Alt Investing Made Easy

Sarah Florer (00:07.614)
Welcome everyone to Alt Investing Made Easy. Today, Roland and I are so pleased to have the opportunity to speak with our friend and colleague, George Lee of FBFK Law, which is the law firm we've just joined. So George, welcome. Genuinely looking forward to hearing more about you and your practice today.

George T Lee (00:36.285)
Excited to be here. Thanks for having me.

Roland Wiederaenders (00:39.458)
Yeah, George, it's great to have you here. And we've known each other for a while and have reconnected recently. And I wanted to start off by asking about your practice area. We were talking before the episode, and I didn't know this, but you're actually a third generation attorney. So this was sort of a preordained path for you professionally. But tell us a little bit about your career, your background, and what you're doing now.

George T Lee (01:03.879)
Yeah, you're right. Not only am I the third generation in my family to be an attorney here in Dallas, but we're all named George Lee. So I'm the third George Lee attorney here in Dallas. So yeah, my practice, I've been practicing now for longer than I care to admit.

I started my practice actually at a large law firm in Houston, a now AmLaw 100 firm. In most of my career, have practiced at big law firms. However, in 2008 actually,

that I started my own firm called Leonstone focused on the alternative investment management practice. So since that time, have primarily represented people interested in investments, mostly private equity, hedge funds, real estate, oil and gas, and even some crypto funds, although

I still can't say I understand exactly how it works, although I had to do a very deep dive on whether crypto is a security and whether or not it's regulated by the SEC or the CFTC and that area is still developing. It's really fascinating.

Sarah Florer (02:43.945)
Hmm.

George T Lee (02:48.153)
So my practice generally is most of my clients are registered investment advisors, whether they be hedge fund operators, private equity fund operators, even some real estate managers. A lot of real estate managers don't.

really think about the securities laws and don't really understand that they are subject to the real estate to the securities laws, even if they're investing in real estate only. Unless it's it's just investing directly in the fee simple real estate. So

I represent my clients in connection with fund formation, SEC or state registration, all the state and federal securities laws. And if they get a visit from the securities regulators, be they state or federal, I sit in on the examinations and represent them in responding to any deficiencies or other things that the regulators find.

Sarah Florer (04:00.542)
You know, George, it's such a privilege to get to work with somebody with your experience. But I do have one question. I don't know that we've ever talked about it, which is, your father and grandfather also involved in sort of the financial side of transactional law, like you've developed your specialty in securities?

George T Lee (04:00.742)
Thank

George T Lee (04:15.677)
F**K ME!

George T Lee (04:19.251)
Well, my grandfather, who unfortunately I never knew because he died when my father was 13, his practice as was in the day, really a general practice. He just took whatever came in the door. He graduated from law school.

in, I believe, 1915. So things were very different back then. Probably the largest law firm in Dallas back then was maybe eight lawyers. And of course, nobody had law firms with more than one office. There weren't even firms with a Houston or, I'm sorry, a Houston and Dallas office. It was one or the other. In fact, it was really

Sarah Florer (04:52.221)
wow.

Sarah Florer (05:08.362)
Hmm.

George T Lee (05:10.617)
only in the mid-80s that that started to happen. And now these big firms have just run like crazy. So my father was with a large firm. He went in-house and then rejoined that same firm. His practice was a little different than mine, but it was a transactional practice, project finance.

So yeah, my practice really, I've

You know, started doing just general everything transactional related. did bankruptcy law for a little bit. I was in-house with a Northfield service company and then I was in-house with a hedge fund. So that's really where I learned the investment management business, both from a legal side and an operational side. And then formed my own law firm focused on this area.

Sarah Florer (05:49.226)
Hmm.

Sarah Florer (05:54.973)
No.

Sarah Florer (06:03.379)
Right.

George T Lee (06:11.957)
2008 after the 08 crash. We were really in the right place at the right time because we knew Dodd-Frank. Congress was working on Dodd-Frank. They passed Dodd-Frank. We were able to get it up to speed on the regulations. In fact, Congress said to the SEC, we want you to start regulating

Sarah Florer (06:15.635)
Hmm.

George T Lee (06:39.397)
multifamily offices, hedge funds, but not single family offices managing their own wealth. However, they left it up to the SEC to define what is a single family office. And their original proposed definition was terrible. was the person that made the money and their descendants, not their mother, not their father, not their in-laws, not their brother or sister. So they could only manage money for their

Sarah Florer (06:42.527)
Mm-hmm.

George T Lee (07:09.301)
immediate with family members. We wrote a comment letter to the SEC about that. They actually took some of our suggestions and as a result we got a lot of family office clients. So my practice is

Sarah Florer (07:11.767)
Wow.

George T Lee (07:28.261)
also includes representing investors like family offices and advising them on the terms of their investment and whether or not those terms can be negotiated with the sponsor of the investment.

Roland Wiederaenders (07:46.094)
That's one thing that I think people sometimes fail to realize is even with family offices, there are some exemptions, but there's no friends and family exemption from the investment advisor rule. So once you start getting paid, then you really do need to pay attention to the investment advisor regime.

George T Lee (07:55.956)
Right, that's right.

George T Lee (08:02.887)
That's right. Yeah, if you're if you're setting up a small investment fund and you're allowing friends and family to invest in that investment fund, you definitely are subject to the securities laws. You need to talk to an attorney about what you need to be doing.

Sarah Florer (08:22.174)
Yeah. We've talked about family offices a little bit, George, and I think it's a topic I'd love to get more into on this channel because in other parts of the world, family offices are now formalized structures that people use or regulations in different countries about the various special aspects of what you might need.

for a company or companies that you set up business entities, you set up for family office purposes. But I do think that historically family offices are just family businesses. for example, in places like India where extended families stay closer together for generations and share wealth and build wealth together culturally, successful or not, you'd end up sort of...

George T Lee (08:53.597)
Thank you.

Sarah Florer (09:15.892)
having this family office structure in a way, but not formalized through consciously calling that. And so I think it's really good that now this has just become a common part of the ecosystem of wealth management really. And I don't know how many years it's been because I don't know when you first started out where family offices, something that people talked about.

George T Lee (09:36.2)
No, no, not at all. In fact, was really the first time I heard the term family office was when I was in-house with the hedge fund and we did have family office investors. And I really think family offices have become much more

institutionalized recently. You're right, you know, a family office originally was very loosely structured, but now they can become very institutionalized. They have their own in-house investment managers, you know, many more employees than they originally would. Some do their own deals, sponsor their own deals, and others just tag along and invest.

Sarah Florer (10:00.746)
Mm.

Sarah Florer (10:22.314)
Hmm.

Sarah Florer (10:25.93)
Yeah. We talk about this often, don't we, Roland, that this alternative investing or private securities, it's such a vast market actually, and then it's not quantified on a daily basis necessarily. So it's easy if people aren't working in this space, it's easy to just sort of go about your daily life not really understanding how much of the economy and how much wealth is being managed or generated in this private space.

which is composed of, of course, so many family offices and other kinds of private organizations.

George T Lee (11:03.005)
Yeah, absolutely. Yeah, and actually just getting back to the current exemption for family offices, it's very broad. You can go back or forward 10 generations. So, you know, the Rockefellers, the Roosevelts, they can have family offices with hundreds of investors, maybe

They don't even know each other. Family offices that size obviously have their own issues beyond just investments. And so, you know, my family office clients consult with me not just on investment issues, but management issues.

Sarah Florer (11:45.502)
Right. It's a lot about governance, isn't it? Yeah. Yeah.

George T Lee (11:49.04)
It is.

Roland Wiederaenders (11:50.872)
There's probably a lot of overlap with the estate planning function.

George T Lee (11:54.966)
absolutely. No, that's very important. one rule I've heard is that, and this may be out of date actually, but a family office really needs a hundred million dollars worth of

Sarah Florer (11:55.732)
Yeah.

and tags.

George T Lee (12:11.867)
investable assets to make sense to become a formalized family office. Otherwise, you can get advice outside the family office that may be cheaper than hiring your own employees full-time to be managing your investments.

Sarah Florer (12:22.922)
Hmm.

Sarah Florer (12:29.33)
Right, that's a really interesting thing to talk about actually separately from, we don't have to digress here, but when are you a family office versus just family members who inherited together and therefore are in business together? And this is something we've been talking about with our other colleague in the office, Dan, and that's a topic for another day when we interview him soon. But it is such an interesting thing, isn't it, that this...

People are in business together, families are in business together, whether they want to be or not sometimes, often, especially if there's a big piece of real estate involved. And then, end up, if you're very successful, maybe you do go into those formal structures to help manage those family relationships actually, but it's not going to make financial sense necessarily.

George T Lee (13:03.196)
Yeah.

George T Lee (13:12.359)
Yeah, that's what... Right. Well, and also if the family, for example, made their wealth in the oil gas industry, they may want to diversify their investments into other things. And that's when it really makes sense is to have someone in-house that can help manage those other assets that the family may not...

Sarah Florer (13:26.526)
Hmm. Hmm.

George T Lee (13:38.947)
understand as well as they do the oligose industry.

Roland Wiederaenders (13:44.686)
Well, George, there was a question that came to my mind moving on from the family office discussion. You had mentioned that even people that syndicate or create funds for real estate with the 2013 changes, a real estate fund was a new thing. And how do you talk with the people that are primarily working in the real estate area about the investment advisor regime?

George T Lee (14:12.303)
Right, so traditionally real estate managers have not registered as investment advisors and I think there's good reason for that. The area is fairly gray. However, if you are managing a fund

that is investing, for example, in real estate joint ventures with a developer and the fund doesn't control the developer, then that joint venture is a security. And if the fund invests in the joint venture, that could trigger the Investment Advisors Act.

Roland Wiederaenders (14:55.448)
So that element of control is really important.

George T Lee (14:58.355)
It is very important. And there's a lot of SEC guidance on that, but unfortunately there's not a lot of bright line tests. Of course, the fund itself.

when it brings in investors is offering securities and has to comply with the securities offering laws. If the fund is using a third party to raise money, that person may need to be registered as a broker dealer. So, you know, it's an area that is, I think, a little bit of the Wild West still. And

I think the SEC just doesn't have the enforcement staff to be able to go after everybody. at the end of the day, it's possible to fly under the radar, but it's when things go south and your investors start raising issues and the regulators find out about it, that's when you can get in trouble.

Sarah Florer (16:03.178)
Hmm.

Sarah Florer (16:07.048)
Roland, did you have a question?

Roland Wiederaenders (16:07.564)
A little, yeah, no, just a little bit about like playing the audit lottery with the IRS, taking a position, you know, just thinking, well, it's saving me a bunch of taxes and I'll never get audited. So, but it's just like what you.

George T Lee (16:13.241)
Right. Yeah. Yeah.

George T Lee (16:18.981)
Right, right. Although I, yeah, I think the IRS is a little more aggressive and has, at least until recently, has the staff to really monitor things.

Sarah Florer (16:33.642)
Hmm.

Roland Wiederaenders (16:34.604)
Yeah, this is a hard area for us. we talked about this, what we were going to talk about ahead of time and how difficult of an area this is for us to advise on this area about, or when people say, how can I get paid on helping people raise money for private securities deals? And you just use the term Wild West and it just means that these rules get broken all the time. There are people out there that

George T Lee (16:37.203)
Thanks.

George T Lee (16:42.547)
Thank

Roland Wiederaenders (17:04.428)
are helping raise money for private securities deals that aren't registered as broker dealers and maybe they aren't even associated persons of the issuer, but still they get paid. that was one of the things that we wanted to talk about today is, you know, first acknowledging how difficult it is to advise in this area because the rules get broken all the time, but then give people the correct information.

George T Lee (17:29.201)
Yeah. So I think the area that's really flies under the radar the most are these country club deals, right? Where somebody at the country club knows somebody who's raising money for a fund and the fund wants to pay them to find investors. they round out up a bunch of their friends at the country club.

but they don't register as a broker dealer, which they may have to. And that's not only under federal law, it's also under state law.

which a lot of lawyers don't look at. They know about the broker-dealer laws at the federal level, but Texas has even a more broad definition of who has to register. For example, under the Texas law, a broker-dealer is basically any person who, for all or part of their time, engages in

selling, offering or soliciting investors for securities investments. So there's a lot of people and this happens all the time, know, my buddy does this, why can't I do it? It's really tough to give advice in this area. And sometimes you just have to say, you know,

Sarah Florer (18:37.182)
Hmm.

George T Lee (18:57.843)
You've heard my advice, you're going to take a risk and I can't stop you from taking that risk.

Sarah Florer (19:05.898)
Hmm.

Sarah Florer (19:09.522)
It's been interesting on our channel to talk about why we have all these regulations and securities laws. And you're right, especially I think with commercial real estate and in places where it doesn't seem obviously, you know, with a hedge fund, it kind of makes intuitive sense that some regulation could bring stability. And, you know, maybe consumers of such investments need a bit of protection, right? Because they're inherently supposed to have these cool new strategies, cutting edge kind of stuff, etc.

George T Lee (19:24.851)
I'm sorry.

Right.

Sarah Florer (19:39.786)
But I do think, I mean, I think it's just important to always go back and remind our audience that these regulations that we talk about, including these about who can sell offer securities, are all about protecting the wider population of investors that are out there. And the reason that we know they need protection is because of history and what's gone really wrong in the past.

And sometimes I think just bringing that little reminder into a person kind of puts things in perspective. Not everybody wants to hear perspective, but I know it helps me and people I tend to get along with. Like if you remember that things are pretty bad in the 20s and then in the 30s, we got some protections and then look at all the wealth that's been amassed today, perhaps there's somebody who's already traced that history to what if we didn't have the securities laws, how much more money would have been lost already by average people.

So I think it's really interesting to just remember that these regulations, first of all lawyers don't create them to create work or to be difficult and the SEC doesn't either. There is, you know...

George T Lee (20:38.449)
Right.

George T Lee (20:50.547)
No, in fact, Congress and state legislatures are the ones that create these regulations. The SEC is just doing what Congress said. Now, I will say the mandate from Congress to the SEC is threefold. One is to protect investors, like you said, but the other two people don't think about.

The first is to create efficient markets, which the US leads the world in. I the Chinese markets, think the translation into English is literally buyer beware. So the US has really the most efficient and respected, and that's why investors have confidence. The third leg of their mandate is to

Sarah Florer (21:26.174)
Absolutely.

George T Lee (21:47.57)
to facilitate capital formation. And when I tell my clients that they're amazed because they don't see the SEC doing that, but I think by having these regulations, investors do have more confidence in making investments and creating wealth.

Sarah Florer (22:05.14)
Mm-hmm.

George T Lee (22:11.655)
You know, there's at the state level, I think they're more interested in protecting vulnerable individuals, you know, somebody who's inherited a lot of money, but it's not sophisticated. Whereas, you know, a big institution, like a. Texas teachers retirement, for example, they don't need as much protection as individuals do. So.

Sarah Florer (22:23.978)
Hmm.

Sarah Florer (22:34.74)
Right.

George T Lee (22:39.133)
there is a difference between federal and state regulation.

Sarah Florer (22:44.01)
Well, Roland, I don't know that George knows this, we talk about this all the time with our term democratization of capital, right? Which is essentially what you mean by capital generation. This is how you create confidence so that people who aren't trained for years and have years of experience as professional investors have an opportunity to go out there and try their hand step by step, let's say slowly.

George T Lee (22:51.773)
So, bye.

Sarah Florer (23:12.188)
until you become an accredited investor and then increase your net worth and then you're more risk-proof in a certain sense. I think it fits in with the themes that, George, you may not know this, but we've talked about this before in our introductory episodes especially. It seems unlikely that the strength and size of the American economy today are directly linked to the fact that lots more people here have an access to build their wealth.

George T Lee (23:42.548)
Yeah, absolutely. And I think that really points to the importance of getting a good investment advisor, somebody who is registered either with the state or the federal regulations, because they are fiduciaries, unlike brokers.

Sarah Florer (23:50.538)
Hmm.

George T Lee (24:00.308)
They have a fiduciary duty to look out for your best interests. And if you're not sophisticated in investing, that's a really good way to start. They can educate you.

Sarah Florer (24:13.31)
Hmm. Yeah, exactly.

Roland Wiederaenders (24:16.184)
Yeah, the value of that and understanding it's the test for investment advisors is giving advice with respect to securities for compensation. And so, you know, if you imagine that you're able to, you know, become an expert and know, you know, what, what, how to construct a portfolio, what to buy for each different allocation area. But

Gosh, to be an expert and to have that knowledge and all the different asset classes, all the different things that are possible to invest in. Yeah, an investment advisor can be great money, well spent. We've talked to several people and not only the planning, but portfolio construction and asset allocation and you know.

George T Lee (24:46.852)
Right.

Sarah Florer (24:54.762)
Mm-hmm.

George T Lee (25:00.755)
Absolutely. And one thing that I think, one area where I think the regulations need to be adjusted a little bit and are being adjusted is in the area of alternative investments. For example, know, private equity, not only do you have to be an accredited investor, but you have to be a qualified client, which is somebody with at least

Sarah Florer (25:15.306)
Hmm.

George T Lee (25:26.963)
2.3 million I think is the threshold now to make those investments.

I think the SEC at some point is going to look at making other people qualified clients, for example, if they do have a registered investment advisor looking out for their best interests and telling them, look, you need to have some other diversification than public securities. It may be real estate, may be hedge funds, private equity. And I think that's probably where

the regulations need to and may in the future be more investor friendly.

Sarah Florer (26:12.286)
Hmm. Hmm.

Roland Wiederaenders (26:14.062)
And just to remind everybody, the qualified client rule is a requirement for any investor in a deal where the advisor is getting paid a percentage of the profits. But it wouldn't include real estate, isn't that right, George?

George T Lee (26:31.923)
No, it could include real estate. For example, if somebody is getting paid a percentage of profits in a fund that invests in real estate, back end carried interest, for example, if the real estate is a security, you're right. But again, a lot of real estate deals involve securities that people really don't think about.

Roland Wiederaenders (27:01.976)
Well, it's just a complex area and one statement that I've told Sarah is joining FBFK has been great for me personally because I finally have somebody that is senior to me that not to call you old, both of us have been practicing.

George T Lee (27:05.552)
It really is.

George T Lee (27:16.723)
Well, I'm getting there.

Sarah Florer (27:19.082)
You both started practicing in the last century, as Roland likes to say, George.

Roland Wiederaenders (27:22.242)
the 1900s we've been.

George T Lee (27:22.996)
Well, that's true.

Roland Wiederaenders (27:26.52)
But it's great. It's good to have you as a teammate and a resource to talk about these rules.

George T Lee (27:32.388)
I appreciate that.

Sarah Florer (27:34.632)
Yeah, no, it's one of those areas that a lot of people don't wake up in the morning and think, I would like to discuss this complex area of regulation. But when it is your chosen path, it's really important to have people to run ideas off of. mean, lawyers, we're advising, right? We need to understand. And this is why the hierarchy of experience is so good. Yeah.

George T Lee (27:44.816)
Yeah.

Yeah.

It is. Yeah. And it's absolutely. And it's nice to have a little niche where I can nerd out.

Sarah Florer (28:03.754)
Yeah, we were joking about that before we started filming George. Anyway, I don't know if you caught my Star Wars references earlier.

George T Lee (28:14.323)
I did. You're in the same generation as my younger brother. So he would appreciate those more than I would.

Sarah Florer (28:23.592)
I have to tell you, I worked with a young lady in her 20s a couple years ago and I made a joke with, you know, may the force be with you and she didn't understand it. It was so interesting. Yeah, yeah, it was funny. All right, well, Roland or George, is there anything else you'd like to touch on? Because actually, sometimes we like to, we've had a really fruitful discussion and so think we're fine to stop now. But also sometimes it's nice to hear a little bit about, you know,

George T Lee (28:32.115)
That is funny. Must have been a boomer.

Sarah Florer (28:52.722)
Maybe just tell us one other thing that you do that's not related to your law practice. It's just more about, you know, who you are or what keeps you interested outside of the practice of law.

George T Lee (28:58.253)
Right. Yeah, sure, sure, sure.

Yeah, well, I really like to travel and luckily I have a daughter who loves to travel. and she runs marathons in the most interesting places. So, she just did one in Oregon. She's doing one in the south of France. So, I love at least watching from afar, but I also like to travel. I like to fish.

Sarah Florer (29:06.194)
Yeah.

Sarah Florer (29:20.362)
cool.

Sarah Florer (29:26.868)
Yeah.

wow.

George T Lee (29:30.227)
don't get as much time as I would love to get away to Colorado or like to fly fish. So that's something you can't really do in Dallas.

Sarah Florer (29:42.32)
Yeah, not in the Trinity River, You know, I've only seen fly fishing on TV, even though I grew up outdoors a lot, but in North Carolina where you're mostly in the forest. And I do think that it looks like incredibly relaxing and beautiful. Yeah, yeah, that's really neat.

George T Lee (29:45.529)
no.

George T Lee (29:58.874)
It is. It is. It's very Zen.

Roland Wiederaenders (30:02.486)
I think they stocked some of the rivers around here, like in the Guadalupe maybe or the.

George T Lee (30:05.619)
Yeah, actually, so think the Guadalupe is one of the few places in Texas that you can fly fish. Boy, unfortunately, you know, now it's not fishable.

Sarah Florer (30:22.058)
Not a great time. Well, in due course, maybe one of the times you come down to Austin, we'll take the initiative to sort you out to get a chance to go fish. I don't know if I would be any help. I could be, I'd happily sit next to you and read a book.

George T Lee (30:28.723)
I'd love that. I'd love that. Well, I'd be happy to teach you how.

Sarah Florer (30:38.25)
That would be cool. Thank you.

Roland Wiederaenders (30:40.142)
One thing that I think we were going to talk about is the Finder rules and that's gotten press recently, the SEC announced.

Sarah Florer (30:46.451)
that's right.

George T Lee (30:49.139)
It has, it has. And that's another area that I get a lot of inquiry and we briefly touched on that in the country club situation. But there is a Texas exemption rarely used which allows you to

quote unquote, register with the state of Texas as a finder. You don't have to take any exams, but there are certain things you can and cannot do.

You can only work with individual accredited investors, but you can take transaction-based compensation. Unfortunately, right now, you can only do deals that are wholly within Texas. So the investors and the issuers both have to be in Texas. The SEC is working on a proposed Finder Rule, which they proposed during Trump 1 was never passed, but it would also

create a federal exemption for finders with a lot of the same guardrails.

Roland Wiederaenders (32:01.71)
one thing there that people should remember is that you must register individually. You can't register an LLC as a finder. And then at least the way it is now, you really can only make the introduction. You can't get involved in negotiating the terms or even really, as I understand it, you know, informing somebody of what the terms of the deal are. All I can say is George, please meet Sarah. I think you guys should meet.

George T Lee (32:09.105)
That's right.

George T Lee (32:28.431)
Yeah, I think that's true under the current state of the federal law. However, I think there are some things around that you can do under the Texas finders exemption and I think you will be able to do if the SEC passes its finder exemption. So keep a lookout for that.

Sarah Florer (32:48.522)
That'll be something to follow up on.

Roland Wiederaenders (32:52.238)
Yeah, we'll do our next episode. When they adopt that, we'll get you to come on and explain it, George. Well, I guess that seems like a good place for us to wrap up. What do you think, Sarah? OK. Yeah.

George T Lee (32:56.453)
I'd be happy to do that.

Sarah Florer (32:58.409)
Okay.

Sarah Florer (33:04.638)
Yeah, I think so. Shall I close? Thanks everyone. Sorry, it's been so great, George. I just look at this always as just the beginning and we'll do the next one in due course. Great. Thanks everyone for joining us today for this episode of Alt Investing Made Easy. If you like this episode, please like and subscribe to our channel.

George T Lee (33:08.253)
Well this has been fun.

Well, thanks for

George T Lee (33:17.649)
Sounds great. Glad to do it.

Roland Wiederaenders (33:30.476)
And remember everyone, take aim with your alternative investing strategies.

Sarah Florer (33:36.042)
See you next time.