All Forum Posts by: G. Brian Davis

Why is my syndication asking for capital calls?  Are any of you experiencing this?

 Brian, This is a discussion forum. If you're going to use it to generate leads for your "investing club" I'm going to put the dangers and risks close by so at least the small investor you're pursuing for these ventures knows there is more here than meets the eye. 

I agree with you there is no loophole. You seem to believe that using the words "investing club" makes what you're doing legitimate. It does not. These are not four friends investing together. You market the service across the Internet; nearly every time you post there's a reference to try to generate interest. You select every investment Spark creates. Your partner forms and controls the investor-LLC. You charge fees for these services. The investors in the LLC expect to earn a return from the efforts of you and the syndicator. You are acting as an Investment Advisor. The shares of the LLC you sell at your monthly meeting are unregistered securities. It's widespread practice in the Real Estate Syndications industry to compensate bundlers by selling them their shares at a discount to par. If you're not participating, as you say, OK, but I will keep looking into it until I'm satisfied that is not taking place. This happens every day, there's lots of marketing activity to say no to revenue, and oddly prior to anyone bringing it up you're screaming from the hilltops that Spark doesn't accept this money - well time will tell. If you are, together with the fact that you execute trades and maintain accounts for your customers you're a broker.

You market to the least sophisticated, smallest investors out there. If your investors had $50k to invest and were accredited, why would they need you? Small dollar, unaccredited investors with little real estate experience are wholly unsuitable for the investments you are selling. My math is correct. You are not licensed, at least in part, because the activity you're engaged in would be prohibited of any licensee.  Investors must remain in the club, paying dues for the life of their investment. You even have contractual language that allows you to withhold these fees from any remittances due the investor.

Not a single false word has been written about Spark. We do have a legitimate difference of opinion on the rules and regulations that govern Spark's activities. I will request the SEC give us their opinion and that should settle the matter. I recall you like chocolate.

Quote from @Simone Montague-Jackson:

Hey everyone, 

I'm interested in RE syndications, but I'm quite cautious because I don't want to incur any scams. And I don't know how to start any on my own at the moment. However, I attended an RE meetup and learned about this company called Spark Rental (https://sparkrental.com/coinvesting/?utm_source=SparkRental+...). If anyone is currently investing with this company or know more about it, please comment below or PM me because I don't want to jump into anything that would cause me to lose money. 

Thanx in advance :) 

Every investor comes from a different risk tolerance, financial situation and has different financial goals. So what looks great to one investor will look terrible to another vice versa.

I'm a conservative investor and for me this sponsor is an easy "no":

1) I generally want to see at least one full real estate cycle experience in the exact strategy (and with little to no money lost).  This sponsor appears to be way too green for me. Other things that are red flags for me: Their bios don't even mention how long they've been managing other people's money.  I want to see their experience managing other people's money (and which is much harder than just buying properties for personal investing purposes).

2) No details on key things that indicate risk like co-investment, structure of debt etc. Often the lack of these things are associated with sponsors and deals that target unsophisticated investors. If that happens to be the case here then these types of sponsors and deals usually have multiple things that I can't stomach.

3) I'm not a fan of the gimmick of charging investors a recurring fee just for the potential chance to get access to an investment. There are many other ways to get access that don't do this.

@Simone Montague-Jackson Spark's main claim to fame is that they have created what they believe is a loophole to allow non-accredited investors to invest in Reg. D offerings together as an "investing club LLC." There are additional fees incurred investing this way: membership fees, fees to maintain the entity that carries every deal you get involved with and possibly other non-disclosed fees.

Syndications are EXTREMELY risky investments suitable only for highly-experienced accredited investors who can appreciate the risk both to their principal in the case of bad planning or a scam AND to having their capital locked up for 5 years+. If everything goes according to plan you might make some dollars along the way and a payout when the asset sells. All deals have their own unique structure and you should understand the advantage and disadvantage to taking distributions along the way vs. a higher payout of profits at the end. And you must not forget that WHEN (not if) there are bumps in the road the monthly distributions will be put on hold, you may be told to have to invest more (a "capital call"), or you may lose some or all of the principal originally invested.

Spark's self-reported record is "two dozen or so" investments, 2 of those have had their distributions paused and one of the two had a capital call. The record is not terrible, but I'm not a fan of their model because it targets investors for whom these are wholly inappropriate investments. Here's why: Let's say you put $5,000 into one of their deals and everything goes well. This means sometime five years from now you'll pull out $10,000. Some of that $5,000 profit you may get along the way in distributions. You'll also pay Spark's $59 membership fee 60 times, the LLC maintenance fee 5 times - $3.915 in expenses to use Spark as your "platform. " Net $1,085. The same $5,000 put in TBills and rolled over would net you $1,622.36 with zero risk, liquidity should you need it and no state income tax.

Furthermore, I find Spark's claims dubious at best. Only the person running the club chooses potential investments. In my opinion this characteristic results in Spark not meeting the definition of an investment club under SEC rules. If this ever becomes an issue while you're in a deal everyone invested will have to pay out a share of the compliance costs to get their investment entity legal with the SEC. I also believe, but cannot yet prove that Spark has earned remuneration for putting together the group of investors in that if they are buying a $50,000 share from a promoter they remit some amount less than that and receive the full share giving them a "share" of the LLC they created to hold everyone's funds. This is my opinion only and Spark denies it but the details will come out eventually. A savvy investor will impute a negative inference to the fact that Spark is unlicensed, cannot legally make investment recommendations and owe you no sort of duty (fiduciary or otherwise) to put your financial interest ahead of their own.

Proceed with extreme caution. Or just buy a TBill on Treasury Direct and call it a day. 

Thanx for responding, and I'm glad you're in the group to answer my questions. Also, with the investment, is there a monthly ROI or is the money simply held in the syndication?

@Simone Montague-Jackson Montague-Jackson

Brian Davis is on BP (not letting me tag him) as he runs the group.

In the past I have heard they have done a good job underwriting deals they invest in.

@G. Brian Davis Thank you for your forthright reply. Your now-removed post praising syndicattitions as an answer to maintaining privacy in direct real estate transactions is what inspired my comments.

While I'm sure your investors were disappointed with the deals that are on hold your record is better and more extensive than i thought it would be. I did not expect you to answer. Most people in  that space who market here cannot answer my questions. 

Can any syndicator present at your club's meetings? Any fees for that? Do you ever pitch any syndications yourself when nobody from the syndicator is available to attend the club meeting?

In my lay opinion the LLCs you create to bundle your investor funds are investment contracts subject to registration. Generally, a membership interest is an investment contract if members invest and expect to make a profit from the efforts of others. If every member in an investment club actively helps decide what investments to make, the membership interests in the club would probably not be considered securities. If the club has even one passive member, it may be issuing securities.

@G. Brian Davis How many of the syndications that were part of your "club" have paused distributions or had a capital call?

Syndications are extremely risky investments where one has no control over their investment, no ability to liquidate their investment, no control, no title, and no way of verifying the investment promoter's claims. 

Your operation, which earns commissions from marketing and recommending investments, is not a club. You're a broker. Non syndicated investments have specific caps one must observe. Your failure to mention these caps leads me to believe you either don't observe them or don't know what you're doing. Neither is a good sign for anyone considering this line of "investing."