Have you ever wondered if you need a license for your syndication endeavors? Dugan tackles this crucial question and more, delving into the nuts and bolts of the syndication process. Through real-life stories of clients embarking on their syndication journeys, you’ll glean insights into successful deals and transformative experiences.


Speaker 1 (00:12):
Welcome to the Syndication Closer with Dugan Kelly. We all know that navigating the legal complexities
of real estate syndication can be overwhelming. In each episode, we’ll provide expert legal analysis, tips,
and strategies to help real estate syndicators stay compliant and avoid pitfalls. This show is for anyone
involved in real estate syndication, including sponsors, investors, attorneys, and other industry
professionals who want to stay up to date on the latest legal developments and best practices.

Speaker 1 (00:41):
Welcome to the syndication closers. We’re here with Dugan Kelly, the principal partner for Kelly Clark,
PC Dugan. Folks, if they don’t know who you are, let’s have you get to know everybody and have them
get to know you. How many years have you been practicing law?

Speaker 2 (00:58):
Thanks, James. Yeah, hey, everybody. As James said, my name is Dugan Kelly. I’m a practicing lawyer.
Been doing that for over 20 years. Started practicing law in the belly of the beast in Los Angeles back in
2000. Practiced in California primarily as a litigator for a long time, so well over 10 years as a litigator.
And then I realized shortly that I was in the unhappiness game. So regardless of whether my clients were
winning at the courthouse steps or in federal court, state court arbitration or the boardroom, they didn’t
like consequently being involved in litigation. And so we started a corporate transactional and securities
practice in our law firm after 2010. And since then, that practice has exploded. So now primarily what I
do for clients all around the United States is help them essentially structure their deals as they’re
acquiring assets, typically with other people’s money, how to do that compliantly, generate private
placement memorandums, and actually close successfully their transactions, whether they’re using debt
equity or other types of funding for their deals. And that’s what I primarily do.

Speaker 1 (02:25):
That’s great. And one of the things that is really, I think on people’s minds, especially when they come
through your doors, is the security side. It can be fairly complex, it can be a bit intimidating for those
who are just starting out. They don’t really understand it all that well, or not a hundred percent, but let’s
break it down into the basics so that they can understand what is a security.

Speaker 2 (02:53):
Yeah, thanks for the question. I get asked that a lot at masterminds or real estate meetups or
conferences, clients say, well, how either if what I’m doing is the sale of the security, or how do I
theoretically do deals that don’t touch on securities? And I always try to explain it the same way. It
doesn’t help you necessarily to understand that this definition of what a security is came out of a
famous case back in 1946 called the SS e c. That’s the Securities and Exchange Commission. That’s the
regulatory body in the United States that governs and has jurisdiction. Over 27,000 registered broker
dealers, registered investment advisors, exchanges, third parties, people that are buying and selling
what the S e C calls securities. Well, in that particular case, the SS e C actually defined what a security is,
and what they basically said is it’s an investment in a common enterprise with a reasonable expectation
of profit derived solely from the entrepreneurial efforts of others.
Now, if somebody’s like, well, that sounds like 1946 speak, right? It’s not like common English. So what
does that really mean? So I usually say, Hey, here’s the rule of thumb. The rule of thumb on whether it’s
the sale of the securities is if the seller’s purpose is raising capital, that’s somebody that’s the seller in
this is somebody asking somebody for money? If that person asking somebody for money, their purpose
behind that ask is raising capital and the buyer’s purpose. That’s the investor. That’s the person listening
to the person that’s asking for money. If their purpose is receiving profit, then it is likely a security. And
as such, it touches on this vast body of law called securities laws. And that’s why it’s almost
indispensable for you to have a team around you when you’re in the business of acquiring assets.
Doesn’t really matter what the asset is. And in order to acquire ownership in that asset, you’re really
raising passive investments from individuals or third parties and engaging in what the S e C calls the sale
of the security. So it’s a very long-winded lawyerly like answer to the question of how do we actually
define and figure out whether what I’m doing is the sale of the security or not?

Speaker 1 (05:43):
Interesting? Well, let’s say that I’ve got a potential deal in the works, and we’ve touched on this already,
but I’m sure you get this question constantly of how do I do this? How do I do this legally? And since
we’re talking about securities, inevitably the question comes up, do you need a license to do this?

Speaker 2 (06:07):
Yeah, these are all great questions. So this is an amazing industry. First and foremost, the fact that
people are able to leverage investments by other people to acquire assets that will produce returns,
returns for both for the passive investor as well as the sponsor operator, syndicator, those terms are
used interchangeably with one another. Those individuals that put the deal together, that out of their
brainchild, they say, Hey, I’m going to go buy this asset. James has an asset that he’s about to buy. Let’s
say it’s an apartment building, and James looks in his wallet and he thinks to himself, man, I don’t have
enough money in order to put forth the down payment that the bank is going to require me to have so
that I could buy the apartment building and get the keys to that asset and then essentially start to make
money through rents and other revenue that’s generated by the apartment building.
But if I still think, Hey, I really want to do this deal, how could I do this deal? Well, the syndication aspect
of it allows you a perfect mechanism in order for James to be able to accomplish that. Now, how’s he
going to do that? How’s James going to be able to do that? Well, first and foremost, he comes, he
knocks on the door and we sit down and we talk about what his purpose is, what his mission is, how he
intends to generate returns for his investors, what his business plan theoretically looks like. And then we
begin the slow painstaking process of putting together the most appropriate structure for him to legally
and compliantly sell securities in order so that he could buy that apartment building. And it usually
entails we are forming another entity, an entity that James will impart sell off to passive investors.
So James might say, Hey, I want to keep 20% or 30% of the deal for myself for all the time and effort that
I put into the deal. I want to keep that, but yet I want to sell off in chunks or fractional slices to passive
investors. The remainder of that limited liability company, that limited partnership or a corporation, he’s
going to sell off to investors, the money that investors send into James for that sale, that’s the sale of
securities. And they do so through what we call the private placement memorandum process. Now, it
doesn’t have to be confusing or very challenging or complex or like nerve wracking. The private
placement is the process by which lawyers are able to legally and compliantly provide you a structure,
meaning you the sponsor, operator, syndicator, such that you would be able to go raise that money. And
it typically involves a couple of key ingredients.

So regardless of whether you’re buying an apartment, building a donut shop, a piece of raw land, a
skyscraper, or other types of assets even outside of the real estate sphere, what we see as practitioners
are the key ingredients inside that P P M tend to be the same, meaning regardless of how it looks, the
wrapper, the presentation, the formatting, the style, that can all change depending on the lawyer that’s
actually drafting it and putting it together. But at its core, the core essence of all these things, the key
ingredients stay the same. And that is risks. We want to always inform our investors of all the potential
risks associated with the transactions such that they’re able to make a knowledgeable, informed
decision about not only the merits associated with the transaction, but also the risks associated. We
want them to see your business plan. So that’s another key ingredient we want to know.
Okay, I understand all the risks associated with the transaction, but what are the benefits? Like what is
actually being sold? Where is it located? If it’s a piece of real property, all of the potential returns or
your estimate of what those returns theoretically look like, that’s the business plan. So we have risks, we
have the business plan. We also want to make sure that it is what the SS e c calls suitable for you to
invest because not every deal is a suitable investment. There are certain investments that are only for
accredited investors. Accredited investors are typically individuals whose net worth is north of a million
dollars, backing out the value of their primary residents, or they have made in the last two taxable years
at least $200,000 or in combination with their spouse 300,000 with a reasonable expectation of making
that in the year in which they invest.
If you fall into that category and the offering itself is only for accredited investors, then it might be
suitable for you to be able to invest. If your income or your net worth isn’t such that you fall into that
category of accredited investors, then it would not be suitable for you to invest into that opportunity.
Right? So then we see risks, right? Business plan suitability. We have what we call a subscription
agreement. That subscription agreement is the legally binding document that basically says the seller
who’s asking for the money is willing to take this amount of money and sell you X amount of interest in
the entity that is being sold and the buyer’s purpose, right? The person listening to the ask for money
says, yeah, I’ve looked at this. I think this is good. It’s probably suitable for me. I want to engage in that.
And they’ll fill out the subscription form and they sign that and they sign that, and there’s money that’s
exchanged. That’s that process of subscription. And then last but not least important, this is one of the
most important things is what is the legally governing document that will exist throughout the lifecycle
of the investor’s position in that entity? In most cases, that’s an operating agreement or a limited
partnership agreement or a shareholder agreement. And that really governs what the passive investor,
the investor can expect as far as voting, distributions, sale of the asset, potentially who is governing the
entity, all of those things as well as sale potential, redemption rights, other things like that. Those key
things are going to be set forth in that document, and you should always be able to see that in your
private placement memorandum. So those, James, are some of the key ingredients that everyone that’s
looking at a private placement memorandum, whether you’re going to invest or whether you are
someone who’s trying to put together a deal to get other people to invest into, those are the key
ingredients that will be in your P P M as well.

Speaker 1 (13:41):
And we’re not just talking about this in the abstract. This is what goes on all the time with deals and with
clients who come through our doors trying to structure things like this. Is there any sort of story or real
life example that you’re able to share with us of perhaps a successful transaction or just anecdotes or
anything that you’re able to share with the audience?

Speaker 2 (14:04):
We love helping people. So some of the best stories that we have are clients that are able to get their
very first deal. So they’re somebody that is potentially working a highly in their own career, but they’re
wanting to create financial freedom, not just for themselves, but most of the people that I talk to are
missional in purpose, missional in their lives. They want to actually be able to give back and sow seeds of
financial prosperity in their children’s lives or their family’s lives. And so for many people that get into
this space to syndicate, they have a prior career, right? They’re doing something else and they’re
successful at it, but they want to be able to passive income to be able to become financially free. And
maybe their why is different than your why, that’s totally fine. But at the end of the day, we get such
pleasure and joy in being able to help people get across the finish line in their very first deal.
So if you’re somebody that’s listening to this right now and you’re trying to think to yourself, well,
maybe I don’t have enough experience maybe to speak to somebody like Dugan or James or to contact
their firm, that’s not true. We want to give you the confidence and encourage you in your journey. Now,
not every deal is one that you need to acquire. So I think when you’re starting on this journey, setting
very realistic steps in both for success as well as growing your base and speaking to the people that are
surrounding the people that will likely most likely invest in you. Those are people that know you, like
you, trust you. It’s important to have realistic timeframes as well as realistic goals. But you should never
be paralyzed by analysis. So if you’re never going to act, you’re never going to profit, you’re never going
to advance in your goals.
But having a team member like us who will help encourage you and keep you on track, and then really
to the extent you need it hold your hand or push you, nudge you, pull you across the finish line and
make sure that your syndication actually closes, actually is successful. That’s what I take great joy and
pleasure in. And thankfully, we were able to do that for a lot of clients last year and the year before that,
the year before that, the year before that. And every year we look forward to adding new clients and
making tremendous impactful changes in people’s lives, including their families lives.

Speaker 2 (16:55):
That’s what it’s all about. And one of the things that you did mention is that certain, depending on how
it’s structured, some of these investments may not be for everybody. Sometimes it’s something that’s
good for a sophisticated yet unaccredited investor, and then there are certain ones that are strictly for
accredited investors. We’ll get into that one in the next episode.