Fundraising is definitely one of the biggest things any aspiring note investor has yo think about. Scott Carson talks with Joel Block from Bullseye Capital about raising funds like Wall Street does. They discuss when and why you want to create a fund to maximize opportunities. Joel shares the difference between syndications and funds and why you need someone who has operated funds to help you create the documents and understand the legal side of putting a 506(b) and a 506(c) together. Joel also shares his upcoming Syndication and Hedge Fund Symposium taking place in Las Vegas, NV on May 1-4th. You can book a call with Joel Block at https://bettercapitalnow.com/.
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How To Raise Money Like Wall Street Does With Joel Block
We’re honored to have you. We’ve been doing these shows since 2011. I started doing them back in 2011. If you would like to catch up on all the replays, you can also check our YouTube channel and subscribe to The Note Night In America podcast by going to WeCloseNotes.tv. Hit the subscribe button and the little bell so that you’re notified when we go live or when we upload new videos, which we’re uploading each week after. Check out the Note Closer Show Podcast, which is our megawatt blood port to the Note Camp Live podcast. We release new episodes each week. There’s a lot of great stuff out in the market and great things happening. Season deals flow and having some great conversations with different Wall Street guys.
I know so many people are looking to raise capital. They’re looking to do things bigger and better, especially all the doom and gloom that people are talking about with the market crash in different areas and real estate dropping or increasing, which makes for a lot of opportunities out there. We did have our master class on wholesaling notes. You can catch the replays at WholesalingNotes.com. You can purchase the replays for the class. We ran from 9:00 to 3:00 and had a great turnout for this. That includes over 70 pages of contracts and forms to go along with. You can watch all the replays live.
We also make videos available for you to download, so you can take them with you on your laptop or computer. I’m going through a lot of stuff. You want to grab the ticket and go to WholesalingNotes.com and grab your access to the replay. It’ll also give you a ticket to the Note Weekend Class. It’s our one-day cliff notes version of note investing. For any questions about that stuff and any questions on access or our contact, go to WeCloseNotes.com to check out all the different things that we have available for you out there.
This is a very special thing. We’re very honored to have a very special guest. A guy that I call a friend. He is probably doing more for investors out there than many other people that I know. He’s somebody who has got a ton of experience in this field of raising capital, doing it as Wall Street does. I almost call him your Gordon Gekko motivational speaker. He has been a hedge fund manager since 2012. He is the chief bottle washer and head honcho over at Bullseye Capital Group.
He likes to say that he’s a hedge fund manager turned motivational speaker. He is a great guy who has a big heart for helping people take their businesses to the next level. He has many years of experience as an entrepreneur, raising capital and taking businesses whether it’s real estate or other things, and helping people put funds together.
In the last few years, he’s helped launch over 75 funds and over 150-plus indications. We’re talking about billions of dollars raised through his training, and how he has helped other investors like you and me get started. He’s a board member of the National Speakers Association and has been doing that for years. We’ll let this slide because he is a big LA Dodger super fan out there. He finally was able to see the Dodgers win a World Series here. We’ll hold that against him as well. We were talking about Joel Block. He’s a hedge fund pirate.
I can tell you a story that I was sitting at Dodger stadium. It was a very intense game, and then a foul ball came and hit me right in the face, but that’s not what happened. I’m not going to tell you that story, but it would be a great story.
You got a full house there, is that what that is?
The one thing that’s not on your list of all those things is I started my career as a professional card player. I was a Blackjack player and a card counter. There are a lot of lessons and that has become part of what I talk about. I share a lot of lessons. I’m invited often to corporate events and association events. They dig out learning how to count cards. I teach them some of the lessons and strategies that come out of playing. It’s called being an advantage player, which is somebody who plays at the top of their game.
They think in ways that others don’t think. They do things that others don’t do. They see things that others don’t see. Imagine everybody sitting at the Blackjack table seeing the exact same thing, but only the advantage players get enough information. They have the situational knowledge and awareness to be able to professionally bet their hands and play their hands, and everybody else is just guessing. If you think that guessing is the way to run your business, think again.
Especially more so these days.
I want to talk about predicting the future because we’re all in a business where you have to predict the future a little bit. I’ve got this technique. I call it sweat. What’s the impact of that? Anytime somebody gives me a fact that I asked the question or the people at the board rooms where I sit, I asked the question, sweat. There’s about to be a war or now we’re in the middle of a war.
What’s the impact of that? I can tell you that there are traders on Wall Street. They are the smart guys. They sit around a table and they ask a question similar to that. Remember I’m a professional investor. Scott, so are you. You’re buying notes and that’s what you do for a living. We have to look forward in time. What’s the impact of there being a war in Russia and so forth? One of the impacts is that the oil supply has to be affected. These smart guys did it a few months ago. Is there probably going to be a conflict? If there is a conflict, what’s likely to be the problem?
They produce a lot of oil. What’s likely to happen? Disruption in supply. What’s the impact of that? Shortages. They go on and on. Finally, they say, “Who wins? Who loses?” There are guys that bet long on oil futures, which means they bet that the price of oil would go higher. Guess what happened to those guys? They cashed in. Billions of dollars got made on oil futures. You and I have that discussion about notes. What’s the impact of inflation, the war, and the supply chain problems on banks, notes, individual people, and their ability to pay?
We don’t have to do it in front of everybody, but that’s the kind of exercise that people would give their eye tooth to participate in between a couple of guys like us. Maybe that’s something that we talk about doing because, for the corporate clients, the funding executives, the mastermind of hedge fund managers which I have that you’re a part of, those are the kinds of discussions we have. I think that your audience would eat that up.
That’s something we got to have at a future date because there is a lot of unease. We’ve seen that already for the year. When they announced that inflation is going up. What’s the impact of that? How does that affect your dollar?
The money doesn’t get made when things are going smoothly. Mainly, you make a little. When things are turbulent and they’re flying around, that’s when all the money gets made. The thing is a lot of us have been through these patterns before. If you came into real estate in the last few years, you would know that. If you’ve been around the block like I have a few times, I got a few gray hairs and that proves I’ve been around the block a few times. I’ve been around the table to eat my share of the dinners and the desserts, just to be clear.
I’ve been around this block before. I know pretty much exactly what’s about to happen here. There are people who don’t understand what the pattern is. Now is when the money gets made. It’s made by speculators who are smarter than other people that ask better questions than other people that are advantaged players. Let’s make our conversation about creating a couple of advantage players.
We look at a lot of different things out there. The biggest thing that people probably need to do first is to digest what the news is telling us and started looking at other factors out there. Would you agree with that?
By the time you heard the news, it’s over. They don’t usually get it right. There’s usually a narrative or some fake news. Unfortunately, a lot of what we hear is distorted. They have a hidden agenda. I’m not one of these conspiracy theorists. I’m in a world where we know a little more than maybe some other people. That’s why hedge fund managers in our group come to me, and I give them what I hear. That’s the deal. I would brainstorm with people you trust and know. The smarter the people you can get around the better.
When you’re looking at different things, what’s your go-to for information. What are you doing to go up the food chain to get closer to that direct source of information? As we make the joke, “You have that inside track, Bud Fox.” We were talking about the movie Wall Street. What’s the information that you know that nobody else knows.
There is an inside track, and you’re either on the inside or the outside. There is another inside and I’m not all the way on the inside, but I’m closer than most people are. I’ve got people that I call and talk to. I’m on the phone all day long. I’m connecting on LinkedIn all day long. I’m getting a little bit of intel about what’s happening in the markets. I wouldn’t say it’s secret or confidential information, but it’s not information that’s widely reported necessarily. I just hear what I hear. Number one, I would tell you that you have to improve the quality of your network. Your network has to work for you. You have to have a good network.
Not to say give up your old friends, but if you want to be in this business, you need to start making better friends. You need to get around people like Scott and his friends because he hangs out with people that are probably at a higher level than many of the readers. If that’s the case, get around those people and learn from those people. Take in as much as you can, and be concerned about being able to deliver that value back if you can. Networking up is hard because you don’t have that much to give. You may have to join a class or take a program. Whatever you’re going to do to get into the loop, you do it.
If you want to up your income, you always take a look. As they always say, you’re the average of the five people you surround yourself with the most. If you don’t like that you’re average, then you need to update the conversations and the networking. Attend our class, join our mastermind group, and start finding those people that you want to hang out with or where those people spend time to start networking and talking to those people. You got to grow into that level. Most investors out there start off at that lower level trying to figure out their local REIAs, then they’ve got to take that step up.
I do want to say what not to do. Don’t call somebody like me and say, “Can I take you out for a cup of coffee and pick your brain?” A $4 cup of coffee at Starbucks is not going to do it. That probably is not the right angle. You got to find a different angle than that, You got to be a little bit more creative and go from there.
Take them to the Dodger game.
Now we’re talking. Take me to a Dodger game in good seats and I’m yours all night. I’m not telling anybody I need this. I got my own seats and everything, but that is a good idea.
One of the best things that we’ve always done is go where the folks that have money are hanging out, whether it’s the country club or the Four Seasons. Pay a little bit better for a more expensive seat at a game. I’ve always found that when you paid more for a seat, it was always valuable, not just a better view, but the people that surround you and engage in conversations. I’ve raised money at professional sporting events when I’ve been out there talking and rubbing elbows with folks. You never know who’s sitting next to you on the plane, at a game or on a train if you’re in the VIP or first class.
I want to talk about syndication and raising money here. One of the smartest things I ever saw a woman do is when I was speaking to a non-profit audience. In the end, there was a charity auction. They auctioned me off to do whatever, and then they got to keep the money. This woman bought half an hour of my time and donated it to the charity in the amount of $500, $1,000 or whatever they were asking for me. I get on the phone with her. I said, “How can I help you?” She goes, “You cannot do anything. I just wanted to get to know you.” I go, “You got to be kidding.” It turned out that she was a very impressive woman. I’ve referred a lot of business to her because I don’t do the kind of things that she did. This woman is very smart. She laid out a few dollars and has gotten it back a hundredfold
One of the things that you and I both have shared about having our show is it is a little bit for our audience, but it’s more so for us because we want to pick the people’s brains and the interest of people that we’re talking to.
There’s no way I’m going to have a guy on my show for 60 minutes and we’re not going to become friends. There’s no chance that that’s going to happen. We become friends. I’ve had the most extraordinary men, women, and people in all different industries come on my show and talk about interesting things. I’ve learned a lot and made some nice friends. Let’s talk about money. These people want to buy notes, but they probably don’t have all the money they needed.
Let’s talk about that. There are a lot of people out there that the money question about raising capital scares them. Especially in times of disturbance like we talked about, those that have the money have the golden rule because there are so many things that happen and it’s hysteria being able to buy deals and have that capital available. There are specific things that you need to do to protect yourself and raise it the right way versus the wrong way. There are a lot of people that do things the wrong way and get in trouble.
Let’s not focus on the mechanics. Let’s talk about the concept maybe in the bigger picture. The guys with the gold make the rules. I get that’s the golden rule. In a funny way, the people with the gold nowadays are the most nervous of anyone because every day, their money is worth a little bit less. In the last 40 years, we haven’t had any inflation in the United States. There aren’t that many people who remember what it was like. Just like there are a lot of people who don’t understand the real estate cycle, they also don’t understand the inflation cycle. They’re about to get a big surprise. What people of means understand is that every day, their money sits in a bank account underperforming. It gets to be worth a little bit less than the day before.
That is a serious problem. Where do people go? They go to hard assets like real estate. Notes secured by real estate are about the same as real estate. They go to gold. More and more are going to cryptocurrencies like Bitcoin because that store value. They’re going to more places. That’s where professional investors are putting capital, into these hard assets. The stock market is volatile. In fact, I predicted at the beginning of January, we hit the top. We’re all the way down and we are way on the way down. I didn’t know there will be a war. We all had a sense. For the last eight years, this has been brewing. We didn’t know that it was going to happen in February necessarily, but here we go and we’re there.
If you have expertise in buying, controlling and managing assets, this is a great time to go to people that have some means and say, “I’m good at this. Would you like to ride on my coattails? I’m an advantage player. I understand the market. I get it. What I don’t have is the capital to buy all the things that I see and have access to. If you want to put some money in, we’ll do it together and then we’ll share the profits.” That’s the concept. How do most people do it? I’m not quite sure how they do it in notes, and maybe you can correct me and straighten this out because I don’t have a lot of background in notes like you do, but I do have a lot of background in real estate.
In real estate, they’ll get a private money lender, somebody with an IRA account that will give them $100,000 or whatever. They’ll secure it against the property. It has to be secured in order to be careful. They become a mortgage lender privately and then that’s it. They may make a 100% loan or maybe the person gives them some amount. They get a loan from a bank for some other part. If not from a bank, from some private lender. They put this up. That works fine if you do one property at that time or if you’ve got a couple of people that have the money. Eventually, if you’re good at this, you’re going to run out of capital. I’m sure you’ve seen that happen to people before where there are 1,2 or 3 sources. Many things could happen.
“I’m stretched too thin. I’m involved in too many deals and they haven’t paid off yet. I got to turn my money over and it hasn’t happened.” It could be that maybe that person gets busy. They go on vacation. Maybe their stockbroker called and showed them a better deal than you’ve got. They put the money over there. When you call them, the money is not ready. There are all sorts of problems that come up with using these kinds of people. They’re not bad. There’s nothing wrong with these people but I wouldn’t depend on these people if you’re trying to feed your family. The bottom line is that if you put all your eggs in those baskets and those baskets ended up dry, then your family suffers. That’s not a good place to be.
What you want to do is you want to create a bigger pool of capital, where you can access the resources that you need on a more ready basis. You get what I always refer to as readiness premium. In other words, if a note is going to sell for $200 and you walk in and say, “I got the cash. I don’t need to fool around. I’m ready to go. I’ll give you $160 today.” They go, “It’s a little bit low. How about $165?” You’re going to make some additional amount of money just because your money is ready. That’s the readiness premium. Having a ready pool of cash is enormously valuable. Especially if you’re going to go into one of these bigger outfits that have got pools of notes. They won’t even talk to you if you can’t show them that you have the money ready to go.
When you look at some of the bigger banks or note holders out there who have bought a lot of distressed debt or even have performing stuff. Many of them won’t even deal with it once you can fund $1 million to $5 million. Certainly, it even gets bigger up there if you want to buy it from the top 10% or 15%. You need to have $50 million. There are a lot of people who start off with onesies-twosies, and they’re borrowing money from their friends or family, or they start an LLC with their funding partner.
Our conversation is not for the onesies-twosies. It’s for the people that are at the next level that are ready to buy 10, 20 or 50 at a time. They need somewhere between $500,000 and $5 million. That’s the range of people we’re talking about. If now is your first day in business, keep working with Scott, keep figuring this out, learn how to do it, get all the coaching you can get, whatever you to do to get coaching. Whatever you got to learn, you can learn it.
Once you’ve done this a handful of times and you start to develop a little track record. You’ve got a little appetite for this and you understand it better. You say, “I can work on many more deals at a time. I have more bandwidth than just 1 or 2,” then you’re ready to raise some capital. Do you have the bandwidth to do 5, 10 or 20 notes at a time? I wonder where people get their money from. Money is an invisible thing. It’s hard to know, but I’ve been in the money business for most of my life.
One of the things that I know is that it’s a little tricky and slippery. It’s a little bit hard to see what’s going on because a lot of things are invisible. At the end of the day, you have to finance your property. The bigger the deal gets, the more you have to do it the right way. Here’s how early-stage people do it at least certainly in real estate and may be similar here. They find one of these private lenders people or somebody to put up some money. Hopefully, they secure it against real estate. That makes them a lender, which is great. If they say, “Let’s just be partners. We’ll be JV partners. You put in the money, I’ll put in the time. That’ll work out great. We’ll share the money.”
That works great until it doesn’t work out great. When it doesn’t work out great and something goes wrong and you lose a bunch of money, then the person who lost the money runs to their attorney. They say, “What happened?” “I had a joint venture partner.” “That’s too bad because those are pretty ironclad. They’re pretty hard to bust-up. Did you really have a joint venture partnership? When you guys did this, did you see financial reports?” “Not really.” “Did you look at the property in advance to decide if you’re going to buy it?” “Not really.”
“Did you study the portfolio to see if those notes are going to work out?” “Not really.” “Did you make any decisions?” “Not really.” The attorney says, “That doesn’t sound like you had a joint venture partnership.” “I know but I got this document that says joint venture.” That doesn’t mean anything. What was the real substance of the transaction? Was it a piece of paper? What happened on a day-to-day basis? What a lot of people do is they put these JV partnerships together, and they look fine until they’re not fine. Now you don’t have anything in what you’ve done. Let’s talk about active and passive. If you’ve got an active person who’s responsible for handling all the affairs, and you’ve got a passive person who put in money, between the active and the passive, who has all the power?
The active person.
Who has all the knowledge and the control?
The active person.
Who is easy to put out to pasture?
The passive person.
For that reason, the government has created these securities rules. Those rules are designed to protect these passive people because you have such a tremendous imbalance of power, control, and all these things that if something goes wrong, they give this power back to the passive person. You then got the R-word and it is a terrible word. It’s a very vulgar and very derogatory word. It’s called rescission. The attorney just calls you up and says, “We totally get it. Sometimes deals go South. It’s not a big deal. Just give us our money back and we’re going to be okay.” You go, “What do you mean? I don’t have any money.” “I don’t care about that. Sell your house. Whatever you got to do. Give us our money back and we’ll go away.”
You’ve committed a securities violation by taking money from somebody in a securities transaction, and you didn’t even think it was a securities transaction. Sometimes securities transactions are like if you’re selling shares in LLC, that’s for sure securities. There are lots of securities things where you can have one person be passive and one person be active. It doesn’t matter if that person is your grandmother. If she gets mad and wants to sue you, that’s a securities problem. I’ve seen some mean grandmas. They run after you. I’m not talking about they’re running after you with a purse. I’m talking about they get some wild ones out there.
The person on one side and the cane on the other. Joking aside though, this is a serious conversation. We show people the right way to do this, and there is a right way to do it. Let me just put it like this. Think about Wall Street. Do you think that Wall Street put their deal together with joint ventures? They take money from a guy and hopefully, nothing goes wrong. This is not how professionals do it. I don’t fault anyone for doing what they have to do to get started in their business. You run off half a dozen or a dozen people that are doing better. They have some means and they need to protect those means. If something goes wrong, everything that they’ve worked for is at risk.
You want to make sure you’re putting together a structure, a fund, syndication, whatever the structure is that you’re going to put together. The one thing that Wall Street is great at where it’s the best out of anything in the world is the ability to take an asset and slice it up like a loaf of bread. Here’s what you can’t do. Let’s say you want to buy a note for $500,000. Your private lender only can do $250,000. How do you do that? It’s very difficult to do that. How do you secure two people and have them be even? It’s very difficult to do that? Real estate doesn’t lend itself well to two people being even. There’s usually a subordinate and a junior. I mean a senior and a junior. That’s what they try to do.
Wall Street has ways of slicing up an asset like a loaf of bread. You buy as many slices or shares of stock as you want. Let’s say that you say, “I’m going to build a fund for the purpose of buying notes. It’s going to be $5 million and I’m going to go get $100,000 from 50 guys. Each share is $25,000. You got to buy 2,4 or 6 years minimum. You go out to people and say, “How many shares do you want?” Somebody says, “I’ll take 4, 10 or 6.” They can put it in the IRA. They can put to their pension plan. They can buy it personally. They can gift it to their grandchildren.
It’s enormously flexible. You’ve done this absolutely correctly. There’s an attorney involved and I’m not an attorney, just to be clear. I’m a CPA by my training and I’ve been in this business for 30 years. I’ve done probably about 40 of these deals myself in the past. My syndication hedge fund symposium program, which you’re an alum of had spawned. You said 75 funds and 150. I want people to be clear. Those are not my deals. Those are deals that we help people put together. Cumulatively, our graduates have probably raised $1 billion, which is incredibly impressive because we’re not talking about going to Fidelity and getting some giant hedge fund to give us $1 billion in one check.
This is a lot of people getting a $100,000, $200,000 or $300,000 at a time. It takes a little effort to get to $1 billion. We’ve done this for a long time and we’ve put a lot of people in business. We’ve made a lot of people a lot of billions and that has been great for us. The bottom line is that you can absolutely have a fund or a bankroll of cash that you can go out and shop with, but you have to do it in the right way. I would encourage people. They can get their readiness premium, participation, fees on the acquisition, the solution, distribution, and all the different things that happen.
They get servicing fees if they’re licensed properly. There are a lot of places where they can make some money because they can be the vendor of record for their own fund. It’s not a bad idea for you to be your own client. There are a lot of things that work about this. We’re only talking at surface level, but I would like to whisper into people’s ears who know what they’re doing. In fact, I would be curious, does anybody operate from proper syndication or fund structure now or are you winging it? I don’t need you to incriminate yourself and say you’re winging it.
It’s not for me to assess whether they’re doing it right or wrong, but if something does go wrong, it’s not pretty. I would hope that people would do it the right way. The bottom line is that the fund pays for its own legal expenses. It’s an insurance policy for the promoter. If you’re good at what you do, then you should handle this in the right way.
Let’s talk a little bit about that. Promoters are the individual that is putting the fund together. You say in terms of professional investor who has the experience and the knowledge of investing in asset classes that then put together a fund. Why don’t we define what the fund is? I know we know there’s a pool of money and he raised it by selling shares. Is there a legal document? How long does that take?
Let me start at the top. There are two different structures. There are syndications and funds. Syndication is a project. It’s like if you find a shopping center for $35 million that’s got a bad note on it, that happens, and you can pick it up from $15 million. You might syndicate that note and just do it as a project. You go out to some folks and you say, “Let’s each put in $1 million and we’ll buy this thing. I think we can fix it up and sell it for $30 million and double our money and in a year or two,” or whatever the business plan is. That’s your syndication.
A fund, on the other hand, to finish the syndication, when you sell the property, give the people all their money back, and now you’re back. You keep your profit and your back to scratch. You have nothing, then you come up with another deal and you’ve got to go out and start over again. You raise your money for that next project. That’s great. The projects are fantastic. Funds on the other hand are ongoing businesses. You set up a fund. People commit to let’s say five years. You can buy and sell. You buy an asset and take the profit. You give the people their profit, but you keep the principal and then you go buy more notes.
You’re not constantly in fundraising mode, the way you are with the syndication in that model. It’s possible that you put 50 people in your fund and you come across this $35 million special deal and you call ten people and say, “Would you like to do this one deal as an offshoot? It doesn’t have to be in the fund because maybe it’s not right for the fund.” Funds tend to have a theme. We’re going to buy residential mortgage notes under $500,000 in the Southern part of the United States, or we’re going to buy commercial notes in excess of $20 million.
You have to create some parameters around it. People aren’t just going to give you permission to buy anything you want because you might buy a Harley motorcycle. Who knows what you would buy? If they said, “Buy anything you want and don’t mess it up,” that’s not a formula for success. Part of the reason why our people have been so successful is that we help them to be focused. A lot of people want to do a lot more things than we recommend, and sometimes they push back. For the most part, we try to get them to focus.
It’s an important thing, especially since you’re helping me with my fund that we’re going through helping to narrow down that niche and that focus. You have it crystal clear about what we are focusing on, so it is not what’s available in a broader fashion. It’s more like, What’s your bread and butter? Let’s talk about that bread and butter.” Investors don’t like to invest in just anything.
There are a couple of things. They may go, “I pretty much get how residential mortgages work. I don’t get how commercial mortgages work, so I don’t want to be involved in that.” That’s the reason why you specify. It’s because if you think the people you go to are going to want to be involved in bigger and more stable assets like commercial shopping centers, I don’t know if they’re necessarily more stable, but they’re highly risky in a certain way, but if that’s what they like, then that’s what your fun should be. If you think that the people are going to like residential projects, then put together a residential project. You think through what your deal is and you have to stay true to whatever your theme is.
It’s important, but the ability to take an asset that doesn’t fit in with what your fund is, and then do it and offshoot it as syndication. It still allows you the opportunity to do it.
If you’re doing all residential and then you come across a shopping center, you don’t put that in the fund, you do that separately. Having these structures, they’re not mutually exclusive. People say, “What do you prefer between syndication or fund?” I said, “What do you prefer, putter or driver?” They would go, “That’s a dumb question. It depends on your situation.” I said, “Your question was dumb too. It depends on your situation.” I don’t mean dumb in a bad way. In certain circumstances, the fund is better. In some circumstances, syndication is better. Don’t focus on that. That’s my job. My job is to tell you what the right structure is going to be for you. That’s something that I can help you with.
That’s the thing I want to bring up. I want to hit that nail on the head. I think you take it for granted quite a bit. It’s also what makes you so unique in helping people. I have talked to a securities attorney and put together a private placement memorandum. It’s legalized, but it doesn’t have a lot of good operating wheels when it comes to the business side of things. You have done a great job of bringing the operations to the business side, the legal side, and putting that together.
That’s why the attorney and I worked together. You could go to an attorney and get this done. There are a lot of people who go straight to an attorney, but attorneys don’t work in the field. They don’t work with investors. They don’t see the real estate. They don’t typically leave their office and get involved in projects. What ends up happening is that I can’t tell you how many people have called me and said, “We’ve got a private place. We are ready to go.” “That sounds fantastic. How are you doing? “It’s not going that great.” “What do you mean not going that great?” “We are raising money.” “What’s the matter? Don’t you know any investors?” “We’ve shown it to a lot of investors. They don’t like the deal.” “What’s the deal?”
When you find out what it is, the attorney’s job is to advocate for you, but sometimes they have to make things fair for the deal. Attorneys are not great at that because they’re trained to make it free. My job as a businessman is to make the deal work and say, “We have to make it a little more investor-friendly. The attorney wants to tighten the screws a little bit, but we have to loosen that screw a little bit.” For example, you don’t want investors selling their shares to other people.
The attorney might say, “No sale of shares or transfer of shares to other people.” That’s probably a little too onerous because what if grandma and grandpa want to do some estate planning and they want to give shares to their grandchildren. That’s an acceptable transfer. You don’t want them to sell the share to the next-door neighbor because that could be a cantankerous, mean-spirited, who knows what, and that you don’t want your deal. There is a reason that you want to make sure that you have control over that, and then you get to approve the sale or not.
Every single deal has something. I’ve seen attorneys who locked down deals so tight that nobody wants to invest. It’s such a great deal for the promoter but it’s a bad deal for the investor. You want to make some balance. The attorney and I balanced this, but on the other hand, we have a strong operating agreement that we’ve developed over many years. That’s what our clients get the benefit of because that is helping them do this.
It’s not a coincidence that a lot of our people have been very successful in that it has worked out. It’s probably a little more money than you could probably find a guy in the Yellow Pages, but the guy in the Yellow Pages isn’t going to get the job done the way you needed to. You can try but here’s the problem. You’re not going to find out something is wrong until you’re deep in the deal, and then it’s too late to turn around.
That’s a key factor there. Once that ship has sailed, you can’t turn it around.
Once the first person signs the operating agreement, you’re stuck. You can’t change it around easily. You then have to get everybody’s permission to change it. If you forget to put in a fee, if you forget to do whatever, you can’t go back to the investor and say, “I forgot to put brokerage commission into the end of the thing. That’s very important to me because I’m going to make a lot of money from there.” They’re going, “No.” You have to get the stuff.
You get the first crack at it. That’s what we help people do. It is to make sure that they understand what they’re doing and do it right because they get one thing, then they’re stuck with the documents for years once the deal starts. Part of the reason I fell into these years ago is that people call me and say, “I’ve been syndicating. Five years, I’m not making any money.” “Why not?” They would tell me and say, “Did you charge this?” They forgot everything.
“The attorney didn’t tell me about that.” Of course, they didn’t tell you about that because that’s not what they’re thinking about. They’re thinking about lawsuits and things that attorneys think about. I’m not criticizing attorneys. The documents were all written by attorneys but I give them a template of instructions to include all of these things into the deal. That’s the way that he and I work together. I help you do all the clarification and all the thinking. We design all this stuff and then we give the instructions to the attorney for him to write down.
One thing you’ve said is if you’re collecting a fee, just disclose it. That’s the biggest thing, whether it’s a sales commission or an asset management fee or servicing or costs associated. Instead of you off-sourcing it to somebody else, make sure you’re the vendor of record for that specific line item.
Here’s another thing that’s important. There are a lot of smart people out there. Sometimes being smart is a curse. They come up with these totally creative ways of doing things. They’re so creative that no one can understand what they are, “I got this new way. I’m going to be doing it. We’re going to do this.” That’s not what investors want because when they turn it over to their attorney or their accountant. Both the attorney and the accountant studied these things in college. They studied them for their professional examinations. They understand how this stuff is supposed to work. Every accountant or attorney has seen this They know how to write these documents. They certainly have looked at these kinds of documents before.
The client says, “Would you look this over?” They look at it and they go, “I don’t understand what this is. Do you want to pay me $10,000 to read every word? We’ll pass on this one. We’ll go to another one.” The problem is that the person who gave the investor the deal, whoever that promoter, sponsor, syndicator or fund manager is, you never get feedback that says, “Your document was stupid. We don’t even want to read it.” What they say to you is something like, “I want to invest in your deal real bad, but I remembered that my daughter is getting married and I need that money for the wedding. I totally forgot. My kids are going to college. I have to use that money.” Some ridiculous excuses, but they never tell you the truth. The truth is that when you have a bad deal, people don’t flock to it. You have to create investor-friendly terms and that’s a mandatory part of this business.
With the terms, are we talking about preferred rights of return, different rates of returns, what somebody invests with or some profits on the back end? What are we talking about?
That’s what I would call industry standard. When you use a system of hurdles and waterfalls. Our hurdle is preferred. In other words, you have to exceed or jump over 8%, 7% or 9%, whatever you pick, or you don’t get anything as the syndicator because we get the first money. That’s fair because they’re putting in the money. You’re putting in the time. Time is valued differently than money. They get paid something for their money. After that, then we’ll share. We have a couple of other little steps in there that we’ve added to make it a little more fair to the promoter.
Put it like this, if somebody says we’re going to do a 70/30 deal. The investor gets 70% and the promoter gets 30%, and there’s an 8% preferred. If there’s an 8% preferred and then you split, you’re not getting 30%. You’re probably getting 25%, 23%, 22%, and they’re getting closer to 80%. You want to be very careful. We’ve done the math. We’ve thought through this carefully. I’ve been doing this for a long time. There is a much more fair way to do it. That’s how we operate. We have a very clear way of doing this that is much better than what most other people do.
Somebody asked online, “Do the funds always need to be with accredited investors, or can you raise capital from your friends and family when you’re starting off?”
In 2012, the government changed the rules and made them much more flexible so that non-accredited investors could participate in a better way. Non-accredited have always been able to participate a little, but they made it possible for us to advertise for accredited investors, which was decided that we could never do. For somebody like you, Scott, who’s good at internet marketing, this will be something that will work for you. Not everybody has advertising sense and marketing sense. They may be great at other things but that’s it.
That’s part of why we have the mastermind. We talk about techniques, approaches, and how to do things so that everybody learns from each other. You’re one of our great marketing guys, but there are other people that are doing some other cool things that are working for them, and then we share those ideas.
Here’s how it works. If you want to talk t non-accredited investors, that’s fine. You can have up to 35 of these non-accredited investors come into your deal, and then you can have accredited or the ones that make over $200,000 or $500,000 net worth. You can have those people come into, and you put them all together. That’s called 506(b). B stands for before crowdfunding. I don’t know what it really stands for but that’s what I call it. It doesn’t stand for anything. It’s the way the tax code and the legal code. It’s written with numbers and letters. The more letters and numbers, the more confusing. The more confusing it gets, the higher your billing rate. They do that on purpose.
That’s good, but the way you put it there with the 506(b), before crowdfunding, makes it pretty understandable.
It makes it easy to remember. I’m all about remembering stuff. It’s the rules before crowdfunding. You can have up to 35 non-accredited and unlimited accredited. That’s the old rules. In 2012, they introduce these new rules. These are called 506(c). C stands for crowdfunding. These are the crowdfunding rules. Under crowdfunding, you’re allowed to advertise to people. In the old days, there was no advertising. It was a stupid rule because when you think about what they did, the government got it right this time. They said, “Advertise all you want. It doesn’t matter who sees it anymore.” In the old days, if a non-accredited person saw it, the whole offer was contaminated, but now it doesn’t matter who sees it. The only thing that matters is who writes the check.
It’s not like there’s anything wrong with anybody seeing it, but that’s how the old rules were. The new rules are under 506(c), the crowdfunding rules, you can advertise. You can only take money from accredited investors, not from non-accredited. The strategy is to get your non-accredited into the deal first and close that round. You then open another round to advertise for accredited investors. That way you get the best of both. You cannot do it the other way around because once you’ve advertised, you cannot ever in the future, for that particular fund, take in non-accredited investors because the supposition is always, “What if they saw the ad? They came into the ad. You’re violating the rules.” You can’t take that chance. The answer is that’s the way it works.
Start off with the 506(b), friends and family. Basically, 35 non-accredited and unlimited accredited once you figure out that a windfall. What kind of amounts are you seeing people raising in that 506(b)?
Most people will raise between $500,000 and $2 million. That’s normal. My experience is that average investors will put in somewhere between $50,000 and $250,000, and do these kinds of deals. These are people that have discretionary capital. Maybe it’s pension funds or retirement funds. Those retirement dollars are good because they’re long-term dollars. They’re not dollars that people need anytime soon. That’s a good thing.
They can close that round, open a new round, and they can keep going. Some people are good at raising capital. Some people struggle at it. I would tell people, “If you’re great at raising capital and somebody else isn’t, be partners together. One person can run the business. The other person can be more involved in raising the capital,” not 100% raising capital but they’re better at it. You’re only raising capital in certain windows. You’re not constantly raising capital. Your job as the fund manager is to make sure that you’re able to deploy the capital that you raise. If I gave you $5 million and you didn’t know what to buy, this is not a good idea for you.
A lot of people are control freaks and trying to do it all versus delegating things off or bringing the team together to partner up to take one of these things on and grow.
I think of this as a team sport.
What’s the average cost that you’re seeing of somebody putting together a 506(b) then to a (c), and then going from there?
Let’s say it’s a $5 million fund. It’s about one point. You’re going through the process. You pay it in stages. It’s not all paid on the first day. As soon as the fund comes together, you’re reimbursed for everything. That way, the fund picks up the tab for it’s all legal, but the fund doesn’t exist now and therefore, it can’t pay for if it’s illegal. You advance something. Once it’s funded, then you get reimbursed. From that way, it has picked up the tab. That’s for the attorney, for me, and for everything that you need. We put a lot of energy to make sure you get it right.
That’s the beauty of what you guys have put together. You know what works, what doesn’t work, what’s attractive, what’s unattractive, and what protects the promoter when things go wrong.
I’ll tell you another thing that almost no one ever thinks about. Attorneys write these documents. They do their best to write a good document. I’m talking about all attorneys, whoever they are. The real question to ask is, “Has the document ever been litigated?” Another attorney has gone to court and battled over this document because they will find loopholes, mistakes and soft spots. That’s every single document. Our document continuously gets better over time. The question that you want to ask is what’s the litigation history of a set of documents. No one ever thinks about that, but that turns out to be quite important. That’s a gold star right there. That’s a big one.
Let’s talk about that because Attorney Russ is very experienced. Do you want to talk a little about Russ and how he helps put these things together?
Russ has been my attorney for many years. We have done a lot. He comes to my symposium. He educates investors. I only give him a little bit of time because I think people would start leaving if I gave him too much time. The truth is you need an attorney to put all this together for you. We cannot educate you to become an attorney in our symposium. You need someone to help you to become educated in this. The bottom line is that we want you to understand the securities world, what securities are, and what the do’s and don’ts are so you don’t step in the mud and make some big mistake. That’s the thing that we’re focused on.
It’s not about turning you into an attorney. I know there are a couple of attorneys that do programs for 2.5 or 3 days long. They give you all this legal stuff. You want to go out and take a bullet when you’re done. We give you a couple of hours at the most because that’s enough to understand the landscape. The rest of the time that we spend is about raising capital, about structuring the transaction, about how the investors get paid and how you get paid. It’s the business side because you have to understand the business part because those are the decisions that you get to participate in.
You’re not going to participate in the legal decisions. The attorney has to make those decisions for you. I have a pretty good sense of it. I give direction about my opinion about these kinds of things, but ultimately the attorney calls the shots on the legal matters like how arbitration, voting and certain things happen. We’re going to give them a lot of input. I’ll tell you how to organize yourself around that.
Over the last couple of years, you’ve had the Hedge Fund Symposium online through Zoom. You do it in Las Vegas and you’ve got one coming up back in Las Vegas.
You’ll be there.
I have it on the calendar. It’s already scheduled.
The last one we did live was in October of 2019. We’re itching to get back. We attract a very strong crowd of people. That’s not to be in any way demeaning to people who are just getting started. Put this on your goal sheet and make this one of your aspirational goals. This is not for beginners. This is for people who are already along the way, people that have already raised their hand in that chat that you asked. Those are the kinds of people who probably could raise a bunch of money. We could do a whole separate program privately, talk about how that works, the details of how a fun structure works, and how they would be benefited.
The Symposium is two and a half days. It’s almost like a survey course in college about how this all works. People get it and a large percentage of the people end up saying, “This is something that I want to do. I need to have one of these structures. I want to make that happen,” then we help them make it happen. It’s a very cool thing. I would suggest that if people are interested in this thing, we do one of a couple of things. If you’d like to have a further conversation with me, Scott can coordinate something for a few people. We can all get together and put our heads together.
Larry said, “You are a great source. I’m somebody brand new, but already closed on stuff and raising cap. I have very good success in talking with investors.”
We’re not going to make any pitch selling that kind of a deal, but if you indicate in the chat right now that you’re interested in participating in whatever the special offer is, we’ll reserve that special offer for people who put something in the chat. There will be an offer that we’ll make that’ll be a little better than normal. If people just put in there that you want to have a conversation, either I or Scott will call you and we’ll make it happen. You’re welcome to get on my calendar and we can talk at your convenience. I’m going to a real estate event and I’m expecting to sell the majority of the rest of the tickets.
We have to get anybody who’s interested involved here quickly because it’s a small event, 50 people. I keep it very small. People say, “Why don’t you get a big auditorium?” This is such a powerful tool that we don’t want to give the tool to 500 people. There aren’t 500 people that are qualified for it. This is a special skill for people that are at the place where they’re ready. What we’re looking for is to take people who are ready.
The best thing to do is get on my calendar and go to the Ask Question bar. Let’s talk because this is something that could change the trajectory of your career and your business. It would help you to think about things in a new and better way. It would help you to move things forward for you, your family, and everybody around you. It’s good for investors. Investors like these deals because it’s a set-it and forget-it deal. You put the deal on, the investors give you the money, then you handle it for them, and you’re doing what you’re supposed to do. That’s the beauty of it.
Let me say one last thing. Some people will ask sometimes if people ever heard of this private placement type of deal. Ironically, in the private securities market, while we’re talking about selling these private shares, doing these private placements, and raising money, this way, the amount of money that moves into these deals is bigger than the entire United States stock market. Why? What asset do you think is held in the private placement that makes it bigger and more valuable than the entire United States stock market?
I’ll give you a hint. It’s not Bitcoin. This is how almost all the real estate in the country is held. Most real estate is held in these private placements. I’m not talking about people’s houses, but the investment real estate, every shopping center, every industrial park, everything, and apartment buildings are all held this way. The aggregate value is enormously greater than the stock market. Everybody knows about these deals. People are in these deals already, and that’s where they’re putting their money. When you go to people and you say, “Will you put some money in my deal?” They go, “My money is already in these private placements.” They’re already doing it. If you don’t know about this, you’re behind the eight ball before you ever get started.
It’s one of the great ways to leverage a lot of the knowledge and attract some bigger funds and more knowledgeable funds so that you understand the value of it. Honestly, it’s a lot less headache when you’re dealing with more sophisticated people out there. They’re not calling you about stupid little things. This is a great way for you to take it by buying off a bigger piece of the pie, making bigger profits and doing it the smarter way.
We talk about in the symposium how to manage investors and expectations, and raise the capital. We have some role-playing where we practice and pretend that we work with investors. I’m standing over your shoulder, giving you hints about how to be more successful so that we learn from each other. It’s very smooth. If somebody is seriously interested in joining us at the Symposium, we’ll probably have 40 or 45 high-quality people.
When I’ve been through the ones online there, it has all been great people and learned stuff from everybody that has been a part of it. One of the great things is communication, talking with people and vice versa. People see deals all the time that don’t fit their fund and they’re like, “I have a deal for you that doesn’t fit in ours that would fit into yours.” That’s a cool thing. I have potentially 50-plus people that have their focus that were all saying, “It doesn’t work for mine, but check out, Scott’s, Joel’s, Larry’s, Tony’s or RJ’s fund. They’ll be a better fit for you.”
The other thing is that a lot of people are out there looking for deals and they don’t have any money. They see something that they want. They can’t buy it and they get all frustrated. The way I look at this is if you’re not ready, don’t even bother. Get your ducks in a row. Go out hunting, and when you’ve got all the bullets in your gun and you’re ready to go, and then you’re going to get those readiness premiums. It’s a strong deal.
If people want to, they can text the word ASSET to the number 72-000. That’s the same service you use. It’ll put you on our list. We have a giant library of videos. It’s 150 videos on syndication. People are writing questions to us. For every question that has been asked here, there’s a video about it on our site. This puts you into the flow. We don’t send out a lot of emails. We’re not strong marketers in that way, but we do produce enormously good content. If you would like some, we are happy to share that with you.
Joel, thank you so much for coming on and sharing the insights, value and experience on stuff.
We needed to do a sweat exercise, and start predicting the future so we can look at some of these notes in advance because whoever your private clients are, whatever you have, wherever you organize it, that would be a great exercise for them to sit and participate in.
I think it would be good.
Thanks for sharing this. I hope some of your folks got some value.
They did. I know I did as always. If you’re wanting to up your game, now is the time to do it. Don’t wait until later. You’ll be happier as soon as you start. One of the biggest mistakes I did early on is I didn’t start a fund sooner. I didn’t have the right advisor that’s trying to put one together for me. I wish I had called Joel a lot sooner. Hindsight is 20/20, learning from my mistakes so you don’t make the same ones. Go out there and take advantage of it. Thanks, Joel.
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About Joel Block
Joel is a hedge fund CEO and for much of the last 25 years, he has been in the venture capital business. Though he has conceptualized, capitalized, operated and sold several companies. He grew a financial publishing company from scratch and later sold it to the Los Angeles Times.
Joel is a Certified Public Accountant, a licensed real estate broker in California, and he is a recognized thought leader in the emerging CrowdFunding arena, speaking at conferences across the country and advising both entrepreneurs and investors how to profit from the recent changes in approaches to raising capital.
In addition, Joel is a professional member of the National Speakers Association, a Certified Speaking Professional and a member of the elite NSA Million Dollar Speakers Group.
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