As part of this seven part series, we've been going through different hot topics that regulators such as the SEC, or state regulators are hot to, and they are going to be my prediction, increasingly vigilant to protect the investing public about. So this next topic is definitely way way not allowed. And it is a very hot topic. If you are doing it,
then you need to stop it immediately. And if you're not doing it, you definitely don't want to get trapped in finding that yourself doing it or thinking that it's okay. So what is this hot topic that state and federal regulators are going to be definitely looking for? And I think that there will be a greater scrutiny in the future. And certainly a desire to go after people who are doing this. More and more. The idea is something kind of simple and probably on its face, you're
like, oh, yeah, that's no, of course you can't do that. And that idea is commingling. commingling is not allowed. commingling is not part of any of the funds. So let's talk about exactly what commingling is in this context, where I see it happen kind of under the radar, that causes a problem. So let's put up a whiteboard. So let's talk about the problem that is obviously wrong. So the one that's obviously wrong is you've got a fun here with money invested in.
And this is your fund LLC. And then this is the one that's wrong is money comes out just for a short time, because you want to put together another your pool, you want to put together something new, but you need to pay, say your attorney, you need to pay him legal fees. Right. So you want to pay your syndication attorney in order to pay him legal fees and draft documents for you. This is obviously not allowed. You are not allowed to commingle your joint bank and your bank
accounts this way, right? Same thing, same problem that you need a place to just temporarily Park some money, you can't just put it into the fund LLC. It's it's not allowed, you're not allowed to do that. So that's the obvious case of commingling. What I see happening a lot of times is this. And certainly I've I have had clients ask about whether or not this is allowed. And the answer is no, it's not. And it looks something like this. You've got sorry, this is you've got your fund LLC
here. And you've got your management company here and I'm drying him his buckets. Because really, a fun is just it's a bucket of assets. All right. So we can let's call this fun one LLC. This is fun to LLC. And let's make fun three LLC just because we can oops. It'll make the point better. Oops, can't see this. There you go. Fun. Three, LLC. All right. So you're here. You've got these three funds that are going and they're
working wonderfully. You've identified a potential opportunity that you would like to create over here and this is say fund four. Let's put it into context. Let's say these are real estate deals. was that that happens a lot. So you've identified fund for? And you said supposed to be a question mark, and it doesn't look anything like one. So you don't know how to get it started? You found this great asset. Right? So that you want it to buy? All right, that's how you want it to
go, but you don't have the cash to do it. So what some people think they can do, and you can't, is this, the thought comes up of how can I just borrow money here? Can I borrow money from fund three to put the downpayment on or put the deposit down on this property? So that when it gets locked up, it'll get locked up in escrow. And as soon as this fund has enough money, will repay that money back. plus interest? And
the answer is probably not. Now, it's it's possible that your fun is allows for loans to be made to other projects, which is okay. But at the end of the day, the analysis goes something like this, does this guy here? And this guy here? Who are investors in this? Are they going to have a problem with this going on? Is
there any way that they're going to have a problem? Or were they told specifically, we may make bought loans to our investment, other investment companies in order to reap to pay them back, including investment companies that are managed by the same manager? If the answer is no, which most of which will be most of the time? That will be the answer, then you can do it. So that's the commingling problem that happens, and it's the commingling problem that actually, is is very prevalent,
because managers don't see what they're doing as buckets. Right. They see them as really a list of assets and sets of investors and things like that. But the truth is that they're buckets, and they're totally self contained. If they're going to do something outside of fun one or fun two, or fun three, if those things are going to be doing something outside of what those specific vehicles are, your investors are being wrong,
right. So money is being taken from them. Maybe it's just an opportunity cause for an opportunity that's not even there, but it's affecting them. It's their money, and they have the right to have what they expect happened with their money. So that's the problem that I see happening with commingling. Now regulators know this happens, they see it
happen. And if they know this is gonna happen and see this is going to happen in one of your funds, you can bet they're going to be calling and go, there's going to be some major enforcement action to bring something down. If an investor got wind of this happening, and they were to let the SEC or a state regulator now, I would bet 100 Donuts, that they would be investigating it as quickly as possible. And stopping that kind of action with whatever for enforcement actions they have,
because it's just plain illegal to be using funds that way. My name is Tilden Moschetti. I am a syndication attorney with the Moschetti Syndication Law Group. The whole point of these videos here is to help you understand what compliance is and help you be in compliance with the SEC and state regulators. I'm a huge fan of Regulation D and all the rules that are related to it. Because it makes raising money. Very very knowledgeable, very
formulaic, very, very doable for people. It keeps the cost for you as a regulator down and lets you do what you want to do in order to raise funds and protects the investor public as well. So if I can help you stay in compliance with the SEC in the state regulators, that's what I enjoy doing. And I enjoy working on projects and with good clients. So feel free to give us a call if you think you might be one of these