Structure for Raising Capital without Broker-Dealer

17 Replies

(Yes, I understand comments provided are simply educational, I will consult with an attorney before moving forward. Thanks in advance for your input!) 

Over the years, I have 1) invested heavily in education (underwriting, financing, market analysis, asset management, identifying macro/micro trends per market, etc), and 2) developed strong relationships with a network of accredited investors who are interested in diversifying and jumping into the multifamily space. The next phase of my maturation cycle is gaining "on the job experience" in the form of GP participation before attempting to take down a deal by myself. Full transparency, I have not passively invested in multifamily syndications and no experience as a GP. I am clear on our markets of interests, returns we would like to see and our risk appetite.  

However, I believe partnering with other syndicators (i.e., proven syndicators w/ track record) raise money for their deals is the next best move. However, I want to ensure I'm properly structuring deals, receiving legal and fair compensation. 

I understand there are multiple ways to legally raise money for others without tip-toeing the broker-dealer line: 

1) Consultant Fee. Become a consultant of the issuer where compensation is not tied to the amount raised.

2) Finder's Fee. Without solicitation introduce passive investors to the group (flat fee). 

3) Class B. Of class B (management) share, a percentage is given to the "capital raise" LLC. (I've seen a lot of groups choose this structure)

4) Become a part of the issuer (GP-side)

I do not want to give other syndicators access to my investor database, so Number 3 seems like the best move. I understand my role should include more than raising the initial equity investment and continue throughout the holding period and disposition.

Here are my questions:

  • Is Number 3 (from above) a good idea to create anonymity for investors?
  • How is the acquisition fee distributed if no compensation should be tied to the amount raised?
  • Could my LLC provide bring additional credibility (i.e., loan requirements) which directly affects the amount of capital received from the bank?

Thank you in advance for thoughtful insight, pearls of wisdom and/or tips. Excuse me for any ignorant questions/assumptions, feel free to direct down the correct path to further my research.

    @Larry Caper

    I recommend becoming a part of a GP group. If you can raise capital that will easily help you find a group that may lack that specialty but you should also have another function.

    If you are part of the GP you will get a portion of the acquisition fee. 

    Being a consultant or flat fee referrer is good if you have the "rolodex" but then it's limited and like having fixed income. I would rather be part of the GP.

    Broker-Dealers don't touch deals as small as the ones done by most real estate investors at this level. They prefer NYSE, NASDAQ and OTC for their placements. 

    I would strongly recommend to join several syndications as an LP for your next step. 

    This will help you to understand deal structures from the LP perspective and will give you some credibility if you raise money for others.

    Also, be prepared to "eat your own dog food" - invest your money in the same deal you're raising money for. This adds to your credibility too.

    @Larry Caper if your goal is to do your own deals and you do not want to expose your investors to other operators then you need to create a fund of funds. That way you can legally negotiate all kinds of fee structures with other operators.

    Second option would be to just go ahead and do your own deal. You can partner with an operator or hire a mentor to help you.

    Either way sounds like you have a good problem as most people struggle with raising capital so your already ahead of the game.

    @Larry Caper - sounds like you've built an incredible education foundation. well done!

    Here is another thread on the topic of multifamily and syndication coaching programs from just a week ago or so. Here's a comment I left on that thread, that speaks to a strategy I found incredibly effective, from when I first got started:

    "I'll share my personal experience on this topic. When I was getting started, I used both strategies in combination:

    • Strategy #1: Invest as an LP in an experienced operator's multifamily syndication
    • Strategy #2: Partner with mentors/coaches. I used multiple coaching programs and still subscribe to a couple actively, on-going."

    I found this approach to be highly effective. Even though you aren't looking for a mentor program, i'll still recommend that you consider it."

    Agree with @Nick B. 's comment, above 

    @Larry Caper

    Is there a reason you're opposed to getting a broker-dealer license?

    I mean if you get it, it will allow you to retain your investors.

    As an alternative, you can take the route others suggested:

    1) Fund  of funds

    2) Partner with others on GP side in an investors' management role

    Keep in mind, that both options would require you to have a full understanding of the role and the regulations involved. 

    @Larry Caper great job by taking the necessary time to build a foundation before raising capital.

    1) Consultant Fee. Become a consultant of the issuer where compensation is not tied to the amount raised. (This is against SEC rules. You can become apart of the GP role, but you MUST also have an active role in the deal. According to the SEC you simply can't be compensated for bringing capital to the table. Although many syndicators tend to hide this is some shape form or fashion. You can't be compensated for being a capital raiser. You need a securities license to sell securities. That is essentially what you're doing. Are there any other skill sets that you can add to that group, besides just bringing capital to the table? You can still do it, just have to be smart. Consult with @Mauricio Rauld one of the best SEC attorneys in the business)

    2) Finder's Fee. Without solicitation introduce passive investors to the group (flat fee). (See #1)

    3) Class B. Of class B (management) share, a percentage is given to the "capital raise" LLC. (I've seen a lot of groups choose this structure) (See #1)

    4) Become a part of the issuer (GP-side) (Yes, this means you would take more an active role in the deal)

    Yes @Tj Hines I'm extremely clear on the need to have an additional role which is why I included "I understand my role should include more than raising the initial equity investment and continue throughout the holding period and disposition" before asking my questions. I just need more clarity on the best structure or "next best move". 

    Thank you for mentioning one of the best SEC attorneys in the biz! I've listened to him speak more than a few times, he's very thorough. 

    Thank you @Alina Trigub for your insight. To be frank, if an individual does not understand their role, they are most likely going to squander the opportunity. 

    As it relates to getting a broker-dealer license, I briefly thought about it during my research on the topic. However, I do not think it is necessary to receive in order to be successful in the CRE game. There are enough guys/gals from all walks of life successful in this space without licenses, certs and the like. They have simply put in the work for yours (some decades).

    Even though the GP-role is what I'm leaning towards, the Fund of Funds is interesting - I will definitely look into.

    The legend @Greg Dickerson ! I've listened to many of your podcasts and interviews. I enjoy your perspective and purpose-driven attitude, there is no substitute for hard work over an extended period of time.

    As relates to this topic, protecting my guys (many of them pro athletes) is important to me. The Fund of Funds is a concept I want to dig into. However, with that said, I do not want to unnecessarily overcomplicate things. If I can find a great coach/mentor, someone whose values align well with the group, I have no problem doing business. To protect my reputation in the biz and the capital of my investors, having a coach on board is a MUST. 

    Thank you for your wisdom!

    @Larry Caper

    If you were to setup your own fund of funds, you’d be GP in it as well.

    As a side note, having access to funds is great. It will work best when combined with the right approach and knowledge about how the process works.

    Hiring a coach or a mentor will expedite the process.

    Best!

    Originally posted by @Larry Caper :

    The legend @Greg Dickerson! I've listened to many of your podcasts and interviews. I enjoy your perspective and purpose-driven attitude, there is no substitute for hard work over an extended period of time.

    As relates to this topic, protecting my guys (many of them pro athletes) is important to me. The Fund of Funds is a concept I want to dig into. However, with that said, I do not want to unnecessarily overcomplicate things. If I can find a great coach/mentor, someone whose values align well with the group, I have no problem doing business. To protect my reputation in the biz and the capital of my investors, having a coach on board is a MUST. 

    Thank you for your wisdom!

    Thank you for the kind words. Feel free to reach out if I can help out at all. I work with some pro athletes as well NFL and MLB so I definitely understand where you are coming from. 

    Originally posted by @Tj Hines :

    @Larry Caper great job by taking the necessary time to build a foundation before raising capital.

    1) Consultant Fee. Become a consultant of the issuer where compensation is not tied to the amount raised. (This is against SEC rules. You can become apart of the GP role, but you MUST also have an active role in the deal. According to the SEC you simply can't be compensated for bringing capital to the table. Although many syndicators tend to hide this is some shape form or fashion. You can't be compensated for being a capital raiser. You need a securities license to sell securities. That is essentially what you're doing. Are there any other skill sets that you can add to that group, besides just bringing capital to the table? You can still do it, just have to be smart. Consult with @Mauricio Rauld one of the best SEC attorneys in the business)

    2) Finder's Fee. Without solicitation introduce passive investors to the group (flat fee). (See #1)

    3) Class B. Of class B (management) share, a percentage is given to the "capital raise" LLC. (I've seen a lot of groups choose this structure) (See #1)

    4) Become a part of the issuer (GP-side) (Yes, this means you would take more an active role in the deal)

    TJ I agree with your number 1 I don't know any syndicators that will pay referral fee's as out lined by the OP.. he needs to be part of the management team is my thinking .. or the fund of funds idea.. that works.

    Hey @Larry Caper , you've clearly done an incredible job on building really strong fundamentals in the MF space, so I can see you have the fortitude needed to succeed in REI.

    Now, I've spoken to a few people who have this same issue when raising funds for our deals. 

    @Greg Dickerson hit the nail on the head with respect to the fund of funds.

    To add to this, what I suggest is that you approach this issue from the soft side, which means building and maintaining strong relationships with your investors because, at the end of the day, they are your investors. Doing it this way can help mitigate the risks of investor loss to the syndicators you raise money for. 

    To conclude, I am going to go unconventional here and encourage you to go all-in while keeping a mentor very close to hold your on a small-ish deal, at least, this way you don't have to worry about investor poaching 🤗

    I would definitely NOT do number 3. That raises a ton of red flags to me. The general rule of thumb is that you cannot pay (or accept) transaction-based compensation. Most people are doing it incorrectly, so do your own independent research and don't follow the crowd, because right now--as least with respect to this particular topic--the blind are leading the blind.

    I just wrote a client advisory on this subject yesterday but can't post here. You can PM me if you want it.

    @Ola Dantis Thank you for the words! When listening/reading in between the lines, many of the successful operators simply took action and partnered with a trusted coach (mentor) to look over their shoulder. Shortly after they were off to the races (the power of the first deal). The goal is to K.I.S.S. along the way. 

    Thank you!