Tilden Moschetti: So you're
doing a Regulation D Rule 506b

offering, and you need to
establish a pre existing

relationship with your investors
that may not be as strong as

you'd like them to be. How
exactly do you do that? That's

what we're going to talk about.

My name is Tilden Moschetti. I'm
a syndication attorney for the

Moschetti Syndication Law Group.
We're going to talk today about

506b investors, how you make it
so that you have a pre existing

relationship with them prior to
making an offering. So it seems

rather straightforward, doesn't
it that you would bring in

investors and that you'd
automatically have a pre

existing relationship. But a lot
of times that relationship isn't

very strong. Many times I get
asked about, well, what if I

have a situation where it's a
friend of a friend? And I don't

really know that person? How do
I bring them in to a 506b

offering? Because they be a
really good investor? Well,

that's a great question. So when
it comes into the analysis of if

there is a pre existing
relationship with them, which is

important, because we need to
establish, hey, these investors,

I didn't make any solicitation
to write a solicitation is only

for Rule 506c, and we're doing a
506b. So there must be just by

fact, a pre existing
relationship. So how do I

establish that that actually
occurred? And what what would a

court or what would the SEC look
at? So the SEC is really looking

for two distinct factors, one
from the investor's point of

view, and one from your point of
view as the syndicator. Let's

talk about the syndicators point
of view, first, that we need the

answer. So what the SEC, or what
a court would be wanting to see

is, do you as a syndicator,
understand the needs the goals,

the general idea of what that
investor is looking for in an

investment vehicle? Do they have
a level of sophistication, where

they can understand what your
investment is, what the downside

risks are, and can weigh them
reasonably, and come up with a

good decision whether it was a
good fit for them or not? Now,

obviously, that's not a very
easy thing to just say, Well,

yes, of course, I knew that they
had that. But we can do it

through issuing, for example, a
questionnaire. So a lot of

people and including my clients
as well will give their clients

an investor questionnaire that
starts to establish that you

have that knowledge. And that
basis for being able to

ascertain not only their goals,
but also their level of

sophistication in be it in this
investment of prior investments,

or education, or whatever it is.
The second piece that a court or

the SEC is going to look at is
whether that investor, in their

own mind feels like if they have
a question, which they probably

would, that they'd feel free to
just pick up the phone and call

you and ask you a question,
whether that question seems

outrageous or stupid or anything
like that, that they feel like

it would be something that they
can easily do and don't feel

like it's this black box that
they're going to be putting

money into, without any sort of
answers coming out. So those are

the two criteria looking at it
from both the investor's point

of view and from the syndicators
point of view. Now, how do we

exactly establish that as a
practicality. So here's what

many people choose to do. And it
is a good practice, and it will

work. And I'll tell you where
the gray area is on it as well.

So first off, you know that
there is an investor that who

wants to who may want to invest,
and you've identified that

person. And so you go to your
brother in law, or whoever has

that relationship, and you say,
Hey, I'd really like to meet

with them and talk with them.
You have those conversations,

and you probably started with an
email of, hey, I'd really like

to talk to you about real estate
investing in general or whatever

it is that you're offering in
general. And you're just making

a nice sit down meeting either
on the phone or in person or on

Zoom and have a good
conversation about what it is

that generally that they're
looking for, you know, what kind

of criteria that there is or
what how they think about the

market or how they think about
investments in general. You have

a nice good dialogue that that
goes through that. You document

that either in an email just the
easiest way that says, hey, it

was great to meet you last
Tuesday and talk about how your

thoughts on the market. And I'll
get to compare notes about what

I think too, it was really nice
to meet you. And I look forward

to talking with you again soon.
And some time then goes by

between that initial meeting.
And when, when you talk to the

investor again, and so maybe you
talk to them again, and still

have non substantive as it
relates to your investment

conversation. But to you some
time goes between that initial

conversation. And when you
decide to discuss your

investment. Now, it would be
ideal in the in the grand scheme

of things, if you didn't even
have another investment lined

up, right, if you didn't have
one in the offing, and then now

suddenly you do and then you go
to the investor. But the reality

is, that doesn't happen in
today's world. And so what we

need to do, and I don't think
it's prohibited based on no

action letters that we've seen
from the SEC, to still have

those kind of those substantive
conversations later about an

investment that may have pre
existed that initial

conversation to begin with, as
long as you didn't have it at

that outset meeting. So now you
go back to them, ideally, two

weeks, three weeks, four weeks
later, you can probably get away

with one week, but one week was
a little short. So just know

that that's there. That's the
gray area that I alluded to

before. So you go back to them
some period of time later, and

you say, Hey, Joe, we had such a
great conversation about real

estate investing, or investing
in stocks or investing in crypto

mining operations, whatever it
is that you're doing. And you

say, I've now got this
opportunity. And I'm letting

friends and family invest into
it. I'm not advertising it to

the general public. I'm just
doing it to people that I know.

And I've thought maybe you might
be interested, would you like to

see it and discuss it later? And
that's when you establish that

now you've also got since you've
sent that by email, ideally, or

maybe you've just called them in
send a follow up email about it.

Now you've got another clear
demarcation of time. So you've

showed this lapse time between
the initial meeting, and when

you've actually discussed that
investment possibility with

them, whether or not they want
to invest? And that's the way

you do it. That's the way most
people do it. And it's probably

very, very good. Now, what are
the things that will make it not

as good, it's that length of
time from that first meeting

until that introduction of the
of the security itself, as well

as the gathering of an
investment questionnaire and

getting a really good sense of
who that person is and what

their investment thing is. Now,
is the investment question are

always like, critically
required? No, because what if it

is your brother, I mean, your
brother, you have a very

substantive relationship with
probably. And so there, that

level isn't really required,
right. So it's sure it's still

helpful to have, but it's not
like you're going to lose the

case if your brother was to
bring an action. And he made a

claim that there was no pre
existing relationship, because

it's kind of clear that there
would be. So that's the general

thing we look at. Now, here's
the key takeaways for this.

Number one, the process of
turning someone with no prior

relationship into someone with a
pre existing substantive

relationship. It involves
several important steps. And we

talked about what those steps
were, it's meet with them do not

discuss the investment, then you
introduce the investment some

period of time later. And it's
helpful along the way. If you

get at that time, an investment
questionnaire or prior to an

investment questionnaire, it's
best practice to provide a

detailed questionnaire to get to
understand that investors level

of sophistication and goals.
Building a substantive

relationship requires offline
conversations, preferably

through a phone call or in
person to discuss goals and

experience. This is not
something that you can do. Well,

they were my friend on Facebook.
Fostering interactions that

allow for the establishment of
the substantive relationship is

crucial. And the quality of
those interactions is more

important than the time it takes
to actually establish the

relationship. So the more time
that goes on is helpful, but

it's not dispositive. What
really matters here is the

quality of those conversations.
So now you have the basic

toolkit in order to go change
the relationships from didn't

know them at all to probably
could qualify fine for your 506b

Reg D syndication. I hope you
found this helpful. My name is

Tilden Moschetti. I'm a
syndication attorney for the

Moschetti Syndication Law Group.
We specialize only in Regulation

D syndication. So we help in
syndicators put together all

their offering documents and
also offer the support and

guidance needed to be successful
with their offering