My question is about capital raising and working under a Broker/dealer to sell securities in the syndication space.
First quick background. My pool of investors is 1500 physicians from across the US. I have hired coaches, consultants, SEC attorneys, real estate focused CPA’s to keep us on track. We have formed partnerships with solid operators and have some established deal flow coming in, but have yet to enter our first deal.
Website for reference: digcapital.com
I understand that the industry standard is the Co-GP route. I would like to make sure I am 100% following the law and I see my primary value as bringing capital to syndication deals
Does it make more sense for me to attach DIG Capital to a broker/dealer and get licensed through FINRA? Per my attorney with this route I can legally be compensated for “raising capital” provided all the regulations are followed.
Has anyone here gone this route and found success?
Please reach out to me if anyone has experience and advice!
Broker-dealers are allowed to charge "transaction-based income." So if you get the Series 7 and are supervised by a BD you could place capital for a commission effective immediately. This is probably the safest route to what you're hoping to do.
If you can take income in some other fashion given how your affairs are organized there is a whole host of other ways to get paid for the value you're offering. You could fall in to the Series 65 regime as a RIA, co-GP as a deal sponsor and provide other deal activities other than raising capital, or form things up in other ways. A lot depends on what you're actually doing. If you're solely raising capital for a fee you really fit most squarely in the B/D category.
Note that the securities laws have also recently evolved to make "finders" a lot more legitimate. If you're finding investors and are getting paid for the introduction and not to sell the security you'll need to play the role of matchmaker and let the sponsor sell using the issuer exemption. This may or may not work for what you're doing. Just make sure both sides of the deal and your attorney are all clear about the role you're playing and what you can and cannot do without the proper licensure.
Thanks @Bryan Hancock for your reply.
My original plan was to organize the physician group and simply come in as a Co-GP and actually perform outside duties for compliance reasons (as well as personal interest).
Then it occurred to me that in the future when we have potentially dozens of deals this may get complicated and time consuming. It also may make it difficult to scale if our investor group grows substantially.
This is part of the attractiveness of simply playing the role of capital raiser and investor relations person for our physician group and going the route of broker/dealer. I guess the trade off is “fitting in the box” and strictly following all the regulations.
If anyone has any contacts in these roles I would very much appreciate a referral. Thank you!
I am sitting for the Series 65 right now and opened a new company with my securities attorney for some of the reasons you're citing. Note that you don't have to be just one box-checker either. You can do deals as a principal even if you use the B/D or RIA regime. What really matters for the B/D regime is you're taking "transaction-based income," which means that you're taking a commission for marketing and selling securities.
You also need to consider whether you'll be selling investors straight in to the cap table of the issuer or, instead, if you're intending to serve as an intermediary and use something like a SPE to take their money in and invest on behalf of the entity as one item on the issuer's cap table. There are, of course, plusses and minuses with either approach. For larger deals having a single source of funding is often desirable and it would serve to allow you to negotiate a better deal on behalf of the investors with better control provisions in the OA.
It's hard to do many things well so focusing your effort on capital raising is probably a smart idea. For larger and more complicated deals I hire fee developers to do a lot of the work they're good at and focus my time and attention on raising and organizing capital, which I think is the highest and best use of most syndicator's time if they're organized properly and have a track record. Everything else can be hired out save a few key things that should be assigned partner-level value in deal flow from how I view the world.
If you need someone to sponsor your license please reach out. We're happy to see if we can help and how our firm that I am starting can be of service. We have the DNA of sponsors and real estate operators and have started this firm mainly to deal with some of the compliance issues you're dealing with. My partner is a securities attorney and can keep you compliant without needing to rely on anecdotal information from message boards; albeit very well-meaning advice.
The regulatory compliance is hefty. Be ready for SEC inspections and audits for each and every trade you broker. The mindset that "regulations are bad" so prevalent with REI will fail you completely. Take it as "cost of doing business" and you might survive. Short cuts = double-plus-ungood.
The brokerage house has to be FINRA licensed, then each broker-dealer has to be licensed.
Forgive me Jerel. I am a little confused by your post. Are you saying the broker dealer route is actually a riskier venture?
Outside of being an issuer (finding your own deals, managing them to disposition) which enables you a lot of exemptions from being licensed, the only two options left are starting your own Fund (Special Purpose Vehicle - SPV) or getting licensed and having your company affiliate with a licensed broker dealer. I have experienced all of these options.
If you are going to solely focus on a capital raising business, then I believe the broker dealer route allows you the most flexibility and aligns best with your investors. Your investors simply would be getting the same deal as the operator is showing. The issuer can pay the BD directly. The biggest con, you can only educate and market deals with operators that have been vetted and pre-approved to be on the BD platform. So if you go this route, you want to make sure the BD has a lot of quality deal flow in niches you have interest.
The downfalls w/SPVs are simply, you cannot receive compensation from the issuer for raising capital. You will have cost to launch your fund (legal, admin backoffice), you have to run or hire a backoffice for directly managing your investor base and all costs / fees must be between you and your investors. You, ultimately are adding cost to your investors on deals they could go direct to the operator and get better returns. So, the issuer wins, you can't collect anything in compensation from the issuer for bringing them your investors / capital. You probably need a min of $3M raise to make a SPV viable. The biggest pro is you have the most flexibility to do any deal you like.
@Tom Dittrich - not really. Just pointing out some aspects that might not be apparent. Most new brokerages are "trained up" in other firms and know to expect the regulatory compliance. They eat fiduciary duty for breakfast and their bm's are all about disclosures (to clean up a phrase).
People coming from an REI background are mentally very far away from that.
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