Alt Investing Made Easy

Roland Wiederaenders (00:00.118)
It is an important point because the only time trouble will arise or is most likely to arise is if the deal goes bad.

Roland:
Welcome to Alt Investing Made Easy, where we explore the complex world of alternative assets. I'm Roland, a securities attorney, investment advisor, and your co-host.

Sarah:
And I'm Sarah, an investment advisor and corporate attorney, and your other co-host. We'll guide you through real estate, private equity, and more, making complex topics accessible. Tune in for insights that empower your financial journey. Let's make Alt Investing Easy, one episode at a time.

Sarah:
Today we're talking about a really important topic, which is who can offer and sell alternative investments and related issues.

Roland:
Yeah, that's right. And it's important to recap kind of where we've been going in our discussions today, talking about alternative assets and how so frequently they're structured as an investment in private securities, distinguishing private securities from public securities. And what's important to note here is what we have been talking about are exemption from the registration rules with respect to securities. The general rule as we've discussed is that all securities must be registered and every company must go through this lengthy process of registering their securities and filing a registration statement with the SEC. And incurring up to a million dollars in legal fees associated with that. But thankfully, there are exemptions from that general rule. And that's what we've been talking about with respect to private securities. And private securities are securities that are sole pursuant to these exemptions. And what we're talking about today, though, are other exemptions that exist with respect to the broker dealer rules.

Sarah: Right. So.Roland Wiederaenders (02:02.936) Taking us back, we talked about alternative investing. There are these different asset classes that are known as alternative investments and most of them are structured as private securities, contrasting that to public securities as Roland just mentioned. So when you're dealing with private securities, you also are subject to other parts of the security regulations and that includes, like we discussed in our last episode, who can invest in a private security if you're promoting one.

And that would be normally an accredited investor, subject to certain exceptions. And there are reasons for that, including the fact that accredited investors have a certain wealth and therefore certain tolerance for riskier investments potentially, or for non-liquid investments. And then also on the other side of it, we wanted to talk about who can actually be offering these securities to investors in the first place. And so that's also subject to regulation. And that brings us to the main requirement or the main point, part of the law that's been historically the longest standing. And that is what Roland is going to discuss further in further detail now.

Roland:
Yeah. And this kind of gets to my personal preference. I wish the securities laws were written a little differently, but unfortunately they didn't consult with me when they wrote them.

Sarah:
So, was a long time ago too.

Roland:
So maybe if I've been involved, we could have done it differently, but they are what they are now. And so we have to think about, how the securities laws think about this, this issue about eligible people who can sell private securities. And there's two kind of directions that we can go in here. I think probably the most useful one is just to think, take an even further step back and remind ourselves that the private securities are sold by business entities. And there's a specific term that we're going to talk about today, issuer. But very generally, issuer is either an LLC or corporation or a limited partnership. There may be some other types of business entities that are in there somewhere, but Roland Wiederaenders (04:22.358) everybody kind of has an idea of what a corporation LLC is. Remember that defined term issuer so that we don't have to keep saying over and over again, it's a corporation LLC, a limited partnership. Right. What we have to remember with issuers is they're not natural persons. At the law, they're legal persons, persons who are formed, created through a filing with the secretary of state. Texas, whatever state you're in. But it's an abstraction. It's not, an LLC doesn't go out and do things on its own. It only acts through natural persons. And so that's really the important question is who are the natural persons that can act on behalf of an issuer, again, using that defined term. Who are the natural persons that can act on behalf of the issuer to sell the securities? It's remarkably kind of a complex question, but that's what we really want to flesh out today.

Sarah:
So just Roland, just on behalf of our viewers, because this is, I just want to say a really complicated area and there are some defined words and parts of statutes that we're going to get into in detail. But more broadly, before we, and now we know we have this common term issuer, which is going to be really useful for talking about these topics. But broadly speaking, the basic point that we want to get to today is there are certain classifications of people or entities that can offer and sell securities, private securities or public securities, but we're focusing on private securities. And interestingly, Roland, you're actually one of these people who can do that with your status as an investment advisor. Now we're going to get into investment advisors last because really I think we wanted to set out the basic rule, which is that broker dealers have historically been those most involved in the sale and promotion and offering, et cetera, of securities. Then we have some other categories now that have Roland Wiederaenders (06:45.826) that are of most interest probably to our viewers. But maybe it would help us if we understood what is this thing with the broker dealers and why do we need to be concerned about it?

Roland:
Yeah, no, that's really important. And really, the question is, you know, it's not only who can sell securities, but how do they get paid? And so this is my complaint with how the securities laws have laid it out. But we'll just say it and say what the rule is. And really what we're talking about here is Exchange Act, Section 15A1 requires that any person that acts as a broker or a dealer in securities and interstate commerce must register with the SEC, first off. And second, it's only the broker dealers who can receive commissions on the sale of the securities. And I was just going to check and see if there was anything else in the rule specifically. But I think that those are the two main concepts. And the compensation is important to specify what it's related to that. It's a success based and transaction based compensation. It's not success of the company. It's not success of the business.The issue are going out and having great success in the marketplace, whatever their business concept is.

The success based nature of the commission compensation that's payable solely to broker dealers. It's the success of getting the dollars in through the door, getting the investor to invest with the company. Then beyond that, you know, there, there, there's nothing else that's really related to that commission based compensation. And that commission based compensation is, what's limited to paying. The issuer can only pay that to a registered broker dealer.

Sarah:
Right. So in other words for that, that I think are thrown around is something like a finder's fee or a referral fee, those kinds of fees. So it's a percentage of the amount of capital that's sourced for the deal. Yeah. Basically is what it amounts to. And so on the front end, that doesn't sound so great for people who might want to be in the business of raising capital for deals.Roland Wiederaenders (09:10.072) But there is a reason why historically it was there and probably, and it's all for protective reasons probably because, you know, it means there's a certain amount of oversight and scrutiny and business investment that a broker dealer needs to go into to be able to earn that kind of compensation. Arguably in the future, this could change and, but instead of having exceptions to other groups who can actually have this kind of compensation. What there is instead is that there are other groups of people who can offer and sell securities, private securities, especially we're talking about here. But the compensation works differently and we'll get into more details about that. But importantly, we want to really explore who these other categories are because we think that the majority of our viewers are those are going to be
fall into those categories, first of all. And secondly, as we discussed before, another reason that the broker dealer situation is not so prevalent in the private investment space is because a lot of the deals are too small. If you happen to be in alternative investing space and you have reached a place in your journey where the deals that you would like to participate in or promoter of such a size, well, then it would be normal for you to use a broker dealer. And this whole question of who and how to compensate them is not really an issue for you, right? But for a lot of people who are at the beginning of their journey or are comfortable in the kind of space with deals that wouldn't be so attractive to broker dealers, then we have different alternatives available for how to go about offering and selling securities. And when we're talking about deal sizes that are not, have a certain magnitude.

Roland:
And I think one thing that's good, we've referenced this before is the deals that we work on are, typically smaller. And I put that in quotes because, a million dollars is a huge amount of money to me. And I think most people, you know, no matter who you are, but that's a relatively small size deal from a securities Roland Wiederaenders (11:28.33) offering standpoint, but it's not atypical. I think most of our deals are a little bigger than that, maybe in the five to $10 million range, but for a broker dealer to get interested in selling a private deal, I think that they have to be sufficiently sized where the broker dealer will make enough money off the commissions to justify all the expense that they have to incur. And people have to remember that broker dealers are registered with the SEC and with FINRA. They're subject to oversight by FINRA. There's a bewildering array of complex rules and audits and reports that they have to undertake in order to satisfy those ongoing compliance requirements. But being a broker dealer, it's expensive to register and expensive to maintain. And so that's why this deal size issue is so important that if we, if our clients go to a broker dealer and say, Hey, can you help me raise money on my $10 million deal? The broker dealer may say, well, that's too small. You know, come back when you want to raise 50 or come back when you want to raise a hundred. And I'll say that this isn't totally alien to our practice. And we have one client right now actually doing an infrastructure deal. It's really exciting. They're wanting to raise $150 million for this project. And they're going to be relying on regulation D, the rule 506 exemption from the registration rules we've been talking about. They're going to be selling private securities, but they have engaged a registered broker dealer to help them sell their securities. And in their offering document, in their disclosure document, they describe specifically, we have hired this broker dealer. And we're going to be paying this commission and we're eligible or they're they're eligible to receive and we're we're eligible to pay because section 15a says that we can only pay that to a registered broker dealer and that's what they are. So, you know, that's what we're doing. You know, this is it's important to to to step back again. You know, we mentioned it that that we're working with exemptions from these rules and it would be easy for us to say that Roland Wiederaenders (13:45.876)
every offering must be registered and sold solely by broker dealers, but we would go out of business as attorneys in a week if we did that. Nobody would hire us because we'd be telling them that they'd have to incur a million dollars in legal fees to raise the million dollars that they need for their deal.

Sarah:
So and apart from that, too, sorry, just sorry to cut you off. But I think where you're going with this is that as we've discussed in previous episodes. An important feature of what's going on in our country and all of these rules and regulations we're talking about is this concept of democratization of capital. And so this is another piece of that, right? Just like if you want to buy a private security, there is a route for that. If you're not even an accredited investor, there is a way to do that. If you're able to find a...through connect, you have to have prior relationships, but you're not restricted from starting your journey once you get to know other people who are promoting investments, once you have friends and family who are involved. Likewise here, we're going to start, we're going to talk about these two different categories that then support this idea of democratization of capital, which is yes, the established structure is a broker dealer. If you have a big enough deal, you want to use a broker dealer because you actually are seeking really high dollar investors and you probably want that relationship with the broker dealer to protect you also because you do receive certain benefits from that. And that's great. Once you get to that level of your investing journey, then that's the kind of business that you get into and you get comfortable with that and everything's fine. Prior to that, though, there needs to be a way to start and move up through your wealth building process. And that's where these other two categories really come in.

Roland:
And one thing, you know, I want to point out, we talked about this beforehand. And, and in other episodes we brought it up, but it's, it's really important here. The, the purpose of this webcast is to provide you with education, information, and hopefully entertainment. We want to try to make this entertaining and not just bored, boring, you know, dry and reading off a page. You know, we want to try to inject some humanity in this process. But, Roland Wiederaenders (16:04.908)
because of that, because we're doing this for information purposes, we're specifically not doing this to engage our audience as clients solely through this webcast. Or we're not looking to engage our audience members as clients of the investment advisor firm, Real Advisors. We can do that separately, but it's not pursuant to this webcast. This webcast is just a, it's a TV show basically.

Sarah:
So we want to share information. We also want to get feedback about what is confusing our viewers, what could be useful to understand more. Because in the end, I believe, and I think you believe Roland, that many people are capable of understanding the world of alternative investing and alternative assets and some of the complexities that underlie all of it. So yes, if you have an individual deal and you need legal advice, you need to go get that legal advice, whether from us or from somebody else. If you have a deal and you need investment advice, you need to go and speak to your own investment advisor. We aren't establishing that relationship with you here, although we can establish separate relationships with anyone who reaches out to us and goes through the process for that. But mostly, think we're mission driven in the sense that this is an area we both know a lot about and really believe that everybody should have an opportunity to learn about it, and, and be armed with knowledge to go forward into your journey with whoever your advisors are.

Roland:
Yeah. And I have to give this a little disclaimer because an attorney watching this will, will be able to poke holes at a lot of stuff. What we're saying, because, you know, we're, not going into all the detail. We're trying to give a higher level summary of incredibly complex rules. And like Sarah said, I think that our clients can understand. mean, these things can be understood. It's just you need a little bit of a framework and that's what we're trying to provide here. And just to add on to, Sarah, the one point that I think is so essential and it's really why we're laying such a foundation here and giving all this background is that this is Roland Wiederaenders (18:17.346)
This really is the hardest area for us to provide advice to people about because the rules in this area get broken all the time. And I'll just give you this scenario that comes up. This is a common question that we get asked all the time. And if you're watching this and have thought at all about alternative assets, it's probably something that's occurred to you. But a client comes to me and says, Roland, I have my company and I need to...raise a million dollars for it. And I want to sell 20 % of the company for that million dollars. And by the way, my, my friend said that he knows a wealthy investor and he's going to introduce that investor to me. And that investor is going to invest the entire million dollars. I say, that's great. He said, there's one catch though. My friend said that he needs to receive 3%. He needs to receive $30,000 of the $1 million. Hey, that's great. I mean, I can do a lot with 970. I can do almost as much with 970,000 as I can with a million. So what do you think, Roland? Is that legal? And I say, well, is he a broker dealer? No. And then we're going to get into a discussion with the other classes of people who are eligible. But if this person isn't eligible to do that, then they can't even offer the securities. And if they're not a broker dealer, they can't even receive that commission-based transaction based compensation. But I will say that this happens all the time. And so when I give that advice to people, mean, I really do give them this level of detail and explanation because they'll go out and see this happening. The payment of illegal commissions on the investments in private securities to an unregistered broker dealer. They see it happen and they think, God, this Roland guy doesn't know what he's talking about. He's telling me that you can only do it through a broker dealer and this, but it happens all the time. I see it happen all the time and it, nobody's ever gotten in trouble with it. And, and this is, this is an important point because the only time trouble will arise or is most likely to arise is if the deal goes bad. And when the deal goes bad, people call up the regulators, whether it's the sec or the Texas state securities board. And this, this will be a point. They'll say, well, how did you find out about the deal? Well, Joe told me about it. And then the Roland Wiederaenders (20:42.734) the regulators will go ask, was Joe paid any compensation in connection with the sales securities? Was Joe a registered broker dealer? And if he wasn't, then you've violated the law. And this is an area where it can create huge problems for not only the person receiving the illegal compensation, but also the issuer who pays the illegal compensation. It's a hard area to...to advise people with. It's very factually intensive when you start talking about the types of compensation that is permitted. And we're going to touch on that a little bit. But I just give that caveat because this is probably the would be the hardest episode for us to record because we're having to talk at such a high level. And it's hard to go into the specifics of the facts, you know, without talking to the person, you know, the actual client with the issue. What we I mean, I think that we will give you an idea of what we're talking about as we get into this next topic. And really, it's finally saying, what's the answer? You've been talking about what you can't do this whole time. Who can sell securities?

Sarah:
So we've been trying to lay a framework so that when we do talk about what you can do, it's going to make more sense. yes, so just to quickly summarize, we're dealing with private securities that are kind of alternative investment. Usually made available to accredited investors, but also non-accredited investors. And now we're focused on who can offer and sell those securities to investors potentially like some of our viewers. And all of this is leading to it's officially, it's formally broker dealers are the clear case who can be compensated in a certain way, i.e. receiving commission. And now we're talking about the other categories. Compensation will work differently, but the other categories that are most relevant to our clients who work in this alternative asset space and our viewers who might be interested to know more. And that is exactly what they're basically two more categories that we have to discuss here. And these are probably the most relevant and the most interesting for our viewers.

Roland:
Roland Wiederaenders (23:00.684)
Yeah. And if you've worked in this area at all, if you've been an issuer or invested, maybe you've heard this term, but there's an exemption known as the issuer exemption and an exemption from again, the broker dealer rules. So under the issuer exemption, this can be found in rule 3A4-1 of the exchange act. There's a defined class of person. And it's called an associated person of the issuer.

Sarah:
So first, we talked a little bit. You mentioned who an issuer is, but just recap that quickly. We'll use the word issuer a lot because it's a catch all for a lot of entities, really. But briefly, Roland, what is the issuer again? Yeah, it's the person and not a natural person, the legal person who's selling the securities. And again, it's a corporation and LLC, a limited partnership so that we don't have to keep repeating all the different types of business entities over and over again. And this is one thing I appreciate about the securities laws is that they do use a convenient defined term issuer, but just think of the issuer as the seller of securities, but it's not the natural person who is the seller of securities. It's the actual, you know, if you buy shares of stock in the company.

Sarah:
it's the company that issues you or it's the partnership that issues you the membership interest or the LLC issues you the membership. Right.

Roland:
Right. So I think getting into the rule itself and again, we hate being too technical because I think that maybe leads to boredom for some people. But you know, looking at this specific definition is important.

And I'm and we'll set out. Roland Wiederaenders (24:57.838) We'll set out the definition here. Yeah. Yeah. And really, you're going to see how understand this pretty quickly, I think. And maybe we could have even started with this. But I'm going to read it. The term associated person of an issuer means any natural person. So natural people are human beings that fall into
one of several classes. And so these are the classes who is a partner, an officer, director, or employee of the issuer, or a corporate general partner of a limited partnership that's the issuer. There are two other definitions here that we're going to skip today, but we're going to just focus on these two first classes of people because they're it's important to understand who these people are and the roles that they would play with the issuer. And again, this is a company, the issuer is the company. And we're talking about first a partner of the issuer. Well, we really don't deal too much with partners other than in the investment context. Or if there's a limited partnership, then the limited partnership acts through the general partner. So a natural partner, if you had, you never have a natural person that's a general partner of a limited partnership, but theoretically you could. So that's the first class. So it's not really that useful. I think the next natural person, type of natural person that can be an associated person is an officer of the issuer.

Sarah:
And so who would an officer be? That one should be pretty much instinctive for most people.

Roland:
Yeah. I mean, we've all heard about I'm the president of the corporation or I'm the executive vice president or maybe another more innocuous title of director of investor relations. But all those, you know, traditional officer titles means that you're an associated person of the issuer and provided that you have the actual legal, you know, Roland Wiederaenders (27:13.376)
authority under state law purposes than you're a person who's eligible to sell the issuer of security.

Sarah:
Makes sense actually, because if you think about it, a company is not a natural person. A company is not a human. And so the company has to have a way to do business and a company has to have a way to raise money and you either get money through raising investment, taking debt or selling something. So in the end, to me, it's just very logical
that you have these kinds of exemptions or this kind of an exemption because it's actually somewhat of a logical or natural right that should be there. A company that's issuing securities has to be able to do that because otherwise there's really no point. And then you would lose the ability to have a vibrant kind of investment climate, right? Because you're taking, you would,
take away this fundamental activity that companies do that entities do as it say issuers do, is obtain money to do business of some kind or another. So this all and know, companies, this is called an agency problem, or an agency issue companies not being human have to work through humans. And then you have the complexities that come up with that. And, and especially if you aren't from within the company or party dealing with that company, you need to know, you know, if that person you're dealing with is really able to represent the company and what they're telling you. So this is a complicated area that becomes very interesting when you dive into it. And it's covers a lot of different areas of the law, not just securities work and investments, but it's in the end, think prettypretty logical and intuitive for a lot of people that the officers of a company, the employees of a company, particularly senior and executive employees would be able to go out and offer and sell securities in the company and raise money. So this section addresses all of that in a technical way and a level of detail that we could dive into maybe in another episode if you really want to get into what is an employee, what is a director Roland Wiederaenders (29:30.086) and some of the other elements of this definition.

Roland:
Well, and I think one important point, to make is that when you think about people who are working for a company, you know, an issuer, they, they really either work as an employee or a contractor. And here in Texas, we have at will employment. So, there's, there's not a huge distinction almost between a contractor and employee, but if you have an employee and at will.
If you're at will, the company can fire you for any reason or no reason. can quit for any reason or no reason. The company can't fire you for an illegal reason like race, ethnicity, age, gender, know, the other protected classes, but it can let you go at any time. There's an important rule with employee, you have to withhold the employment taxes, the social security from paying your employees. So whether you have an employee or a contractor, that's a really important distinction just to know. But here, if you don't have an employee, then you have to fit the person into another one of the categories. If they're not a partner, then they either have to be an officer,
or a director, everybody knows what a director is, a member of the board of directors. Of course, if a president is authorized to sell securities on behalf of the issuer, then the board of directors. And I guess you can use a director in context of a board of director. And then there's like a director, an officer position as well. the director, executive position, the executive or senior position. mean, but but they're If you have a contractor, if you don't have an employee and you want them to be an associated person, make them an officer, you know, and it doesn't have to be president or vice president. Like I said before, you could have director of investor relations. That's a very suitable role for somebody that's serving in this way where they're going out and talking to the potential investors and telling them about the merits and risks of the investment. And then Roland Wiederaenders (31:42.764) going forward, even after the investment occurs, after I write that check and buy my shares of stock, I'm going to have continuing questions. We talked previously about one of the primary risks is liquidity risks, liquidity risk for private security. So when I make my investment, I can't go out to the online broker and sell it the next day.

Sarah:
Who is your new best friend. What's that? Who's your new best friend?

Roland:
Well, yeah, the director of investor relations, because you're going to be calling him every day. Hey, how are things going? Did we get the rehab done? Did we get the patent filed? You know, what's the whatever, but I mean, you're going to be continually asking that person, you're going to be continually asking questions of the issuer about the status of your investment. And so, you know, that that's who who you want to be involved in the sale of securities and so having an officer level person doing that is important.

Sarah:
And I just want to say, think what you're saying, Roland, is that because officers here are separate from employees, it actually widens the category of who can be an officer. You can have a contractor or an advisor even, you know, play that role if you give it to them in your company through contractual arrangements instead of the contract that is an employment arrangement. There's some flexibility here in terms of who can be an associated person of an issuer. And I think sometimes you can call it agents, employees or agents of, or the associated persons of an issuer. And that just gives, you know, it gives flexibility, but there has to be some level of formality in that that person is associated with the issuer, representing the issuer and compensated by the issuer. And we'll talk about compensation maybe in more detail after we talk about the third category, which is the investment advisor category.

Roland:
Right.

Sarah:
And so if you're ready to talk about that, I don't know if you're done.

Roland:
No, I mean, I think so. And just noting again, you know, if there are other securities attorneys watching this, you know that we're skipping over tons of information. again, trying to keep this at a high level. And so Roland Wiederaenders (33:57.998).

Sarah:
You know, well, I think we're trying to keep it digestible. Yeah, exactly. We can. Well, we'll delve into a lot of these topics in great detail as we progress with producing this show. But also as as we get feedback from people in terms of what they'd like to know more about, because there are certain areas that are really important and people's daily lives and other areas that they just have to touch on from time to time. And also all of those caveated with in your own personal situation, you need to go and get legal advice, investment advice from the people that you formally engage with to provide that advice. That's the advice you've in the end rely on. And what we're doing here is trying to give you the basis so you can really efficiently and intelligently rely on your advisors.

Roland:
Yeah, for sure. It can't be stated enough. You know, I don't want anybody to rely on things that are said here at a high level and they go out and lose a bunch of money and get mad at us when we're really just trying to provide the information and education. But the third class that we're really most, I'm most interested in, we're most interested in talking about today is a new exemption to the broker dealer rule that was adopted in 2013 in the jobs act. And it was an amendment to the securities act. And it added a new section for see of the Securities Act that provides for a new exemption from the broker dealer rules.

Sarah:
Jjust before you continue with telling us what that is, Roland, as I mentioned at the beginning of this episode, this is of a special relevance to you because you are actually one of these people, right? You're an investment advisor.

Roland:
Yeah, I mean. I'm an attorney. so when you become an attorney, Sarah's an attorney. When anybody becomes an attorney, you have to go through a registration process with the state bar of the states where you want to practice in. Texas, there's a state bar of Texas and you get licensed through the state bar. After you jump through a number of hoops like law school bar exam and a background check Roland Wiederaenders (36:11.84) So, you know, that's one thing that, you know, I've always been fascinated by this area. It's a fun area for me to practice in. But when this exemption came about and I learned more about it through some no action letters we'll talk about here in a second, I realized that there may be an opportunity for me to help my clients in a new and different way going beyond what I do as their attorney. And so I decided to register and there's a separate registration process that you go through to register as an investment advisor. And this is going to be a topic that we'll talk about in the future, Sarah, whether you register with the state securities regulators or whether you register with the SEC. Right now I'm registered with the Texas State Securities Board and the name of my real investment advisor firm is Real Advisors. And I'm the investment advisor representative. And Sarah, we can say it's our firm because we are working together on this as a project of real advisors. You're not an investment advisor representative. So any investment advice, we talked about this, you have to be under my supervision. But in any event, that's really where, how we're...that this exemption that we're about to talk about that applies to investment advisors. It's the whole reason why I registered real advisors as an investment advisor. And it's really what gives us license to do this podcast, this webcast. And it really gets at the heart of what we're trying to do through the webcast, which is help our clients sell their deals.

Sarah:
Right. Exactly.

Roland:
So let's get into it. And this language is that I want to read. I'll try to pick out the main parts from this exemption. But again, I don't want to go into too great a detail and any other securities attorneys that are watching this, you know, will be rolling their eyes about everything that I've left out. But I think it always details to pick on at a high level. People can understand this from a term that's become very popularized over the last 10 to 15 years. It's crowdfunding.Roland Wiederaenders (38:32.11) And so what we're really talking about here is I'll read the language. It's with respect to securities that are offered and sold in compliance with rule 506 of regulation D. Have we heard that before? That's all we've been talking about. The first four episodes, we brought that up over and over again. So we're talking about the types of securities that we're talking about, private securities. As long as you've got a rule 506 offering, then you won't be deemed to be a broker dealer if this is what you do. If you maintain a platform or mechanism that permits the offer, sale, purchase, or negotiation of, or with respect to securities, or permits general solicitations, we've talked about that, advertisements, or similar or related activities by issuers of such securities, whether online, in person, or through other means. So we're doing that through this webcast. And when we have a one of our clients on, we're going to say, you know, Hey, tell us about your background and what's your current deal. Is it a 506(c) it allows for general solicitation? Well, tell us about it. Don't say anything that's fraudulent. Don't make any misrepresentations, but tell us about it and tell us, give us information about how people can invest. And because we're re we're a registered investment advisor, we have license to do this. The, the rule itself, the statute doesn't say use the term investment advisor, but there are two important, no action letters, funders club and angels list angel list, that, really flesh this out and it just permits us to do what we're doing here. So we're really in this third class of people who can make offers and sales of private securities provided that we satisfy all the requirements of this, the statute in these no action letters where it's been fleshed out a little bit more.

Sarah:
And this is good news because this covers off like we've been talking about again, the same theme of democratization of capital and being able to enter into this industry in this space. If you want to call it a space without already having a lot of wealth accumulated, this is important because what it does Roland Wiederaenders (40:56.724) is it brings access to experts and expertise in an environment with a little bit lower stakes? So there's lower regulation, but there's also more opportunities to engage and to participate and to seek the help of an investment advisor. So this is all, it's all really critical piece of the whole picture of what we've been talking about in terms of alt investing.

Roland:
I think the next place we can go to is talk about the compensation model because that's an important thing that maybe some people may not understand how investment advisors typically are compensated.

Sarah:
And this is also another really important piece because of course, how do you get people to help you? You're clear about compensation. Everybody wants to know about compensation. And as we noted with the broker dealer rules. The last thing you want to do is find yourself in a situation where you're contemplating a deal or offering a deal and you're violating, somehow violating the requirements and you end up acting as an unregistered broker dealer or something to that effect, or there's an illegal commission that's paid and in the future that brings problems. So the good news here is that there are alternatives for seeking investment advisor support and issuing private securities through the issuer exemption, associated persons to the issuer. And now we'll talk about the compensation that you can do.

Roland:
So the way that investment advisors traditionally are compensated or a percentage of assets in our management are per annum charge. So you invest a million dollars in a deal and the investment advisor is paid one percent per annum on on the amount that's invested. So I get $10,000 per annum for managing that investment. And at the end of the year, Well, it can be. Yeah. I mean, there are different rules about that, but I like to advise people to do the in arrears payment because then you don't have to arrange for a refund if they terminate mid-year. So I really do advise people to charge those fees in arrears. Roland Wiederaenders (43:08.972)
So that's one type of compensation, assets under management. If you engage with a financial planner or investment advisor, that may be a model that they present to you that you're bringing in this chunk of assets and we're going to help you create a portfolio that encompasses all your assets. And the way that we get compensated is we value the portfolio and we take 1 % of that as our charge.

Sarah:
And we see that in many, many of our deals, don't we? Assets under management. It makes a lot of sense actually in any, like say a commercial real estate deal. It keeps the management, the investment, the advisor engaged too, right? Like you have continuing help for that. Yeah, that's right.

Roland:
And I mean, that's an important thing to note that anybody that has any substantially significantly sized investor group, if you have more than 10 investors, I mean, just that's...If you have more than five, you're going to be continuously getting these phone calls about what's going on with my investment. And so you're really going to need a dedicated person, this director of investor relations that can talk with your investors about what's going on. So it's this dedicated role that the person that is serving in that way for a company, they may or may not be an investment advisor. But, you know, it is, they're performing a similar role than an investment advisor would because they're going to be answering questions from the investors about the status of this specific investment. And, you know, this is an area too that it's hard for us to advise in because there are lots of details. And I guess the one thing that I would want to remind people of is even if you are an associated person of an issuer, or the investment advisor, this crowdfunding exemption that we've been talking about, it's still illegal for us to receive commission compensation. So we're not saying that, just because you're an associated person or you're an investment advisor, you can receive commissions on the sales securities. You may not. That's an absolute prohibition. If you want to receive a commission, you have to be a broker dealer. If you want to pay a commission, you have to pay it to a registered broker dealer.Roland Wiederaenders (45:32.696) But there are ways to be for other people to sell the securities and there are ways for these people to be compensated. And we just mentioned the first way, which is asset undermanagement.

Sarah:
Do you want to quickly mention some of the others? Because I think this is really important for people.

Roland:
Yeah. And the other main one is a percentage of profits. And so maybe you've heard of a carried interest, but all of our commercial real estate deals have this where maybe there's a preferred return component, but the distribution splits go, we're going to pay 100 % of cash to our investors until they get their money back. And then after that, it's a 80-20 split. 80 % goes to the investors and 20 % goes to me as the deal sponsor. And that 20 % is a carry. It's a percentage of profits. There are specific rules about...payment of fees based on a percentage of profits for investment advisors. And this is whole other thing that we can talk about. Again, all the securities attorneys who are watching this are rolling their eyes and scratching their heads. But that is a traditional way that investment advisors have been compensated. And what I envision for real advisors is how we might be compensated is that we're going to be working with our issuer clients. And, you know, in connection with the help that we give them to sell their deal, then in return, they share with us a percentage of their carry.

Sarah:
And you know what? This is something just broadly speaking, like when you're invested in the success of a deal, that that's actually is really good because it's going to lead you to want to provide really good services to, you know, if you are bringing investors to the table to a deal, you need to make sure the deal is really good for them and you need to make sure the deal is good for you too. And this is what engages, you know, all of the parties to the investment into it is this promise of a good outcome and a strong, healthy outcome. when you have, it makes sense, doesn't it, to have compensation based on the actual performance over time. There are, know, there are wider discussions about how there should be more of this built into Roland Wiederaenders (47:51.91) all across, you know, Compensation across corporate, the corporate world, really not just Corporate America. So, but that's what this is here, right? Is that you don't get to just find somebody, take your money and go away. Who cares? What happens to the investment that you need to remain engaged to some level, obviously in agreement with the issuer and their management, to support the success of the deal. And if you have skin in the game, then that's something that naturally you'd want to do.

Roland:
Yeah, mean, alignment of interest is such a thing. And I love contextualizing this for people because, know, we started out the conversation by talking about the client that comes to me and says, well, I've got the wealthy investor and I'll introduce him to you if you pay me three percent of the investment amount. And so he gets his three percent illegally and walks away. If the deal fails, though. That investor will be mad at the deal, the deal sponsor, the issuer, but who else will he be mad at? He's gonna be mad at the person that introduced him to the deal as well. And when people get mad, they sue. So if you're out there thinking, thanks for the information, Roland and Sarah, but I'm just gonna continue to break the law just like everybody else does. Just know the practicality of it that maybe you don't get in trouble unless the deal fails. But if the deal does fail, you're on the list. you're on the list. But really, it's in your interest to stay invested in the deal in the sense of I'm working to help achieve the profitability. If there are problems, who's the best person to report on something bad? But it's me because I can couch it and I can frame the problem and then I can immediately follow up and say how it's going to be fixed. that investment advisor role, investment advisor type role versus just a broker dealer who gets a commission upfront, you know, I really want to stay with the deal and help the issuer succeed and manage it and communicate effectively with the investors. And that's super important. Sometimes there are failures in businesses. Roland Wiederaenders (50:10.282) And whether the business gets sued or not is all about how the business handles the messaging to their investors and whether the investors feel like they've been left out in the cold or the issuer is trying to hide the ball or they haven't been communicative. So that's a really important concept is thinking about this in terms of the investment advisory role or investor relations role that you're going to be staying with that investor for the life of the deal. There's no better person to talk to that investor than you, rather than somebody at the company that maybe you don't know. Who knows what they might say to that person?

Sarah:
Also, likewise for the issuer. If they're in a crisis, they're going to need help.

Roland:
There are ways of handling problems that professionals understand that the amateurs may not. You may be a super intelligent business person, but in terms of speaking to investors and thinking about all the considerations that you have to have when you're talking to them and messaging to them, it's just, it's a different game. And so that's really why you want to hire people like Sarah and me to be your attorneys or, you know, have an investment advisor. Or have a sophisticated director investor relations that can answer all these difficult questions from investors and not offend them in the process and be respectful.

Sarah:
But it's just it's a lot of value add that comes because in the end, as we've talked about before, when you talk about money, people's money is hard earned most of the time and. In their emotional, it gets very emotional very quickly. Whether it's because if a person loses money, it may be a large amount for them. You can't make that judgment for them. Everybody has to make their own judgment about their tolerance for that. know, overall, I think it's still a very positive thing to get into alternative investing. You can't prevent problems from happening in any any area of life. Right.

Sarah:
Yeah, for sure. I mean, you think about the public companies and the vicissitudes there, the ups and downs. Right. Roland Wiederaenders (52:25.314) There's no guaranteed investment. in later episodes, I think we'll make the case for why investing in alternative assets can be maybe the very best investment decision that you can make. talking about that investment decision is really why we're spending so much time with this, because of the investment decision, you first learn about it from these natural persons that are eligible to sell the private securities.

Sarah:
The key takeaway we'd like to offer you here is that when you hear about an investment opportunity, you need to think closely about who's bringing that to you and how they're getting paid. And that's important for all the reasons that we've set out here, that there are illegal payments that a party can be asking for. And there are people who are promoting or who are selling or offering investments who maybe shouldn't be. And it's very tricky because if you're facing one of these situations, especially if it's a person where things don't just quite, you know, line up with some of what we said here, then that should raise a red flag. And it can be especially difficult if it's somebody close, like a friend or a brother-in-law or a person in your trusted community. But at the same time, just, we would recommend deeply considering how to proceed when you're faced with a potential opportunity, really think about who's bringing it to you and what the compensation that they are expecting for that is supposed to look like.

Roland:
It can't be overstated. And there are all these indicia that, that you need to reflect on to determine whether an investment is good or not. And if, if you are being approached by somebody that's not eligible to make an offer of the issuer securities, then it says something about the issuer and their integrity. And they may have a great business idea, a great execution plan, but that could be undermined if they go about things in an illegal way. And so if they are doing that, it would cause me to scratch my head about it. And maybe I could help them. I could, I'm, you know, I just saw a Sarah and Roland talk about this the other day and you guys should really talk to them about, know, whether this is legal or not. But I mean, if they don't.Roland Wiederaenders (54:49.72) try to fix what it is that they're doing. I wouldn't make the investment. because, you know, I only want to invest in things where I get the idea that, people have crossed all their T's and dotted all their I's including legal compliance. And if they haven't, then it's not a good investment.

Sarah:
So, And this is, yeah, mean, words for the wise, right. But we say it from the, with gravitas in terms of what we've experienced. It's, you know, I remember a long time ago, a law professor telling me that you can use the smell test in certain ways, which is like something smells funny. is. And I think that's not, you know, detailed legal advice or investment advice, but it's human advice. Right. And we use that kind of a test in lots of parts of our lives. And when it comes to investing, it's always good to ask more questions than to not. So if something smells funny, at least explore it further to understand why you might be having that reaction.

Sarah:

So Roland, shall we wrap it up today? And we want to thank you all for joining us and please subscribe and follow us on our social media. You'll see that all below.

Roland:
And as always, we want to remind everybody to take aim with your alternative investment strategies.

Sarah:
Thanks for joining us, everyone. See you next time.