Welcome to part two of this video series going through how
to stay in compliance with the SEC and state regulators. When
you're doing a securities offering under Regulation D,
this is an exciting video because this one is going to be
a problem that I see coming up time and time again, though it's
happening more and more. So let's go through exactly what
I'm talking about. It's time I call this section, improper
structures. What exactly does that mean? Does the structure of
my regulation security have to do with it? My name is Tilden
Moschetti. I am a securities attorney with the Moschetti
Syndication luck.
All right, we're going to talk right now about three different
structures that I call improper structures. They're structures
that, in my opinion, as a securities attorney, as somebody
who specializes in syndication law, these are big, big
problems, I think the SEC is going to be looking extremely
close at what that these two kind of three setups, these
kinds of three structures. And if they found wind of what was
going on, there is going to be an issue. Now, let's talk real
briefly about how the SEC normally gets notified about
things. So most of the time, 99% of the time, the SEC gets wind
of things when there is a lawsuit filed. So when there's a
lawsuit filed the plaintiff's attorney most of the time will
file a complaint also, with the SEC, saying that the Regulation
D is not set up properly, or it's not compliant, and
therefore, it's not under what we call the safe harbor of the
of Regulation D. If it's not under the Safe Harbor of
Regulation D or any of the other exemptions, then it
automatically is a public security. And if it's a public
security, and there is a violation, then the investor
themselves has a right of rescission. That's what that
means is the investor has the right to say, hey, there was no
contract whatsoever, give me all my money back, give me the money
that I lost as opportunity cost. And SEC states go get them. Just
go get them, grab them, drag them to the ground. And they
will. So let's go through what these three structures look like
and why exactly I think they are a big problem. And what I think
the SEC is going to be doing about them and looking very,
very closely at. So again, I am an attorney. And I'm not saying
that they will look closely at these things. This isn't legal
advice for you. Right. So this is the kind of normal caveat, I
don't normally put this out there except in the show notes.
But this isn't legal advice for you. If you're watching this
video, and you are part of an investment that gets set up for
this, that may or may not be something that is relevant to
you. So do not call my office. If you are an investor in this
is something that happened to you. We just don't have that
kind of case. I want you to get help, you should find a
securities attorney who does litigation and discuss it with
them. But that's just not us. We help syndicators and fund
managers put these together in compliance. So if that is you,
you never got you're never calling on these people because
they're in compliance, they're doing a great job. So, again, if
this is you, it's not us that you want to talk to so let's go
through what these structures are. And they're similar. So
number one is what I call the fake. J V. I've done another
video on this. It's a phony system. Let's talk about what a
fake JV is. So JV stands for joint venture. The idea goes
something like this. We've got a syndicator here, right? And he's
got this wonderful investment that he is syndicating out. He's
got a number of investors actually let's drive over here.
He has some investors over here
who all want to be a part of it. But this guy has a problem. He
needs more money. Right? So he's trying to put this great deal
together. But he hasn't raised all this enough money. Let's say
where I see this happening a lot is under Rule 506b also. So this
is a 506b offer. So 506b offer, say that also lists that there
can be no general solicitation, he cannot put advertisements out
there. He these people here are just friends and family really
wants to do this deal. Everybody's going to make a lot
of money in this deal goes forward, this guy knows it. But
he's doing a 506b, and he's hasn't come up short. He's come
up short. He's got half of the money that he needs. So what
does he do? He calls his friend
over here
he calls a friend and says, Hey, I've got I've got this problem,
I need to raise another $2 million to make this project, go
for it. Forget about the dollar. It's just we need some sort of
dollar. So I need 2 million more dollars. In order to do this, do
you want to invest? And he says I $2 million, I don't have $2
million, you know that? You know, I've got a lot of friends
who would invest. And so this guy has a great idea. But he
thinks it's a great idea. This is supposed to be a lightbulb.
He says okay, why don't you go and tell your three buddies that
they can invest in this in this property? Well, this guy has
heard of securities rules, right? So he knows kind of what
he's doing. And he says, Well, I can't you don't have a personal
relationship with them. And he says, oh, yeah, I don't this
guy's I don't have a personal relationship with them. What can
I do? What if you either put together your own syndication
here. Or sometimes they say, What if you put together an LLC
and bring them in that way, they can either come in on that 506b
that you're putting in or they can come in through this LLC and
then invest up here. And if you do that, I'm gonna give you 10%
of the equity that you raise, because I'm desperate. And this
money this is going to make a big this is gonna make us so
much money we can afford I can afford to pay a 10% Okay, so so
this is the joint V JV problem. This guy says, well, we can't do
this. We we know we can't do this. That's that's not we can't
join like that. And so this guy being clever, being clever gets
us in trouble here. being clever says, oh, yeah, we can because
what we're gonna do is on our paperwork here, on our ppm,
we're gonna say that we're doing a joint venture. And that's how
you come in, you're coming in as a joint venture out, which is in
itself investing into this thing. This is the fake JV JV
problem, because, well, it seems like this should work. It
doesn't. So he is not this is not a joint venture at all
right? This guy is acting as a finder being paid a commission
in order to bring people to the investment. It's a clear cut
case of what is actually going on here. The SEC would not like
this, this does not comply with the rules, and it would
immediately get kicked out. Now there's actually another kind of
JV fake JV and I've made a video about this guy as well. So so
we'll let's call this Let's race here. So we've got fake JV A,
which is finders and then there's fate jVb. Now we've got
this guy here. He's going to be unhappy. But right now we're
going to put him not unhappy. So what his idea is, is, he knows
that he doesn't want to pay a great syndication attorney, any
money. He doesn't want to pay the guy, you know, he just wants
to be able to syndicate this. I mean, after all, all these
people here, who are very excited about his investment are
gonna come in. That's supposed to be a certificate are going to
come in, right? After all, they're all friends and family.
And this isn't for that much money. It's only for $2 million,
and 4 million, like the last example. So it's only $4
million. And the they I know them all really well is what
this guy's thinking. Right? He's thinking that they that they're
all friends. And I don't want to pay some amount, you know, I
don't want to pay something to the to the syndication attorney
to set it up and go comply. I also don't want to file a Form
D, that sounds really hard. I don't want to put together a
private placement memorandum that sounds really hard. So what
I'm going to do is I'm going to put together this LLC. And I'm
gonna go to all my friends here. And I'm going to tell them,
Okay, we're all coming into this LLC together, and we're gonna
invest in this real oops, you can't see that we're gonna
invest in this really great property, for example. It's
really great, we're gonna buy it, we're gonna make lots of
money. And investors listen up. I know, you want to be passive.
I know, you don't want to be actively working on this thing
and banging on toilets for this multifamily building, right? So
you don't have to worry, I am going to be the manager of this.
And I'm going to take care of everything. I'm going to do
everything for you. But if you read the paperwork, if you read
the paperwork, what I'm actually what we're actually saying is
that you're going to be an active decision maker, but
you're not okay. You don't need to be an active decision maker.
You don't need to come to meetings or do anything, I'm
going to do all the work, I'm going to get a small management
fee. But just if anyone asks, tell them that I'm that you're
active, okay. Yeah, well, you can tell already, because the
guy would say that this can't be good. This can't be something
that's actually legit. And it's not legit at all. It's awful.
But there's still some people out there in the world,
including here on YouTube, where you can find their videos, who
think this is a compliant solution, it's not that guy is
going to get have that right of rescission problem. One of those
investors is gonna get mad and he's gonna get compensated for
it. So bad, bad, bad. The, we're gonna call this the SED type of
thing I manage is what we're going to call it. And they are
we're calling it still under the umbrella of g v, because it's a
joint venture under that LLC. With those other people,
everybody is all together doing a joint venture together. Except
it's not that is a fake JV. This is a real problem. This is
something that is absolutely going to bite people in the
butt. And there are going to be people losing money left and
right. When is it going to start happening? You know, we've got
bank rates really high right now and properties are starting to,
you know, need to get reified. And now the actual amount of
money that's coming in is tanking. Look at my, the stuff
that I've published about apples way. Apples way, look it up.
Google it. They lost $240 million of investor money. Do
you think they were in trouble? Yeah. Do you think they wanted
to lose it? Absolutely not. They didn't want to lose investor
money but they screwed up. They did. They weren't doing this
setup, though. Let me preface that. They're not following the
setup there. They actually set up a proper way and they're
probably not going to jail for it. They made mistakes, but not
this kind of mistake. They were inaccurate in their underwriting
and in MIS sized what the risks are. That's not illegal, they
born their investors that that could happen. They're probably
not going to be going to jail. They're probably okay. The end
of the day now, will we be able to do another deal? Again? No, I
doubt it possible, but not likely.
Because that's a pretty bad mistake losing $240 million.
Would you really invest with that guy again? Probably not.
So. But when loans are coming due, and when things are gonna
have to get renewed, this is gonna bite. This is gonna eat up
a lot of people. And when this comes out, there's gonna be
lawsuits filed. And that's how the SEC is gonna see. Wait a
minute, Howard, why are they setting up and trying to claim
that they're not under Regulation D. They're not under
Regulation D actually. Which means it's a securities
violation because this shirt is a security. So these people are
gonna get nailed. I don't know if they'll go after the gurus
who told them that this is an okay setup, because it's not, or
this is going to bite them. Because those finders, those
people are going to be desperate to get their money back. And
they're going to immediately be telling they're playing their
plaintiff's attorney. Hey, you know what? This was Joe Smith,
who brought me in, he actually didn't really have anything to
do with the deal. He just sold me the security. So We're suing
him. But you know who the real bad guy is, is the guy who put
it all together and said it was okay the guy with the lightbulb.
He's got a problem. So fake JV, these people are going down.
That's my prediction. We'll see if I'm right, I'm sure well,
legally, I know I'm right, whether or not they go down or
not. We'll see that's up to the regulators to figure out number
two we'll save the worst for last. So number two, we'll put
compensation Oh, my goodness, compensation of investors. Now
this is actually a problem that I do see from time to time
happen. It looks something like this. It's not a problem in the
structure. It's a problem of disclosure. And so inherent in
that as a problem of structure because if it was disclosed
properly, it would be properly structured. So you've got this
guy here. He put together an amazing LLC and he did
everything absolutely right or so he thought he did a great PPM
right. And you've raised money from investors now the investors
are actually all happy
all right, the investors are actually all happy they're
making money now what was this investing into? It was investing
into this company up here or a let's let's call it a project
and this project what happened the LLC just goes and invest
right? It doesn't matter if it was a development project or
some other kind of security doesn't the one I heard about
this happening on first wasn't even a wasn't real estate at
all. It was another kind of security altogether. Which guy
and will be kept private because the may be figured out double
who that was that we're talking about. So it is a it was a
project to make money. It was completely sound business idea,
and it made total sense. Now that project was run by these
guys. And these guys were super smart. Oops
okay, it was run by this guy, let's say and he's super smart.
Right? He's he's doing everything right. Everything was
totally legit paper looks good. So the compensation problem is
this. He this guy. Now he's that comes up with a brilliant idea.
His brilliant idea is I'm gonna make it so here. There's no fees
Right, there's no management fees, and incredible splits.
Were like 98% to the investor. Wow, that sounds pretty good. So
98% to the investor. And then we've got, we've got all these
people investing here. So that's, that sounds pretty
amazing. I want to go in on that deal. But how is this guy
getting paid? Well, this guy is getting paid by that guy,
because he wants to get this project done. Right. And it
looks legit, it's set up in a way that is not a it's not a
fake JV. It's not anything like that. It looks compliant. And
probably would be, except for one problem. This guy here is
the problem. Actually, this guy's the I actually, this guy's
well, actually everybody on this site is the problem, because
they have no idea that this is going on, they have no idea that
you can see, they have no idea that that this guy is being
compensated by this guy. And that's a problem. And so what
happened in the instances that I know about is the regulator's
said, Ah, so here's the, the regulator.
Aha, I know how we can protect our my investors, I know how I
can protect this guy, this guy, this guy, I know how I can
protect people from this state, because they never had the
opportunity to look at this compensation, this compensation
was being made, it's quite possible that if he knew about
it, he wouldn't have been an investor at all. And this guy,
if he knew about it, he wouldn't be an investor at all. And if he
knew about it, he wouldn't be an investor at all, because you've
got this conflict of interest here. And you know what? He's
right. It's right, it is a conflict of interest. And the
problem with conflicts of interest are, they can exist,
but they've got to be disclosed in your PPM everywhere, make it
super clear, so that everybody knows that it actually exists.
So that is the compensation problem. That happens, why is it
an inverted structure because it was structured everything,
right? Except the disclosure wasn't structured at all. So you
can take that money, but you got to tell them that, uh, you got
that you're gonna take that money and make it super clear,
and give a basis for allowing you to, if it's part of some
sort of thing that requires a licensee gotta disclose whatever
it is, it's got to be disclosed, and that the mechanism for
getting that paid should be disclosed as well. Otherwise, it
is a failure to disclose, which is punishable by right of
rescission, which comes with lost opportunity costs, and
possible criminal penalties for fraud. So bad, bad, bad. That is
the compensation problem. The third, and my new favorite way
of of trying to cheat the system is the fun fund of funds. And
want to use the most egregious form of it that I've seen
recently, and why it's bad. Now, this gets really complicated,
and I'm going to try desperately to try and simplify it. So I'm
going to focus really on what is inherently bad, most of all
the fund of funds problem, so we're going to abstract it a
little bit. So we've got this guy here. He thinks to himself.
Wow, I've got a great idea. I am going to put together this guy
actually let's talk about him first. Very smart has a master's
degree in finance. He knows a lot about securities. He knows a
lot about alternative investments. He knows a lot
about cryptocurrency, he knows everything about money, right?
He knows how the whole system works. He doesn't know about the
laws, but he knows how the money system itself works and how to
make good money. And his friends, he's got two friends.
And both of them are like, Whoa, dude, you know a lot about
making money. Can you help us and invest some of this money
for us? And the answer, he answers Well, sure, I know how
to do this. So he goes to a securities attorney and says,
Hey, can I do this? The securities attorney says, Well,
I don't know. Let's look at it. You know, that's a complicated
question. Okay. And then he asked, well, what's the fee, so
he tells him the fee, and he's like, Oh, I can, I don't need to
pay that. These are just friends, I'm just going to
invest it for, after all, I found this amazing.
website with a YouTube video that plays at the top. And it
says that I can set this up. That basically this beautiful
website, what it does is it lets this guy come in, and it lets
this guy come in, and it lets me charge fees to manage their
account. That's amazing. So I get to manage this account for
these guys. And these guys all have their own individual
accounts, they can keep making money deposits in, they can put
money in, and they just keep getting money back. This kind of
starting to sound like something, something that may be
a little familiar. Well think about what a broker dealer does?
Isn't this pretty similar to what a broker dealer or a
registered investment advisor does? And so this guy is already
thought of that. He's like, Yeah, I know, I know all about
them. But here's where it's different. Is that these assets
that I'm putting in here, they're not they're not full on
things. These are funds. This are your this is your I'm just
choosing, you know, different, different certifications out
there that I think are really good. And I'm putting them into
this hopper. And then these guys get to choose which ones of
those they like? Well, that's certainly interesting, because
now it sure sounds like this guy is putting together a fund of
funds. Wow, maybe on the surface. But to me, what, and
probably my guess, is to the SEC, and every state regulator,
who were would look at this is gonna say, No, that's a big
problem. You're not acting as a true fund of funds. You're
acting as a broker dealer. You're buying securities, on
behalf of clients, probably advising them on what exactly
they need to do and what they need to be doing. And if you're
not advising them, well, then you're certainly acting in their
stead, which is definitely a problem. Because they're not
actually if they're not actually making the problem, then it's
another problem. But if you're making a management fee after
placing them into these funds, well, you're either acting as an
unregistered broker, or you're buying them for your own
account, and then divvying things up which is basically
acting as an unregistered dealer. Either way, you're going
down. And so the SEC or the state regulator, sees what to do
and bows it up. Now, I have seen that this is heavily in
existence right now. There are this platform. These platforms
exist. They're out there. I've read the policeman memorandums
for them. I know how they work. My prediction these guys are
gonna go down by facilitating and unlawful thing there They're
going to be, they've got multiple problems. Right? These
guys are not only giving out PPMS. But they're not attorneys.
So they're going to be hit with unauthorized practice of law.
But they're also facilitating the functions of not even the
broker dealer, but the guy who holds the license under the
broker dealer. These guys have a big, big problem coming. I
predict sec and FINRA, sec, FINRA, and the states are coming
after that guy with with vengeance and look for that
fairly soon, we've got a recession coming, people are
going to start losing money. And when that happens, they are not
going to be in business too much longer, and they have a mountain
of securities problems coming. If they had, if that guy with a
brilliant idea had just called a securities attorney, we could
have set up a system for him to basically do what he's wants to
do in a manner that would be totally compliant. But he fell
into the marketing hype from another company, or from a
company that thinks it knows what it's doing is not an
attorney, and is causing massive, massive problem on its
subscribers. So those companies are out there, a big, big
problem is coming down the pipe. So hope that helps. That is the
section on improper structures, I see those three things as
major problems of structure that are going to start hitting
people or could be four. So we've got the fate jayvees,
we've got the Finder System where it's like, hey, we'll be
partners, and I'm going to and will basically just been paying
you find your fees and not going to work. We've got the fake JV
of the SED. What's all the buzz, I'll pretend that I'm not the
manager, and then but I'll really be the manager, fake JV,
going down, then we've got the issue of compensation. This is
an inherent problem that's so easy to prevent, oh my gosh,
just Tez glows and make it super apparent that it's abroad that
it exists. And then it becomes so much less of a problem. A
state regulator isn't going to be spending every nickel and
dime that he has in his budget to go after somebody who
disclosed everything about what's going on. It's just not
going to happen. Even if it's coming close to a gray line. My
guess is I have Well, Mike, it's not even a guess. The fact is
state regulators are way over work. They are doing a
monumental task against people who are committing massive
frauds, like the people running Jake fake jayvees and funds of
funds. They're working hard to prevent those. They're not going
to be spending time almost certainly going after the guy
who does compensation who didn't disclose a compensation model.
Right? Or who I'm sorry, who did disclose a compensation model.
And then we've got the issue of the funds of funds. I mean, come
on. If you want to be a broker, dealer, go be a broker dealer,
go get a securities license, hang that license under somebody
and be as broker dealer. It's a great job. It's very unpleasant.
And if you love securities, and you love financial instruments,
it's fantastic. I know broker dealers, I know. They love their
job, they totally are obsessed with it and love it. They call
them Masters of the Universe for a reason. Because they feel like
Masters of the Universe. They love it. So if you want that
world, just go do it. Right? And then you're not going to be in
trouble. Because you're going to be fine with all those
compliance rules. Absolutely. I mean, there's like so stack of
those, but be compliant. So again, I'm gonna reiterate one
thing, just because this is a video on the internet. And this
specific one is giving kind of closer to more what some people
may consider legal advice. This is not legal advice. This is
what I'm giving to you as education about what I see going
on in the securities world and urging you to not fall victim
and to be can stay compliant. Just follow the rules. You need
help with those if talked to a securities attorney who can help
you navigate it. You know, that's what we're there for.
Yes, we get paid. But isn't it much better to pay a securities
attorney than to go to jail? I think so. And isn't it much
better to pay a securities attorney than to lose all your
investors money? Absolutely. That's even worse than jail in
some way. So, and if you are somebody who fell victim to one
of these types of problems, what are these inherent structural
problems? Look, I'm not saying you don't have a real issue
here. But I'm just not the attorney for you. I work with
the guys setting these things up, the ones who do it in
compliance and doing it right. That's the people I help. So if
you need it, you definitely need help. If you have questions, it
definitely should get the answers. Talk to your state
regulators. If you if that's helpful. Talk to the SEC, if
that's helpful, they're very, they're actually very good at
helping people. Right, they're actually very good and very
approachable and will help with what your issue is. And if
you've got a legitimate litigation type issue, or you've
got something that happened that went wrong, then talk to an
attorney who can help you. So it's just not my firm. So I
don't have referrals for people who do that. I represent the
other guys, and I make sure that they don't vote that they're
not. I make sure that they're always in compliance anyway. So
I never run across the people who are suing the people because
my guys never never have this issue. So, again, my name is
Tilden Moschetti. I am a securities attorney, syndication
attorney with the Moschetti Syndication Law Group. Now if we
can help you stay in compliance, I would like to talk with you
feel free to give us a call or visit our website. Let's set up
a meeting to talk