Raising Capital Without Breaking The Law: Fund Compliance

All right, welcome back. Let's talk compliance. Now in this video, this is not financial legal compliance advice. I'm just going to share what's worked for me and what's helped me think through this process. I'm actually giving you a couple good places to go to find good partners that can help you. So in this video, I want to go through a few different documents here: your Form ADV, Form D, Blue Sky filings, KYC and AML, and a few nuances of this. But I want to share this first before I dive in. I was launching my fund. Now I've launched a number of different funds. This is ugly unicorns. This is a year and a half, 2 years ago, something like that, 2 and a half years ago. So, I'm over here on phase 4 legal and I asked my lawyers, is everything ready to launch? Oh yeah, yeah, yeah. We got your LPA. We got your PPM. We got your documents. I say, great. Is everything ready to launch? We good? We can go start raising capital? Yeah, yeah. Go start raising capital. You guys are good to go. I go, well, have we filed our Form D yet? They go, oh, we actually— we haven't done that yet. Yes, we should get on that. Yeah, you're right. Okay, let's get going on that. Let's get the Form D ready. Yes, thank you. I say, great. Okay, so anything else? This is a good law firm. They've done lots of funds. And then I said, have we filed our Form ADV yet? And same thing. Oh yeah. Okay. Yeah, we didn't file that yet. Okay, we're working on it. It's coming along. And I go, guys, what if I wouldn't have asked you about a Form ADV or Form D? Like you told me I was good to go. Go get them, Bridger. You got it, dog. What the heck? Like what's going on? This like law firm, I'm paying you tens of thousands of dollars. And I had to remember, Anyways, all that being said, it's good that you know these things. It's good that you understand all these compliance things so you can keep people in line. Now I would have them do it, but make sure you know what's going on so you can check and help them. Let's walk through each one of these. Let's start compliance. Now there are more things than this depending on your fund type. These are the core ones for sure. Form ADV, what is that? This is what you file with FINRA. FINRA is a private company, but kind of with the government, with not. These guys do all the licenses. So if you ever, if you're going to become an investment advisor, get a Series 65, Series 7, all that kind of stuff, you go through FINRA. FINRA is the group to go through. Additionally, you file a thing called your Form ADV. Now there's Part 1 and Part 2 of these forms. It depends on if you're going to file as an investment advisor, a registered investment advisor, or an exempt reporting advisor. An investment advisor, just a reminder, this is at the state level. You are under $150 million AUM. You are an investment advisor. You have to have a Series 65 license. Typically, it depends. Some states don't require it, but sometimes you do at the state level. Okay? A registered investment advisor files with the SEC. It's federal. You have a Series 65 license. You are over $150 million AUM. And that's where you fall. You are one or the other. You are not both. You are either this one or this one. Now, they've created a new rule called the exempt reporting advisor. You're between $25 and $150 million, you can be actually exempt from this. You're under the SEC and you do not need a Series 65. A lot of you might be able to qualify as an exempt reporting advisor. My fund right now is an exempt reporting advisor. So I do not, I was studying, I was gonna patent, and then my guy's like, hey, you're good, you guys are in this range. You don't need to have a Series 65 license. So I said, okay, great, for now. Once we get over $150 million, we'll then go get our Series 65 license and register as a registered investment advisor, okay? That's all done through FINRA. Now, even if you're an exempt reporting advisor, you still have to file with FINRA as an exempt reporting advisor, okay? And I believe we have other videos on that, but that's where that lies. This is updated, I'll put little notes here. Annually. Same with your Form D. Alright, so this is actually a Form D from the SEC right here. You're putting out a notice that you are offering securities. Name, issuer, pretty simple. You just kind of put down a related person. Now I would have a lawyer or compliance group help you fill this out and make sure it's done the right way. You put what industry you're in, the issuer size, okay? Now you can decline not to disclose as well, or you can say how much you're going to do. And then down below, look at all the rules here. Okay, this is just what we talk about. Look at Rule 504, 504 and then . Look at 506, 506. Do you see those right there on the left side? 506, 506. Okay, then if you want to have the Investment Company Act section, so you would, you would select like my fund, for example, is a Reg D. This is a Reg D Form D. 506. Man, this is getting weird with the zoom. 3 fund. And that's what we checked. You can do, the most common are 3, 3, and 3. That's what we teach in the fund. But there's also a 3. There's a 3. There's all these different versions, but 99.9% of companies use the ones that we talk about. Okay? Down below, it talks about equity or debt. What type of fund are you doing? You go fill all these things out. Which states are you going to solicit in? We'll talk about with Blue Sky Findings how many you're offering. How much have you sold so far? All this down here. Okay. So that is a Form D. Ta-da! Pretty crazy. Okay. There it is. You'll file this before you go out and go to market. Your lawyer and legal team can help you file that, your Form ADV and your Form D. And they'll tell you all the nuances of what to do with all those things. Now additionally, what's next? Blue sky filings. Okay, blue sky filings. What that means is when you go and when you're in the United States and you raise from a different state, you have to notify that state that you are raising money out of that state. So how this works, you would, you know, if I'm going to go raise in Texas, I file a notice, I pay a filing fee. They're like $200 or whatever. Pay my fee and I notify Texas that we are raising money out of Texas or New York or whatever there is. Now almost all states allow you to notify them 14 days after someone has subscribed. So someone joins your fund, you have 14 days to notify Texas or Utah or Colorado and you pay your fee that you are raising money out of that state. Okay. Now once you've filed for Texas, you can keep raising, you don't have to pay $200 every single time. You can update your notice though, and every state's a little bit different, so have a compliance person help you or have your law firm help you. But you notify them. The one state, actually 2 places to be aware of, is New York and Puerto Rico. Puerto Rico, I think the filing fee is like $1,500, and New York is like $2,400. To raise out of New York, you have to pre-notify. So you have, before you can even go start talking to people in New York, you have to pre-notify. They want their fee. Great. Puerto Rico is similar. Those are 2 to be aware of. The rest are 14 days after you file your blue filing fees. Alright, moving on. Down below, we've got KYC and AML. KYC and AML, we talked about this in our other compliance section, but I'll review it again here. This stands for? Know Your Customer. Know your customer and anti-money laundering. Now, this occurs when someone subscribes to your fund. They fill out your subscription agreement. They're going to join your fund. You would run KYC and AML on that person. Now, if you use a third-party administrator, they can help do all this. Essentially what they're doing, number one, They are going to run usually a world check or something. They want to know if this is a politically exposed person. They want to know if this person is connected to the mafia or has a warrant out for their arrest. That's what the KYC stuff would help you find and because you, you know, it's against the law to take money from, you know, the mafia. If it's a politically exposed person, you just need to be notified and you can decide as compliance team if you want to accept that money or not. Maybe this person is the cousin Of the king of some country in Africa, I don't know. Whatever the thing is, okay? That's know your customer. Anti-money laundering is verifying that they're not laundering money through your fund. So let me give you an example of how this works. So for example, let's say we're over here. This is our fund. Ta-da! Okay, we got our fund, and we have an investor. We got Joe. Joe's investing in the fund, okay? Joe signed the subscription docs, sub-docs. Joe signed that he's gonna put in $100,000 from Joe, okay? And we go, great, and we send out a capital call and we call down $100,000 and then we get a wire from ABC LLC. And we go, huh, who's that? We don't know who ABC LLC is. And Joe, we message Joe, we say, Joe, we haven't got $100 grand. We received $100 grand from ABC. Are you connected? Is that you? He goes, Oh, yeah, yeah, that's my entity. I'm the owner of that entity. And I— sorry, I sent the wire from my entity. Because of AML rules, anti-money laundering, we cannot accept that money unless we do a couple of things because we don't know if Joe's lying or not. Maybe Joe does own this 100%. That would be OK. And we got to prove that. But if he doesn't, there might be another partner over here. And this partner is a politically exposed person or it's the mafia out of Italy. Right? And they're money laundering through Joe to get money into your fund to get a return because they want to get money back and get in the United States. Does that make sense? They have to verify. We have to verify the bank account now of where that money is coming from. And so in this case, We have a couple options. I'll put them in yellow here. Option number 1 is we send the money back. And we say, Joe, you got to send a new wire coming from a bank account that matches your name exactly. From Joe Brown, Joe Smith, LLC. You know, just Joe. Let's call it Joe Brown bank account. It's got to come from that. That would help us with AML. I'm sorry, we can't accept this. I actually had an investor. Let's use the same example. He sent money from Joe Brown LLC. And his name was Joe Brown, just for this example. And we received money from Joe Brown LLC. And so I called Joe Brown. I said, hey, Joe, I received money, but it came from Joe Brown LLC. Oh yeah, that's my entity. I said, I'm so sorry, but for AML, you signed up as a natural. You subscribed to the fund as Joe Brown, not as Joe Brown LLC. I'm sorry. We can't accept that money. And he said, really? What are you talking about? And I said, I'm sorry, for AML reasons, we have to either send the money back or you need to send us an operating agreement and articles proving that you do own 100% of Joe Brown LLC. And if you don't, that's fine, but we can just resubscribe Joe Brown LLC. We'll have to run KYC on Joe Brown LLC. Those are our options. We can rerun KYC. You can resubscribe as Joe Brown LLC. You can send the money back and resend it from your personal account, or you can give us an operating agreement with articles and we can prove that you own that entity. That would be an example of doing proper AML compliance. Does that make sense? Okay. So when you're receiving wires, this— and again, this is something a group can do. If we go back to the fund waffle, good groups that can help you with this. My firm right now, we use ACA, and I think they're a preferred partner in Black Card. ACA is one of the top firms in the world that helps with compliance. They help with a lot of this stuff. I also use NAV Consulting. NAV Consulting helps with this. Savvy Legal can help with this as well. They can help with Blue Sky, Form D, ADV, KYC, AML, all this stuff to just find a good firm that you trust. They— a lot of them can do this and help you with this to make sure you're compliant and then help you update your annual filings, your licenses, all that kind of stuff here. So again, to review, we've got Form ADV, Form D, Blue Sky filings, KYC, and AML. That'll help you be Feeling real compliant, feeling very good. And by the way, there's always more stuff coming out. There's always new compliance things. This is not it. This is just some core 4 or 5 things to think about and have in your business. There's more. Keep looking, keep asking questions, keep digging. But I wanted to make sure you guys saw this in a video so we had enough here. We'll probably add more stuff down below. But hopefully this is helpful. See you next video. Bye-bye.