investment dollars, this is probably something that would be a good idea for me to learn about professionally. 

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  • Michael Le
    OP
    Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
    10y

    Thanks again, @Roland Wiederaenders. I would love to hear what you find out from that research. As of right now, it might be best to just take a don't ask don't tell stance in regards to their funds. As long as I don't try to provide them with ways to get around their laws (bitcoins, insurance, etc) then it seems like making sure I just follow US securities law should be sufficient.

    1Reply
  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    9y

    @Roland Wiederaenders

    Canisius is meeting with some Chinese money experts next week.  Maybe you can tag along for the meeting to try to help out Michael.  @Canisius Rozario....tagging you here for visibility.  

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  • Roland Wiederaenders
    Investor · Austin, TX · Member since 2016 · 12 posts · 10 votes
    9y

    What arose from my conversations with him really is identifying that the biggest challenge is making sure that the money legally may be wired to the United States.  There are prohibited investor lists that you would need to check, but beyond that, the securities laws compliance issues are relatively straight-forward.

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