Listen as Adam Hooper and Mark Roderick discuss crowdfunding for real estate and the legal documents investors sign when investing in a real estate deal.
Mark Roderick is a very boring corporate and securities lawyer. Since the JOBS Act of 2012, he has spent all of his time in the Crowdfunding space and today is one of the leading Crowdfunding and Fintech lawyers in the United States. He writes a widely-read blog, www.CrowdfundAttny.com, with a wealth of legal and practical information for portals and issuers. He also speaks at Crowdfunding events across the country, and represents industry participants across the country and around the world. He can be reached at (856) 661-2265 or email@example.com.
Adam Hooper – Hey listeners, Adam Hooper here, proud to bring you our 10th episode of the RealCrowd podcast. Just a reminder, if you have any questions, comments, feedback, anything you want to here on future episodes, please send us a note to firstname.lastname@example.org. Thanks for listening. Hey Tyler.
Tyler Stewart – Hey Adam, how are you today?
Adam Hooper – I’m great and welcome RealCrowd listeners to the 10th episode of the RealCrowd podcast. Tyler who’s on store today?
Tyler Stewart – Adam, today we have Mark Roderick, Crowdfunding attorney at Flaster Greenberg PC.
Adam Hooper – Yep, Mark’s been in the business for a long time. He makes a couple of jokes about that today. So going to watch out for him.
Tyler Stewart – Yeah, it was a fun conversation. You and Mark went deep into real estate syndication. So deep…
Adam Hooper – I made a man, I made a man get weepy today. He might have cried a little bit.
Tyler Stewart – You achieved your goal. Your goal was to see if you get Mark to cry talking about the legalities behind real estate syndication and it happened.
Adam Hooper – Anytime you can bring an attorney to tears, that’s a good day. But we talked about a lot of good stuff. We talked about why we’re able to have this conversation with the JOBS Act and kind of backs the PPM. Got back on the PPM again.
Tyler Stewart – Really the nuts and bolts of what allows this form of investing to occur online with the direct investing with real estate companies. Mark dove into the two legal documents that investors are signing when they close down his deals.
Adam Hooper – Yeah, he even teased a little bit of what’s coming in line from his side and talked about some document stuff that hopefully will help make this whole thing work a lot easier for investors coming soon.
Tyler Stewart – Yeah, Mark had some exciting things in store for the future that he teased on the podcast and we certainly look forward to.
Adam Hooper – Yeah, great episode. Lot of really good information and again there we got little into the weeds on some of the topics. But I think it should be a pretty good overview. Good episode. You definitely want to have him back for some deeper discussions on those items too.
Tyler Stewart – Absolutely yeah, we’ll bring Mark on again to dive deeper into some of the topics you touched on today and some new topics as well.
Adam Hooper – We also let him plug his blog. He’s got a really lot of good information on the blog out there. So you’ll see a link in the description of this podcast where you can get access to Mark Roderick’s blog. And with that we should probably get to it.
Tyler Stewart – Let’s do it.
RealCrowd – This podcast is brought to you by RealCrowd, the leader in online real estate investing. Visit realcrowd.com to learn more about how we provide our members with direct access to commercial real estate investments. Don’t forget to subscribe to the podcast on iTunes, Google Music, or SoundCloud. RealCrowd, invest smarter.
Adam Hooper – Mark thank you for joining us today. We just said it’s been a conversation a long time in the making. So we’re excited to hear from you today and hopefully share some knowledge with our listeners.
Mark Roderick – Thank you for having me. Yeah, we’ve been trying to plan this, and other things keep getting in the way, but I’m really glad to have the opportunity, I really appreciate it.
Adam Hooper – Good, well let’s go back a ways, how did you first get into real estate? How long have you been in the law field? What drew you into real estate? And what was your kind of initial entry into the real estate law?
Mark Roderick – Well, yeah, I’ve been practicing law a long time. For listeners on your podcast, like the forensic cosmetology, I graduated from law school six years after the big bang. Some of my colleagues in this industry graduated before the big bang. Everything’s relative. I have been practicing law for decades and have been involved in the real estate industry just as long. In fact, this will date me, and I almost hate to admit it, but when I started my law life, I was a young tax lawyer doing real estate tax shelters. That was my introduction to the world of real estate in general and real estate syndication. I’ve done a ton of tax shelters, tax shelter deals all over the country. Of course tax shelters as such were killed off by the Tax Reform Act of 1986. But even so afterward, after that, I’ve always done a lot of real estate syndications along with representing a lot of other kinds of entrepreneurs raising money. My relationship with the real estate world and the world of raising money for real estate deals goes way, way back.
Adam Hooper – But now you mentioned that word syndications, that’s a word that comes up oftentimes in our world, and in the investors’ minds, what is a syndication? Let’s just start there.
Mark Roderick – Well. You probably could have a really interesting discussion, a very academic discussion about what it means. What I mean by a real estate syndication is simply a developer or a sponsor, someone who’s controlling a real estate project, looking outside for other people’s money to finance his or her deal. I define the word syndication that broadly. It simply means bringing in capital from investors to fund a real estate deal, and from this perspective of the investors, being allowed to participate in somebody else’s real estate transaction.
Adam Hooper – Perfect, that sounds an awful lot like what happens on RealCrowd, doesn’t it?
Mark Roderick – It sounds an awful lot like it because I think that is what happens on RealCrowd. I think you guys do real estate syndications. Were you not previously aware of that Adam?
Adam Hooper – I think that’s a pretty good summary. So much of the conversations that we have on both sides of the equation, with investors and with sponsors, is really laying out in a very base level what it is that happens. It’s as simple as that. These are real estate syndications that have been around for decades. The change that brought this about that we can discuss a little bit was the JOBS Act, right, 2012? JOBS Act was signed in to place. Why don’t you take us a little bit through how the JOBS Act has changed what the historic notion of a syndication was and what we’re seeing today?
Mark Roderick – Right, well, and that’s really this sort of big sea change and it is the biggest change, not only for real estate syndications but to our entire capital formation infrastructure in this country. It is seriously the biggest change in 85 years. Just very briefly to go back to the Great Depression, and what immediately followed it, a big reason for the Great Depression was that our capital markets were in complete disarray. They were filled with shady characters. Now you’re going to say, “Well, what’s changed since then?” But a lot has changed since then. I mean it was really a, an unregulated market filled with fraud and crazy schemes. And that is a big part of what led to the Great Depression.
Adam Hooper – This is just for clarity, we’re talking 1930s, not the reset that we saw back in 8, 10, yeah.
Mark Roderick – This is what was going on in the wild and crazy 1920s. It is in large part what led to the Great Depression, because the public lost faith in our capital markets. Franklin Roosevelt, the elected president, and one of the first things he does is introduce this legislation to clean up the US capital markets. And that’s why so many of the laws that you think about today have dates from way back when. The Securities Act of 1933, and there’s the Securities and Exchange Act of 1934, and the Investment Company Act of 1940. It’s not coincidental because what happened is that Roosevelt with with congressional help obviously just completely changed the regulatory scheme for the US capital markets. That scheme has been extremely successful. The US capital markets are now the most transparent and the healthiest in the entire world. One of the axioms, of US securities regulation for the last 85 years has been the difference between public companies and private companies. A public company is one that goes through a whole IPO, makes all kinds of disclosures to the SEC, very, very heavily regulated. Private companies, on the other hand, are not heavily regulated. And for that reason, for 85 years, the rule has been that private companies had to stay private. If a private company wanted to raise money, it could only do so from people that it already knew.
Adam Hooper – Right.
Mark Roderick – It couldn’t go out to the broader public and advertise. So that’s what the JOBS Act changed. For the first time in 85 years, the JOBS Act says, “Yes, now even private companies can advertise.” How can they advertise? They can advertise any way that they want. They can pull a streamer behind an airplane. They can run full page ads on the Wall Street Journal. But of course in this day of the Internet, what they can really do is have websites, and people like RealCrowd can list these private investments to the whole universe of investors online right there out in the open for everyone to see. So that is what the legal change that has been so transformative, and so, and I’ll stop in a second, and so you have two sides of a pipeline from the perspective of the real estate developer, he or she now has access to the entire universe of investors, rather than just his or her few dozen closest friends. But equally important, and I want to say this becayse it’s so often overlooked when we talk about this crowdfunding space, equally important is that every investor in the world now has access to deals, investment opportunities that he or she has never had access to. If the pipe only went one way, these were only great for developers because they can advertise to investors all over the world, it wouldn’t work, equally important is that investors like Adam and like Mark, and like everyone listening, now for the first time ever, have access to all these terrific deals. That is hugely transformative and as I always say, fortunately there are a lot of legal rules around this because if there weren’t no one would have to hire me. But the big picture is, it’s just the Internet, just the Internet directly connecting buyers and sellers the way it always does, and thereby transforming yet another industry.
Adam Hooper – The access is the absolute biggest part of this. And that’s what we saw as the opportunity when we started this company, was again the ability to fundamentally change how both sides of this equation can access one another. That’s the fundamental shift in how the capital markets can function on both sides. It’s the name of the game in our space. In the JOBS Act there–
Mark Roderick – Let me just add, when you think about the Internet, okay what does the internet do? It directly connects buyers and sellers. Now when you look at the US capital markets, Adam, that you and I grew up with, and the real estate syndication world, that world is a world of opaque, inefficient, expensive, private networks, because if you want to raise money for a real estate deal, it depends on whom you know, and where you live, and what kind of family you grew up with, and who your father knows, and who your mother knows, and are you a member of the country club.
Adam Hooper – Right. And that’s just how it’s always been done.
Mark Roderick – That’s just how it’s always been done. When you think about that and then what the Internet does, you sort of get the picture of just how transformative the industry and a company like RealCrowd are. It’s just a monumental shift toward transparency, and efficiency, and lower cost for everyone.
Adam Hooper – The cost is a big part of it too, right? The distribution. And that’s really what we’re looking at as RealCrowd, right. This is a means of distribution for a process that mechanically doesn’t really change all that much, the process of raising capital, the process of syndication. It’s still what it’s been for decades. You find a deal, you put your materials together, you get it in front of potential investors, and you close the deal. That mechanical process is still the same. It’s that distribution of how you tell that story and the audience that you can build with that, that’s really changed. And that’s again, the Internet has been tremendously disruptive in a number of different industries, and it’s that ability to take what’s always been that one-on-one conversation, kind of hand-to-hand combat of raising capital in the old school way, the country club network. And it changes the means by which you can get in front of people, right? You know, Facebook and Twitter, and all these different social media platforms, a phone call is now a tweet that’s in front of millions of people potentially. So to be able to take that same dynamic to the capital raising world, and the investment and the access side of things is truly transformative. We’re seeing on the 506 b and 506 c side which we can talk about here in a little bit, and taking that further to what we’re seeing now in the Regulation A+, and potentially equity, Title III, at through Equity Crowfunding. The access is only going to become even more greater which is really exciting to see where it goes, and we can touch on that too, once we get through some of the meat of this, we’ll talk about where it might be going forward. But with that access and with that ability to distribute comes some different challenges, right? Some different, not necessarily registration, but some different processes that you have to go through when you’re actually accepting capital from these investors. So when you look at historically, a true private offering which is now, again, maybe getting a little bit into the weeds here, but a regulation, the 506 b offering is what has always existed. Jobs that created this new way of doing it which is called 506 c, which allows for general solicitation. Maybe take a second to kind of walk through what those difference are between the old school way and what we can do now with the general solicitations.
Mark Roderick – Right, and that is a very interesting topic. It does tend to get a little weedy. And you and I had this conversation so many times before. And you had this conversation with your customers and investors. And I had this conversation. So I actually did, I will just plug a particular blog post that I wrote recently about the differences between Rule 506 b and Rule 506 c for anyone who leaves this conversation less than fully enlightened which will probably be about a hundred percent of your listeners.
Adam Hooper – And we’ll be sure to put a link in the description for this as well so people can get to that.
Mark Roderick – So this is the thing. Rule 506 c, as you know, is the new animal, and Rule 506 c says you can do this unlimited advertising, whether it’s through the internet or through the banners behind airplanes, you can do this unlimited advertising for the first time in history.
Adam Hooper – And this the people that are trying to attract the capital. You can do the average person.
Mark Roderick – Pardon?
Adam Hooper – The people that are trying to raise the capital are doing the advertising.
Mark Roderick – That’s right. On your platform, the real estate developer who do all these advertising but the law says you can only raise money from so-called accredited investors. And most of your listeners probably know what that term means. But it used to mean you were wealthy. Now it means you have income of at least $200,000 or a net worth of at least a million. And when I say used to, because those rules, those same numbers have been in effect since 1982. And inflation obviously, I think they’re, the actual value today is about a third of what they were back in 1982. So, anyway, so that’s new Rule 506 c. Unlimited advertising but you can only take money from so-called accredited investors. Now, people being very clever, have figured out, well, we can kind of do the same thing with an old fashioned private offering. Even though we call it a private offering, we can’t do the same kind of advertising. And in my blog I used the metaphor of a jewelry store. So a 506 c jewelry store, when the public walks past the store, they look in the big window, and they see all these glittery diamonds, these actual product is right there in the window, everyone can see. In the rule 506 b offering, when people walk by that store, they don’t see any jewelry in that front window, what they see is a sign that says “We have beautiful jewelry inside.” They can’t show the jewelry but they can advertise, the claim that they have good stuff inside, but to come inside you got to register, you got to talk to some people, and fill out a questionnaire, so you can get in and you can eventually see the jewelry inside, but you have to go through a registration process. And the developer, now coming back to real estate from jewelry, so the developer can’t have a website that shows right on the face, the actual apartment building or the actual shopping center with the actual deal, instead he or she can have a site that says, “Man, we’ve been very successful in real estate,
d look how handsome I am, this is my photograph, and please come inside and register, and then you can see our deals.” So it is online, the 506 b deals. There is an online presence. You just can’t show the deals themselves. So that’s a rough summary of the differences between the two.
Adam Hooper – Yeah that’s a great analogy between the two. On RealCrowd, all the deals that we have adhere to 506 c so that’s where you can display the wares.
Mark Roderick – The jewels.
Adam Hooper – You can see the jewels.
Mark Roderick – Front and center.
Adam Hooper – Yeah. And so you mentioned this accreditation thing. That’s one question that we get all the time from investors because we’re operating in the 506 c world which is, again, showing the jewels if you will. There’s a different requirement for the accreditation process, right? Between the, “Hey we have these jewels behind the door, come in, register, let’s get a relationship going,” and basically, “show us that you can afford these jewels,” versus the “Here’s the jewels, you need to prove that you can afford these jewels.” Is that a fair analogy to kind of expand it?
Mark Roderick – That is very fair analogy. And just so to give it a little context, again, going way back into the prehistory, one of the other axioms of our securities laws for the last 85 years, has been the concept that rich people can take care of themselves. They can hire fancy lawyers, and accountants, and investment bankers. But people who are not rich cannot take care of themselves and therefore need the paternalistic arm of the government around their shoulder to protect them from all those dishonest entrepreneurs and real estate developers. And every time I say that, I hear myself sounding sarcastic as if this is a crazy notion that there should be this difference. But the reality is that it’s actually worked pretty well over the last 85 years. That distinction, that assumption that people with more money can take care of themselves. But anyway, it’s always been there, and it’s still there. And so when Congress passed the JOBS Act and allowed this advertising, they said to the entrepreneurs, “You really have to make sure that your investors, the people you actually take checks from are accredited. You can’t just take their word for it. You have to go through a verification process.” Now the verification process has, as you know Adam, has turned out to be a lot easier than some people were concerned that it would. But in 506 c you got to verify. In 506 b, the old world of private placements, even done online, you do not have to verify. If Mark Roderick tells you he’s an accredited investor, that’s good enough. So that is definitely a difference. And in the beginning of this whole industry, people were very concerned that the verification was going to be a challenge that no one would want to take up, that investors would not want to verify that they were accredited. As it’s turned out most of the time, people verified their accredited just by getting a letter from their accountant or lawyer. So it’s actually turned into not much of a big deal. But certainly a difference. I mean, do you guys get a lot of, do you lose investors because of the verification process?
Adam Hooper – A couple things there. Yes, we’ll lose investors when they’re not accredited, right? If the investor tries to go through the process and either doesn’t prove up their net worth or the income, then yes, we occasionally will lose investors because they’re not actually accredited. But in terms of the actual process itself, I agree with you, I think it sounds like this big onerous process. We tie in with a third party service. We have it fairly streamlined throughout the process when you go to check out. It’s a couple extra steps, right? I mean it can be a pain sometimes. But I wouldn’t say that we get people completely dropping out of the process because of it. Sure there’s been, over the four and a half years, five years we’ve been doing this, there’s been a few, but no, it’s not as onerous as people think it is. I think one of the challenges that we have, again, is just helping people understand that this isn’t, this isn’t RealCrowd just being, being a meanie, because they can go on other platforms and just check a box and they’re good to go. This is an SEC required step. That when you do these general solicitations because of how we’re structured as a platform, you do have to go through that step, you do have to do that, proof, again, of your accreditation, get that verification steps. We think, again, kind of another safeguard for both sides of the equation because there are some ramifications if a non-accredited investor were to get into a deal and something happened, that can have some pretty serious implications for both the existing investors in that deal and the real estate company. So it’s something that we definitely take very seriously. It is…
Mark Roderick – Now, do you guys, do you do the verification yourself Adam or do you hire somebody to do it?
Adam Hooper – We tie in with a third party. So we use Verify Investor because, again we, as a platform, the safe harbor, and again, this is maybe getting a little bit deeper than necessary, but the safe harbor is, again, you have that letter from an attorney, an accountant, a broker dealer, or RIA, registered investment advisor. We are not any of those. We’re the technology platform that brings it together. So we need to tie in with that third party where the investors can get that attorney letter from the crew at Verify Investor.
Mark Roderick – Right.
Adam Hooper – I think it sounds more intimidating than it really is.
Mark Roderick – Well that’s what I, I just want to say, I mean, one, the guy who owns Verify Investor, Jor Law, I just hate the guy so I don’t want to get… He’s a terrific guy. But the point is because there’s a lot more attention, I think, paid to this issue maybe by the entrepreneur, the one looking for capital. They’re very concerned about it. But the key is that what the law says is not that every investor has to be accredited, and if one slips through the cracks, you’re shot at dawn. The rule does not say that. The rule is you have to take reasonable measures to form a reasonable basis that your investors are accredited. And so if you hire Verify Investor or another credible agency, you have passed go, you can collect $200. The issue has disappeared because you have taken a reasonable step even if a non-accredited investor gets his accountant to lie and send the letter. It doesn’t matter. So I just want to say that from a legal point of view. That you go through the process. You take the reasonable step. You’re finished.
Adam Hooper – And that folks is the attorney that said that, not me.
Mark Roderick – Yes it is, it’s absolutely true.
RealCrowd – Thanks again for listening to the RealCrowd podcast. If you like what you’re hearing, please visit realcrowd.com to learn more, and subscribe at iTunes, Google Music, and SoundCloud. RealCrowd, invest smarter.
Adam Hooper – Alright Mark, so switching gears a little bit. When investors are looking at deals, whether it’s 506 b, 506 c, or otherwise, one of the main documents that they’re going to have access to, as speakers on our podcast before have mentioned, it’s this thing called the PPM, the Private Placement Memorandum. Let’s try to unpack it a little bit. What is a PPM? What’s in there? What are some of the clauses? From the attorney’s perspective, with your legal hat on. What are some of those things that investors should look for as they’re looking at these PPMs. It’s a pretty big document. It can be kind of intimidating, can’t it?
Mark Roderick – It can be and it is too often too intimidating. So. Let me see, what do I want to say first? I guess I’ll answer your question first for lack of a better plan. Also part of our securities laws is the idea that investors should be able to make informed decisions. Just like when your doctor asks if you really want that surgery that cut out three quarters of your brain. There’s a thing in the medical community called informed consent. And the same concept applies when you’re making investment decisions. So the idea is that people who are asking you for money should sometimes are required to, but I don’t want to get into the weeds there, should and usually try to give you enough information to make a good investment decision. Partly because they want to tell you what a great deal it is. They want to sell you on the deal. And partly because if you lose your money which is always a possibility in any investment, they don’t want you to be able to sue them successfully. So, the PPM is, I call it a disclosure document, because that’s what it is. It’s trying to describe to you the details of the deal often in very granular detail, as well as all the risks in the deal. So whenever you disclose your document or PPM, you’ll see a long section pages and pages of all the reason you really shouldn’t invest or all the risks that you should be taking into account. So, there’s a section that talks about the tax implications of investing, there’s a section that talks about the project itself, there’s a section that talks about who can invest. And ideally investors would carefully read, understand, absorb, and be able to analyze all of that information. As you and I both know, Adam, that is rarely what actually happens, and one of the ways that the crowdfunding space needs to develop, again, I always remind people, the space is really in its infancy. We’re sort of where the car industry was in about 1912. One of the ways the industry needs to improve is to make these disclosure documents much more understandable, much more readable, and much more standardized.
Adam Hooper – I couldn’t agree more.
Mark Roderick – Yeah. And I am going to be unveiling some plans in that regard in the very near future.
Adam Hooper – It’s a good little tease right there.
Mark Roderick – Little tease there. Because the way the industry has always worked, every developer and every lawyer does their own PPM. There’s no standard. And so when a lawyer’s going to create PPM number 721, they look at number 720, and they add some stuff. Well, number 720 was based on 719 with some stuff added. These things tend to become like the bottom of the ship with barnacles. No one ever scrapes it off and starts again. People just keep adding and adding and adding until many of them unfortunately are essentially unreadable.
Adam Hooper – I think the challenge from an investor, there’s a lot of really, really, important information in there. Like you said, it has the risk factors that the investor should be thinking about. It has background on who the sponsor is. It has specifics about the deal. It has specifics about the structure. But it can be a challenging read. So, and again, previous guests in the podcast have reiterated the importance of that document and investors should be reading that document. If there was a way to pull the most salient points out of there, not everybody has 45 minutes, an hour, or whatever it might be to read through a hundred-and-somewhat-page PPM, are there certain areas in the PPM that you think are more relevant or more important or people should pay more attention to than others if they’re going to be taking more of a cursory look versus reading paragraph by paragraph?
Mark Roderick – Well.
Adam Hooper – Or is it all or nothing or are there some sections to focus on?
Mark Roderick – Not really, but I’m going to answer that question in a broader way that perhaps you wish I would, but first I will say the most important aspect of any investment is you know how much money you’re risking. If you’re investing $50,000 in a deal on the RealCrowd platform, the one thing you want to see in the PPM or somewhere, is that you’re never going to be asked for more money than that. As you know, Adam, there are deals where you write a check for 50, or five, or whatever you invest, and then it’s possible that you could be required to contribute more. And so the most important thing the investor needs to understand is the commitment that he’s making, is he committing 50 or is he committing an unlimited amount or some other amount? That’s the most important thing. But now I’m going to perhaps not sound so much like a technical lawyer and say if you’re an investor looking at deals, and want to invest some money in this phase, the first thing to do is to choose a reputable platform. That is by far the most important investment, piece of the investment decision you will make, and then having chosen a reputable platform, choose a reputable real estate sponsor. Those two things, if I had to quantify, are probably going to dictate 90% of your return outcome. So by the time you get to reading the PPM, there’s not much money left on the table. So unfortunately, and this is a reality that the industry, the lawyers, the RealCrowd, the everyone, needs to come to grips with, unfortunately, so the theory of the securities laws is, if we just give you enough information, you can make a completely informed investment decision, right? The reality is that even someone with a lot of experience, let’s say me, I’ve been representing developers for 30 years, and I’ve invested in a bunch of deals, even someone like me, if I read that PPM from beginning to end which I usually do, and I understand it which I usually do, I’m not necessarily qualified to choose, if you show me three doors, real estate project A, B and C, I’m not necessarily qualified to choose among them. And that’s a tough nut for the industry to eventually crack. That’s sort of why I’m saying you should read the PPM. There are certain essential things in the PPM you should understand. But much more important is you should choose the right platform, and on the platform, choose the right sponsor. Do you agree with that, Adam?
Adam Hooper – Absolutely, and that’s the theme that’s been consistent throughout the prior nine episodes. And now that Mark, you’re our double digit, our 10th episode. That is the theme that has been consistent throughout. It’s so much of this is, I think it was Michael Episcope who origin, “You pick the jockey, not the horse,” right? So who’s the sponsor that’s making those decisions because they are ultimately the one at the end of the day, they’re the ones that are calling the shots, they’re the ones that are making decisions for your money. And so picking the right sponsor which you get to through the right platform, again, shameless plug for RealCrowd, I mean, that’s the thing we take a lot of pride in, the caliber of sponsors, and the work that we do, and the relationships that we have on that side of the equation. I agree completely. I think picking the right sponsor is the majority of the battle for sure. And I think one of the benefits too, right? With what we talked about first is the access that wasn’t available before, right. If you were in a smaller market, you maybe you knew one or two people that were doing real estate deals, if any at all. You just didn’t have access to a broad base of group to choose from, certainly not geographically, certainly not product type. And that access now, to be able to see deals from, I think we’ve done deals with 75 sponsors, 80 sponsors now, that’s a lot of different product on the menu to be able to choose from, and different sponsors you can get exposed to so, again, whole new world of things to look at, but completely agree. You picking the right team, picking the right sponsor is very, very important as investors are looking at these different deals and different offerings for sure.
Mark Roderick – In most PPMs, one thing I’ll say is, in the beginning, near the beginning, there’s a summary, it’s often done as a table, just a summary of the deal. And it’s definitely worth looking at that. That should have the most essential deal points, what you’re investing, what you’re getting, in exchange for investing. I would read that. I’m always interested to see how much the sponsor has in the deal, I’m always interested to see the kinds of fees that the sponsor is taking out of the deal, because of course as an investor, I want the sponsor’s interest to be aligned with my interest.
Adam Hooper – I think what you’re getting to there is what’s the sponsor’s net in the deal. If your sponsor could put in half a million but if they’re taking 750,000 acquisition fees, they don’t have any net, skin in the game. So that’s something we look at too for sure is, what is the actual net capital that the sponsor has in the game after fees. That’s important distinction there for sure.
Mark Roderick – I guess I would always say that if I read that summary and I don’t understand the investment, then I don’t invest, if it just doesn’t make sense to see how something’s going to work or how a project’s going to make money, there are a lot of other projects. The thing is, of course, as I said, when you pick the platform, the reason people pick RealCrowd is that RealCrowd has already gone through that process, because, of course, you guys, the last thing in the world you want is to have a bad deal on your platform. So, you’ve already given the deals. You’re not investment advisors, we have to make that very clear. But for your own business’ success and health, you’ve given those deals a heck of a lot of scrutiny already.
Adam Hooper – When are our level again its on the sponsor, right? That’s our process, is making sure that the sponsors meet our minimums, reputable, background checks, reference checks due, the whole nine on the sponsor. And make sure that they are the caliber that we want to be associated with. And that’s, I think the biggest part of the equation. PPM has disclosures, structures, what does the investor actually sign?
Mark Roderick – The investor ordinarily signs two documents. The way I do documents, they only sign one of them, and by signing that one, they’re deemed to have signed both. But typical deal, the investor signs two pieces of paper. One is usually called a subscription agreement, and the other is usually called an operating agreement. So the operating agreement is the document that governs the operation of the entity that owns the real estate. These days they are almost always limited liability companies or LLCs. An operating agreement is just the name given to the agreement that governs an LLC. If it’s a corporation, it’s called the shareholders’ agreement. If it’s a partnership, it’s called the partnership agreement. For LLCs, it’s called an operating agreement. So that’s the agreement that talks about how the money is going to be distributed and contributed, and who’s going to control the deal, and everything to do with the ownership and operation of the actual ownership entity. The subscription agreement is the agreement where you’re buying your limited liability company interest. And for the most parts, that agreement is where the investor is making all kinds of promises to the developer. The investor is giving the developer the check but also making a bunch of promises, including promising that the investor is indeed an accredited investor and has read all the documents and understands all the documents, and is not a felon, and came by the money that he or she is investing honestly, rather than through criminal activity like money laundering, and just makes a long list of promises. Those subscription agreements, most of them are, way, way, way, way too long and just ridiculous. Actually ridiculously long. And that is sort of the result of this barnacle building that has happened over the last 80 years. These documents always get longer and never shorter. But those are the two documents that an investor signs and hopefully reads.
Adam Hooper – So PPM will often times describe, or the operating agreement will be a part of the PPM, is that correct?
Mark Roderick – Yes, that’s correct.
Adam Hooper – Now in the operating agreement, that’s the meat, like you said, that’s the document that actually governs how this deal is oing to be run. So in there, again, you’ll find control provisions, you’ll find how active the investors might be, you’ll find the structure, you’ll find what the distributions or the treatment of the capital and the cash flows are. That’s really, again, it governs all of that activity at the asset level. Is that something investors should pay attention to as well? A little bit more in-depth read on that? What are some of the sections in the actual operating agreement that…?
Mark Roderick – Well, hopefully the important sections in the operating agreement which are mainly about money and control, those really should have been summarized in the PPM. Operating agreements, and I’m sure this is your experience from running that platform, are maddeningly non-standardized. Every lawyer has his or her own form. And many of those forms are horribly antiquated. And many operating agreements like many PPMs, are almost impossible to decipher. So the concept that a typical investor, even a very smart investor, would be able to understand what the heck a typical operating agreement is saying, I think is, you know, that’s just not going to happen. They’re often decipherable only by the cognizantee, only by other corporate lawyers. And they should be summarized effectively. The important provisions should be summarized effectively in the PPM. But this is another area where our industry is just crying out for standardization and simplification.
Adam Hooper – Yes. Even the same sponsor, right, is going to have a different operating agreement between deal to deal, right? And I think just the continual expansion of those documents without ever really peeling back those layers and getting back to kind of a base document…
Mark Roderick – Yeah, scraping off those barnacles. Because they way it has to work, I think, is crowdfunding, to appeal to the mass retail market, which it should, that’s what it’s built for, right? Investors have to be able to look at these deals and of course no two deals are going to be exactly the same, that’s the whole point. But to the extent possible, investors have to be comparing apples with apples. There are enough differences between two real estate deals, one is in Sacramento, the other’s in San Francisco, et cetera, et cetera. The investor shouldn’t have to make an investment decision based on differences between legal contracts. The legal contract should be apples. And the investor should be able to assume that in all important respects, the documentation of two transactions or 20 transactions is more or less identical. That’s my view. And I am quite sure that that is where we’re heading. Maybe in a not too distant future. So that everything will be standardized, and maybe can be using the terrific technology that you guys have, can be presented to investors in a very standardized, simplified, understandable way.
Adam Hooper – Right, I think I might quote you on that, legal contracts should be apples.
Mark Roderick – They should be. Or oranges but not both.
Adam Hooper – I agree, that is a challenge for a lot of the investors that use RealCrowd and other platforms, is trying to unpack one deal against another even, right? If you got similar deals from a real estate standpoint, maybe you’ve got two different value add multi-family deals in the Dallas market, those can have widely different structures, they can have widely different control provisions, they can have widely different financing even. And trying to be able to get to a spot to where, as a platform, we can help display that information in a more concise way, or the deals that we worked together with you, Mark, the document set that you do provide is a much, no attempt at flattery here, it is a much easier document to understand. I think a lot of the legacy issues that came from this last 80 years of attorneying can cloud…
Mark Roderick – Adam, Adam your voice was a little muffled when you said something about my documents. I wonder if you could probably repeat that for your listeners.
Adam Hooper – I should probably repeat that. They’re fantastic. But I think that’s something, as advocate for investors, we would love to see is more standardization and a more plain English version of a lot of these documents that can just get so verbose and so over attorneyed that it does make it very challenging at times.
Mark Roderick – Well, stay tuned my friend.
Adam Hooper – Okay, you heard that, you heard it here first, RealCrowd listeners. That’s the good stuff that you get to hear only in this podcast.
Mark Roderick – Yeah so, one other area which is related to what you just said, that you and I are in, I think in complete alignment on, is for the industry to become more investor-centric. So, by definition sort of, everyone who works in the industry, is aligned with those who are seeking money. You’re the people who folks come to you, developers come to you, looking for money. And my clients are either folks like you, like RealCrowd, or developers looking for money. And so we tend to see the world through that end of the telescope. I think it’s really, really, important to kind of mentally take a break and think about turning the telescope around to the other end and looking at the crowdfunding world through the investors’ eyes. And it looks a lot different. And to tell you the truth, sometimes it doesn’t look that enticing. I think all of us in the industry really need to focus on looking at ourselves through that end of the telescope, because if we can make the industry, and I think we can, attractive for investors, then everything else falls into place, right? Because we know the deals are great. The deals on RealCrowd are fantastic. You know that, I know that. I think what we need to do is make it look from the investors’ eyes, the same as it looks through our eyes. It’s a big challenge for our industry. But I’m sure you guys are up to it.
Adam Hooper – Yeah, I would say to echo what you said earlier, stay tuned, we’ve got some stuff in the pipeline. A lot of the reason we’re doing this podcast is, we understand that as real estate people a lot of this comes maybe easier or more natural, it’s much more comfortable for us to kind of make these decisions. And I think that’s, across the industry, it’s easy to kind of lose sight of how intimidating this truly can be from an investor’s standpoint that doesn’t have a deep understanding or a background in the real estate industry to get comfortable with it. It can be fairly intimidating to do this. I’m always trying to kind of push the envelope of what we can do to help, make it more approachable, make it more easy to understand, and through this vehicle, the podcast educate, and help people get to a spot where they can make a better, more informed decision when they’re looking at all these different deals out there.
Mark Roderick – Absolutely, and it will happen, but it’s going to only happen with a lot of concentrated effort.
Adam Hooper – Sure. So we’re nearing, close, probably to the end of our time. I wanted to get into a bunch of stuff about structure, about the waterfalls, and different things in the operating agreement. Some of the questions you might want to ask sponsors. So I think we’ll probably just have to have you on back for another episode. But as we wrap this up, we’ve talked about at the beginning what kicked this off with this JOBS Act regulation. We haven’t really touched yet on some of the other avenues out there that are open for non-accredited investors, that being Regulation A+, and Title III through Equity Crowdfunding. Maybe we can take a minute, just touch on both of those, where we’re at, the current state of things, and maybe where we see this in the next five years, being almost five years into this, maybe where we some of that access going, and some of those changes that might be coming down the line.
Mark Roderick – Yep, absolutely. The speculating part is always the most fun of any conversation, right? Because you can never be held to it. No one remembers afterward. I mean I remember saying in 1993 approximately, that the Internet obviously was never going to be that big of a thing. But no one but me remembers that. But anyway, yes, so there are three flavors of crowdfunding under the JOBS Act. And their named for the sections or titles of the JOBS Act laws or segmented into titles. So there was Title II which is what RealCrowd does. That’s the unlimited advertising but only with accredited investors. Then there’s Title III which is this brand new animal under the securities laws, never seen before in 85 years, where everything’s gone online and even non-accredited investors can participate this brand new thing. But because Congress was so worried it’s such a big change to securities laws that non-accredited investors could participate, even though you have unlimited advertising, they put in a lot of restrictions, one of which is you can only raise a million dollars per year. So that’s Title III. And then Title IV, otherwise known as Regulation A or sometimes as Regulation A+, those are all interchangeable, is where you can do what is essentially a mini public offering, and raise up to 50 million dollars per year by going through a long approval process with the SEC. I happen to know, because I represent the portal where we believe the first real estate deal ever financed using Title III Crowdfunding, has just raised their minimum offering. So that will publicly announced in the next few days when the escrow is actually released. So Title III is out there. It’s for very small deals, less than a million dollars. But it’s there, it just became legal a year ago. So it’s really coming sort of slowly out of the gate. And then Title IV which is Regulation A has become, has been legal for only two years. And there are lots of real estate deals being done under Regulation A, as you know, Adam. I know you guys are not yet doing them, notwithstanding my constant prodding but you will, you should. There’s one of them tomorrow. What are your plans? Are you going to start doing them now?
Adam Hooper – Well, so the Regulation A+ I think is interesting. It’s something we’ve obviously kept a very close eye on. There has been a couple groups that have had some success with it. For us it’s going to be bouncing the investor push and the sponsor push, right. What we’re seeing at least from the feedback from the real estate side of things, the sponsor side of things, there’s no certainty around whether the additional steps required to file a Regulation A+ offering, the time, the cost, the energy, and the brain damage of going through that, SEC registration process, are really going to be, will that outweigh their ability to access capital through the more traditional channels? And so I think that’s what we’re seeing as the biggest challenge right now. Until some of those kinks get worked out, again, on the Reg D side, we had 80 years to try to figure out how to run that process. Regulation A, prior to JOBS Act, there was a handful of deals or whatever, be done that way because it was such an onerous process. Regulation A+ has streamline a lot of that with the ability to file at the federal level, and not have to go state by state. So, something we definitely keep our eyes on. We’ll continue to watch it. We’re having conversations quite frequently with sponsors about it. And if the demand’s there, absolutely, we’ll take a look at it, and jump in and get involved. Title III, I think probably less so, just because of the types of deals that we usually see on RealCrowd, the sponsors that we worked with, a million dollars, that caps what kind of real estate you can really look at. I think that’s something that we often lose sight too. And the general public probably loses sight is that the JOBS Act and these regulations, real estate was not the intended target for this method of raising capital. It was certainly not put together with the intent that real estate would be, what I think is the biggest beneficiary of this regulation, right, it was for small businesses, for local businesses to have an easier way to access capital to support job growth, right? That was really the intent behind the JOBS Act, it’s the Jumpstart Our Business Startups Act, that’s very different than real estate. Capitalizing a cafe or a bookstore, or a small business, is a very different need from a capital standpoint than what we see in the real estate space. So, I don’t know if there’s a really great overlap. Certainly with Title III Crowdfunding in the real estate space, certain asset classes, single family residentials, some smaller projects, it could be an interesting avenue, but not really, really applicable to what see see at least in terms of the groups that we work with and the type of real estate that we see on RealCrowd.
Mark Roderick – Soon after the JOBS Act was enacted, there was this brilliant blog piece written by this lawyer that said, “Although the JOBS Act wasn’t written for real estate, real estate is actually the ideal asset class.” But I have forgotten that guy’s name.
Adam Hooper – If only we knew, if we only we knew.
Mark Roderick – But I will say so about Reg A, I think the thing is that because of the larger amount you can raise, Reg A begs for putting multiple assets together into a pool, that’s what Reg A is about, and I’ve always thought that individual retail investors like mutual funds and the stock market, they are going to eventually prefer pools of assets. So that’s the thing. And the only other thing I’ll say about Title III, Adam, is that there are a lot of situations if you think about it, I mean, Title III and Title II are not exclusive. So you could have a project where you wanted to raise, yeah, you can layer them, you can do them simultaneously. So you could raise some money from non-accrediteds in a given neighborhood for example, and then put a few million dollars on top of that from accredited investors and that could have some advantage. I think it’s all going to work together, personally, I think you guys will end up doing Title II, Title III, and Title IV, personally. But we’ll see how it plays out.
Adam Hooper – We feel like we’ve been at this forever. We were one of the first ones to do this and it’s only been four years. As you said, people ask where are we in this whole cycle, in this whole industry, it’s pretty corny but I say I truly think we’re still building the stadium. I don’t even think we’ve started the game. We’re not on the second inning or the 7th inning. I think we’re still just starting to kind of lay the foundation of how this whole industry will go forward. And we’re laying those blocks right now is too see how that game is going to even take place once it’s mature and we’ve got more scale and more access into more asset classes, more sponsorship, more investors. I think we’re still really, really early. But it’s exciting to see some of these things that are pushing those boundaries and starting to see some things where you might layer a non-accredited crowdfunding deal with a more traditional 506 capital raise. So it’ll be interesting to see how it continues to play out. And Mark, really appreciate your time and being a part of that. You’ve been a very early proponent of the space. You’ve been very active with your blog posts which we’ll let you plug and tell investors where they can access that, lot of really good information. It’s guys like you that are helping push this industry and come up with new things that we’ll see where this grows. And I think we’re happy to be a part of it, and proud, ethical guys like you accompany in this march together.
Mark Roderick – I’m just reaching for my Kleenex box.
Adam Hooper – Did I get you weepy? That was my goal, Mark. When we set out today, I told Tyler I want to get Mark weepy.
Mark Roderick – You want to make Mark cry. Seriously, I’m so happy to hear you say what you just said about this stage we’re at, we’re building the stadium. I am delighted to hear you say that, not just because I agree with you, but you’re one of the builders, and I totally believe and I wrote a blog post saying we’re at the auto industry was in 1912, and unfortunately, some people in the industry, I sometimes think they, I think that, I was at a, event in New York 18 months ago where some guy on the panel said, “Well this is a very mature industry.” And I just broke out laughing. We are right at the very beginning, whatever the metaphor, building the stadium. There’s so much opportunity, there’s so much excellence we can achieve, and so much innovation. 98% of the innovation is yet to come. It’s so exciting and to hear you say that, I’m delighted to have you have that perspective on the industry.
Adam Hooper – Great, well, Mark, you’ve danced around it a little bit. Let’s cut the subtleties, where can investors get access to your blog? What’s the website they should go to?
Mark Roderick – I’m sorry. You can get there a couple different ways, but the easiest to type is just my name, MarkRoderick.net. The blog has a different name than that but it’s kind of difficult to spell, which you might say, “Well why did you do it that way?” But anyway, Mark Roderick, M-A-R-K R-O-D-E-R-I-C-K dot net, that’s my blog.
Adam Hooper – Perfect and we’ll put a link in the description here for access to the main one. Again Mark, really appreciate your time. We need to get you back on. There’s some other stuff we want to dig into but I think we’re pretty much at our end today. So, really appreciate your time. Always appreciate a conversation.
Mark Roderick – Thank you so much, thank you so much Adam. It has been a real honor and a real pleasure talking with you.
Adam Hooper – Likewise, we’ll talk soon, thanks Mark.
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