As part of this seven part series, we've been going through
different hot topics that regulators such as the SEC, or
state regulators are hot to, and they are going to be my
prediction, increasingly vigilant to protect the
investing public about. So this next topic is definitely way way
not allowed. And it is a very hot topic. If you are doing it,
then you need to stop it immediately. And if you're not
doing it, you definitely don't want to get trapped in finding
that yourself doing it or thinking that it's okay.
So what is this hot topic that state and federal regulators are
going to be definitely looking for? And I think that there will
be a greater scrutiny in the future. And certainly a desire
to go after people who are doing this. More and more. The idea is
something kind of simple and probably on its face, you're
like, oh, yeah, that's no, of course you can't do that. And
that idea is commingling. commingling is not allowed.
commingling is not part of any of the funds. So let's talk
about exactly what commingling is in this context, where I see
it happen kind of under the radar, that causes a problem. So
let's put up a whiteboard. So let's talk about the problem
that is obviously wrong. So the one that's obviously wrong is
you've got a fun here with money invested in.
And this is your fund LLC. And then this is the one that's
wrong is money comes out just for a short time, because you
want to put together another your pool, you want to put
together something new, but you need to pay, say your attorney,
you need to pay him legal fees. Right. So you want to pay your
syndication attorney in order to pay him legal fees and draft
documents for you. This is obviously not allowed. You are
not allowed to commingle your joint bank and your bank
accounts this way, right? Same thing, same problem that you
need a place to just temporarily Park some money, you can't just
put it into the fund LLC. It's it's not allowed, you're not
allowed to do that. So that's the obvious case of commingling.
What I see happening a lot of times is this. And certainly
I've I have had clients ask about whether or not this is
allowed. And the answer is no, it's not. And it looks something
like this. You've got sorry, this is you've got your fund LLC
here. And you've got your management company here and I'm
drying him his buckets. Because really, a fun is just it's a
bucket of assets. All right. So we can let's call this fun one
LLC. This is fun to LLC. And let's make fun three LLC just
because we can oops. It'll make the point better. Oops, can't
see this. There you go. Fun. Three, LLC. All right. So you're
here. You've got these three funds that are going and they're
working wonderfully. You've identified a potential
opportunity that you would like to create over here and this is
say fund four. Let's put it into context. Let's say these are
real estate deals. was that that happens a lot. So you've
identified fund for? And you said supposed to be a question
mark, and it doesn't look anything like one. So you don't
know how to get it started? You found this great asset. Right?
So
that you want it to buy? All right, that's how you want it to
go, but you don't have the cash to do it. So what some people
think they can do, and you can't, is this, the thought
comes up of how can I just borrow money here? Can I borrow
money from fund three to put the downpayment on or put the
deposit down on this property? So that when it gets locked up,
it'll get locked up in escrow. And as soon as this fund has
enough money, will repay that money back. plus interest? And
the answer is probably not. Now, it's it's possible that your fun
is allows for loans to be made to other projects, which is
okay. But at the end of the day, the analysis goes something like
this, does this guy here? And this guy here? Who are investors
in this? Are they going to have a problem with this going on? Is
there any way that they're going to have a problem? Or were they
told specifically, we may make bought loans to our investment,
other investment companies in order to reap to pay them back,
including investment companies that are managed by the same
manager? If the answer is no, which most of which will be most
of the time? That will be the answer, then you can do it. So
that's the commingling problem that happens, and it's the
commingling problem that actually, is is very prevalent,
because managers don't see what they're doing as buckets. Right.
They see them as really a list of assets and sets of investors
and things like that. But the truth is that they're buckets,
and they're totally self contained. If they're going to
do something outside of fun one or fun two, or fun three, if
those things are going to be doing something outside of what
those specific vehicles are, your investors are being wrong,
right. So money is being taken from them. Maybe it's just an
opportunity cause for an opportunity that's not even
there, but it's affecting them. It's their money, and they have
the right to have what they expect happened with their
money. So that's the problem that I see happening with
commingling. Now regulators know this happens, they see it
happen. And if they know this is gonna happen and see this is
going to happen in one of your funds, you can bet they're going
to be calling and go, there's going to be some major
enforcement action to bring something down. If an investor
got wind of this happening, and they were to let the SEC or a
state regulator now, I would bet 100 Donuts, that they would be
investigating it as quickly as possible. And stopping that kind
of action with whatever for enforcement actions they have,
because it's just plain illegal to be using funds that way. My
name is Tilden Moschetti. I am a syndication attorney with the
Moschetti Syndication Law Group. The whole point of these videos
here is to help you understand what compliance is and help you
be in compliance with the SEC and state regulators. I'm a huge
fan of Regulation D and all the rules that are related to it.
Because it makes raising money. Very very knowledgeable, very
formulaic, very, very doable for people. It keeps the cost for
you as a regulator down and lets you do what you want to do in
order to raise funds and protects the investor public as
well. So if I can help you stay in compliance with the SEC in
the state regulators, that's what I enjoy doing. And I enjoy
working on projects and with good clients. So feel free to
give us a call if you think you might be one of these