On January 2, 2018, Michael learned he was going blind.
Retinitis pigmentosa, he finds out, is genetic, with no known cure.
Michael takes us through his deeply personal struggles of health, wealth, identity, and realization and how this led him to leave the corporate world behind for a new life chapter.
His tale is an adventure, as he shares his transformative experience traveling across South America and Europe, writing, and forming relationships that have helped him rediscover his purpose.
Today, he's found his way back to law. But family and life lessons now guide his WHY.
Beyond the life story, we dive deep into the complex world of investment laws. With his extensive knowledge of securities law, Michael adds context and clarity to the new SEC limited partner guidelines.
His keen insights into the SEC guidelines for real estate funds and the future of investment funds are both enlightening and thought-provoking.
Finally, we touch on the fundamentals of investor education and the critical role trust plays in investment funds.
Links Here:
https://x.com/investing_law?s=20
https://investoropportunitynetwork.com/
Live free. Get Educated. Master Your Money.
Subscribe to our Podcast here!
https://investingstuffyoushouldknow.buzzsprout.com
Youtube Videos now up as well! Subscribe here:
https://www.youtube.com/channel/UC1kV60Yxx4ntgLqAwOCR1Pg
On January 2, 2018, Michael learned he was going blind.
Retinitis pigmentosa, he finds out, is genetic, with no known cure.
Michael takes us through his deeply personal struggles of health, wealth, identity, and realization and how this led him to leave the corporate world behind for a new life chapter.
His tale is an adventure, as he shares his transformative experience traveling across South America and Europe, writing, and forming relationships that have helped him rediscover his purpose.
Today, he's found his way back to law. But family and life lessons now guide his WHY.
Beyond the life story, we dive deep into the complex world of investment laws. With his extensive knowledge of securities law, Michael adds context and clarity to the new SEC limited partner guidelines.
His keen insights into the SEC guidelines for real estate funds and the future of investment funds are both enlightening and thought-provoking.
Finally, we touch on the fundamentals of investor education and the critical role trust plays in investment funds.
Links Here:
https://x.com/investing_law?s=20
https://investoropportunitynetwork.com/
Live free. Get Educated. Master Your Money.
Subscribe to our Podcast here!
https://investingstuffyoushouldknow.buzzsprout.com
Youtube Videos now up as well! Subscribe here:
https://www.youtube.com/channel/UC1kV60Yxx4ntgLqAwOCR1Pg
Hello everyone and welcome to another episode of the Investing Stuff you Should Know podcast. We are thrilled today to have on the Investments lawyer from Twitter, or now ex. First name is Michael. Michael prefers to remain anonymous or semi-anonymous. If you really really want to know him, dm him on Twitter or some other platform and you can find out more. But this man is an expert, he's an attorney. Of course, he's not your attorney in the investing space, especially around securities, syndications and funds and things like that. So we're going to have a great episode and he's going to share a lot of knowledge with us, so let's jump into it. Michael, thanks for being with us.
Michael:Yeah, thanks, good to be here, johnny. Thanks for having me.
Johnny Nelson:Incredible. So yeah, man, I've been watching your content, some of the things you were putting out there, for a while now. I've been impressed and you're the kind of person that I'd love to bring on and share your deep knowledge of all the different things you have to offer the audience funds, syndications, real estate folks and beyond. But before we get into that, tell us a little bit about your basically kind of where you grew up and then also I know you have a really personal story about your eyesight, so we'll talk about that too, but let's give us a little background of like hey, the young Michael.
Michael:Yeah for sure. So you know, like you said, nothing I talk about is legal advice, investment advice, really sort of advice whatsoever. Yeah, so I grew up outside of Seattle and kind of hopped around to LA, new York, and then moved back to LA and one day I went in for just a routine eye exam and they said, oh surprise, you have a disease where you're going blind, which was not exactly something that I signed up for that day, but that's, you know, that's what you get, and so yeah, so basically I was working doing mostly M&A and capital markets work at a big law firm in LA. I didn't really like it, I was working a lot, and then I kind of learned I'm going blind, so at that point I quit.
Johnny Nelson:Can you tell me about your emotion there, michael? That's such an important story. You know, yes, we can talk about funds and legal stuff and money, but also we know this whole thing that we're doing everything that we do and family work, working with other people, and that's the people connection, right? So let's not just gloss over that. Firstly, like, did you have? Like maybe you just said, did you have any discomfort? Or maybe someone else that's going to help someone else, like, maybe you have similar symptoms or was it completely out of the blue and you're like, oh my God, do you have this degenerative disease or whatever the condition was?
Michael:Well. So I didn't really know anything was wrong with me when I went in. But then when they told me I kind of realized, oh, you know, like I've been walking down the streets of downtown LA with my headphones in and it kind of looks like like. I just thought like people would just kind of come out of nowhere from behind me and I thought, oh, you know, it's probably because I'm just like listening to a podcast or something and I just wasn't paying attention. And then I thought, oh, it's because I like couldn't see them until they were right in front of me. So that kind of clicked to some degree.
Johnny Nelson:The realization, like you didn't, like I mean things, like you know, degradation of performance of some kind. It doesn't always, doesn't always hit us Like what's going on, like I was in, somebody points it out, and then it's like, oh, now it's obvious. But then at the time, obviously you know, clearly you didn't, you know, you didn't have that realization.
Michael:Yeah, yeah, like when I was growing up and in high school I played baseball and then I joined the softball team at my law firm, which was a couple months before I realized I was going blind and it was just like you know, like middle-aged people throwing softballs under hand and like I was with it, yeah, and I was like I don't know, like this, I just couldn't understand. It was so frustrating.
Michael:You're like I really, I mean like since college I really lost it here, like I don't know Like this is embarrassing, like what is going on, and then I thought, oh, it's because I'm going blind, that'll do it.
Johnny Nelson:So much of that kind of came together, man. So then, what was it? After you were told that you kind of dawned on you, did you think like I guess I tell us about that that does initial panicky reactions Like I'm never going to work again, like what was, what were those initial handful of thoughts that like hit you. That's maybe not true or maybe aren't true in a large sense, but kind of those first thoughts, what were those things?
Michael:Yeah, I don't. I don't know if I thought about never working again necessarily. I honestly don't remember exactly what I was thinking. I mean, I definitely cried and called my mom and my dad and it was. It was a bad. It was at like 6 pm, so like it was a bad, like rest of that day, but the next day everything was fine, okay.
Johnny Nelson:So you you risked it. You came, came through that quickly yeah.
Michael:I think so. I mean part of it is that it's quite slow, Like I can still see stuff, Like I mean I trip over things all the time and you know I can't like drive at night and certain things like that, but it's, it's slow, so it gives you time to think about it and I don't know, like growing up, when stuff, when bad stuff, happens to anyone in my family, we kind of just like made a joke out of it and just kind of moved on.
Johnny Nelson:I guess a family, family characteristic that one is. You know that one deserved you well, so that's, that's amazing yeah. My family makes blind jokes all the time at me, which I I literally have had like a couple of like like visual funds or references, not as a joke, and I'm like trying to like die out down like what kind of perspective did you?
Michael:have or like you know high and 20, it's like whoa, I could dial that dial the visual. The visual reference is down dude. Yeah, you can, you can make fun of me, I don't care, that's, I think that's important. Like my mom just had cancer and she was like laughing at herself the whole time. Like I say that's incredible, yeah it was it was.
Michael:It was like have you ever had a beard and then like you shave part of it at a time? Yes, have you ever tried that before? So like it's like classic college stuff. I did that to my mom. Like we gave her like five different haircuts on her way from like normal to like chemo bald. Yeah, and she, she enjoyed that.
Johnny Nelson:That's amazing man. Good for your mom Having having a sense of humor.
Michael:Yeah, I'm for real good for my mom, yeah.
Johnny Nelson:At a time of, I mean, cancer is always serious, so my dad passed away from from a brain tumor after a long fight. So yeah, that's, it's, yeah, but anyway, pivoting back to you, know that, that realization, then you had kind of a you know kind of a realization, a life of an inflection point. Tell us about that next part. And again, this is like the human journey and also this is deeply, I think, the audience. I appreciate this. Tell, talk to us a bit about kind of that, what, what that initiated and transferred in you. And then you assumed that you went traveling and you met your wife and some other things. Yeah, what was that? You like I'm working for corporate.
Michael:I'm working for corporate to walk us through that. Yeah, so I I, before that point I had been on, you know, the classic go to college, go to law school or go to the big firm, just do what you're supposed to do Trajectory. So I basically took the exact opposite of that and made that my life. So I quit my job, I moved to South America, traveled around, mostly live in Columbia. I started writing on the internet for money and just kind of traveled around and and was, you know, very transient I suppose. Yeah, just kind of went wherever.
Johnny Nelson:Were you like an up worker, were you on like up work, or how did you?
Michael:find the digs. You know, I think I, I think I did go on up work a bit. There was just a bunch of job boards. There was just job postings as well, but stuff, stuff like that. And then I like built my own website and started getting clients and such, mostly because I didn't want a job and I wanted to make money some other way. Yes, because jobs are dumb and lawyers are dumb and I didn't want to do any of that stuff. So so yeah, like I don't know, I kind of have an extreme personality and sometimes, like we'll go from one end to the other. So so I went all the way to the other end. You know, it was just like reading and meditating all day and that's basically it. That's it, which was good. It was what I needed at the time, there's no question about it.
Johnny Nelson:And then then, yeah, you might hear I think you met your wife in in. Did you meet her in Columbia or did you meet her somewhere?
Michael:in South America. No, no, no, we we had each done a five day trek to Machu Picchu Cool and today we had each took a bus from from Cusco to La Paz, which is capital of Bolivia, okay, and it stopped halfway at this lake called Lake Tericaca, and basically we got out on a boat and went to this island, and so I met her on a boat going to that island.
Johnny Nelson:Um, and then that's I'm a romantic, that's not romantic, I don't know. Yeah, it was pretty good, it's pretty good it was.
Michael:I, yeah, I was crazy and then, like I didn't see her for like three months, basically, and then she asked me to go on a date in Brazil. So then we went to Brazil.
Johnny Nelson:We guys I imagine you guys like keeping in touch. You know, yeah, I was texting every day.
Michael:Yeah, and then she, she grew up in Belgium, so then I moved to Belgium. Uh, cause that's what had to be done.
Johnny Nelson:Uh, again on the extreme, the street the street. Personally scale here Like okay, you know, hello, you know South America.
Michael:Europe, exactly, exactly. Like I got into Belgium one time, like the day they shut down the borders for COVID, like several hours later they locked it down. I like it was nuts Incredible man.
Johnny Nelson:Incredible Wow.
Michael:Yeah.
Johnny Nelson:Hey, you know you're, you live life on the edge and that's that's exciting, Uh and uh. But but also you, you know, perhaps, perhaps, maybe probably is the right word. Yeah, you know you needed that, you needed to. You know you just, like you said, to just hit that corporate treadmill, like you know, kind of mindless zombies on the, on the, on the durable, on the hamster rail, whatever analogy you want to use. Yeah, like, hey, you know, like, after you know that that's that realization of you know how, losing your sight, like what, what the heck am I doing? You went on a couple of kind of big life needs to have some, some, some amazing stuff, but now, kind of at the you know, taking it to the present moment, you have ended up back as a, as a lawyer. But, um, I think you've expressed, you know, but it's with a lot more intentionality, with, with purpose, with reason. You have a child or two now with your family, man, and you're back in the states. Give us that, that, that next chapter here, kind of that, that arc there.
Michael:Yeah, kind of come back. So this happens with me all the time. I don't know if it happens with other people too, but like I'll basically take one extreme and then I try the other extreme, and then I take whatever parts of both of those extremes work and kind of synthesize it into some sort of result. Um, like this happens all like I do, like I was vegan and then I just then I was like, oh, keto, and then in the middle I'm not just like, oh, I'm a normal person who just eats good stuff. Now, you know, I like not that.
Michael:You know it's obviously dangerous to touch topics like that, but, um, that that's basically how it went. You know, I, I, you know I'm back at a big law firm, I'm a lawyer, but I don't, I don't take anything as personally anymore, I would say, and I'm really focused on building something you know like forming good relationships with clients, for example, and kind of thinking with the end game in mind and and really, I guess you know like building a brand and making content and stuff is pretty fun, like I really enjoy it. Uh, just, you know, for its own sake, um, even if it doesn't bring clients. So it's something that I find very rewarding and what is that?
Johnny Nelson:If I could ask Michael, what is the end goal? As you work in a larger law firm, you know, uh, you know, you're just, uh, there's probably other attorneys and you know, I don't, that's not like you're a principal at the firm. What is that? As a just to give other you know professionals, maybe in the similar space, some encouragement, some guidance, some perspective. Uh, what is? How do you? How do you view that?
Michael:Yeah, I think that is important, giving people perspective, um, and I also I mean also just like from my own, from my own side uh, you know it's, it's it's fun to maintain relationships with a bunch of interesting people and you know, things like like Twitter and LinkedIn and such give you access to a lot of interesting people and it's just a lot of fun, you know, to hop on calls like this or to to help people out when they're just starting out in an industry, whether they are lawyers, like I was, or whether they're starting off as, like GPs and investment funds there's things of that nature. I found that the human connection is is is really fun and it can take a lot of time, um, so sometimes you need to kind of dial it back, I've found, and not take every call that somebody you know wants to have, but, but it's something that I've been enjoying a lot. The education process is something that, uh, I really I really enjoy Awesome.
Johnny Nelson:That's amazing. That's amazing. It sounds if I may be, I'm sure it's here it sounds like you maybe were, uh, maybe outwardly, I kind of in-way focused. You know like, hey, just you know where I'm just going to do this thing, in-way focused, and then you kind of had you know some life events and then you're out really focused. Now you're you're kind of giving back. Obviously, you know you're making an income, you know working as an attorney, but also, like those the, the view now is shifted to. You know building those relationships, helping people and then sharing those things that you've learned to whoever my value might get value out of, that might listen, uh, and then kind of, you know there's, there's feedback there, that's that's that's beneficial to you. Is that, is that a fair, um, not kind of a fair summary?
Michael:At least that aspect. Yeah, yeah.
Johnny Nelson:Yeah, amazing, okay, well, that was amazing. Thank you for you know kind of stepping through that and just, you know, again, giving context to the, to the person Michael heritage for my audience. Uh, let's pivot now to. You know something about the more serious side. I help people. Let's get to the meat. You know, okay, we'll get there, we're going to get there.
Johnny Nelson:Yeah, um, we know this is just kind of relevant in the, whether you're a syndicator, a fund manager or you know, just capitalizing space, all those kinds of things. Um, the SEC of recent uh, august 23rd actually that issues to new guidelines. We're just jumping right into the to the deep stuff here. Um, I know you've, uh, I think you put a post about, post, uh, about it out. Uh, can you walk us through at a kind of like talk to us as if we're, you know, uh, five, you know a 10 year old and you got to explain some things here. Give us kind of a rundown, um, you know, maybe within the next five minutes, off the different uh, what's changed and uh what for us as syndicators, fund managers, people that are, you know, don't are not attorneys to kind of like keep in mind as this new landscape unfolds.
Michael:Yeah, okay, we're going to have to start kind of at the beginning of time. Uh, for funds. So there are lots of different laws that regulate investment funds. Like, for example, there's the securities act, there's the investment advisors act, the investment companies act, there's all sorts of acts and, in particular, let's talk first about the Investment Company Act. So the Investment Company Act covers investment companies, as you might have guessed, and investment companies invest in securities. So hedge funds, private equity funds. If you are a real estate fund investing in securities, so like if you're a real estate fund of funds, for example, or if you're purchasing shares in a REIT, or if you are a passive member in a JV, those are all buying securities If your business is investing in securities, then you are an investment company and then you fall into this act. So if you're actually-.
Johnny Nelson:Good to set the groundwork on the terms.
Michael:Yeah, thanks. So if you are an investment company, that's not good. Well, I shouldn't say it's not good, but it's not what any of your listeners want to happen to them. That's like you're a registered mutual fund. You're like a giant, giant investment company that may be public and there's a ton of regulation. You have to deal with lawyers a lot. It's a whole thing. It's not what your everyday syndicator or fund manager is doing.
Johnny Nelson:And we're like a handful of us. There's three or four of us, or one or two, and I'm just a little guy, I have these small investments. I don't have staff 300D behind me. They're just like me and a handful of people.
Michael:Right, exactly, so all of our clients get some sort of exemption from this law. Like 100% of my clients have an exemption from this law, and so there's a few different exemptions that people use. So one is called 3C1. And this is something that I hear people throwing out all the time. People always make up the number. It's always.
Michael:Don't always believe what you hear on the internet, because people will say all sorts of stuff, but the real answer to 3C1 is that you are exempt if you have 100 or fewer investors in your fund. So lots of people say, oh, you can have approximately 100 investors, or you can have 90. There's all sorts of things people say, but you can have up to 100 investors in your fund and counting is kind of tricky. So that is something where you probably do want a lawyer, because it's not just like oh, there's 100 LLCs investing in my fund, I have 100 investors. It's not that easy, unfortunately, because, for example, johnny, if you and I formed an LLC just for the purpose of investing in a fund, then that fund would actually have to count that LLC as two investors Because of the one layer deep there's individuals. The layers keep going. Yeah, there's layers all the way down.
Johnny Nelson:We can whiteboard this out and get really complicated. Like we said, we're going to try to just crystallize just the key kind of the key points for your average fund manager. That's doing a lot of stuff small and just want to like the high level takeaways, but please continue doing so good here, man.
Michael:Yeah, and so for most of our clients who are hedge funds, vc funds, private equity funds, they're using 3C1. It's not that hard for a first time manager to keep to 100 investors. They probably won't have anywhere near 100 investors, maybe they have 20 investors. So they're totally within this exemption. Another exemption that is common is called 3C7. And that means you only accept qualified purchasers into your fund, and qualified purchasers are just super rich people. So 5 million in investment.
Michael:Even I knew that. I knew that, yes, I am no qualified purchaser. Qualified purchaser has 5 million in investments for an individual or 25 million for an entity. So for big funds, lots of big funds, this is fine. They can have like 500 investors, but they're just all super rich. So those are like two of the most common. And then there is something else for real estate funds which is called 3C5C and there's lots of specific rules for how exactly this works. But basically, just for the purpose of this podcast, it's for real estate funds, assuming they're pretty much like their core business, with a vast majority of what they're doing is investing in actual real estate, so dirt buildings, things of that nature.
Johnny Nelson:Very relevant to me in my audience.
Michael:Yes, and some real estate funds say we don't even need to deal with this law at all because an investment company is a company that invests in securities. And we don't even invest in securities, we invest in buildings. So why are we subject to this act? And that's a reasonable interpretation as well. So that's a long-winded way of saying that if you're a fund that's investing in securities, like a hedge fund, private equity fund, venture fund, you're probably relying on 3C1, which is the hundred investor loan, or 3C7, which is the super rich person exemption. If you're a real estate fund, you're either saying I'm not subject to this law at all or you're using 3C5C. So the whole reason why I just went through all of that is because these new laws that came out are applicable only to registered investment funds or registered investment advisors rather, which actually has to do with another law, but we won't talk about that because it'll take too long.
Michael:But it applies to registered investment advisors who are registered with SEC and private funds. So non-registered funds, which are exempt under 3C1, which is that hundred investor limit, or 3C7, which is the rich person exemption, it does not. These new rules do not apply to 3C5C funds or funds that aren't subject to the Investment Company Act at all. So the punchline here is that if you are a real estate fund operator or a real estate syndication operator, these laws don't have anything to do with you. So you can skip the explanation of what's going to happen, because it only applies to registered investment advisors or securities funds that are exempt under 3C1 or 3C7. So that's a good take away if you're a real estate fund.
Johnny Nelson:For sure, man, absolutely for sure. So I saw some chatter on some of our messaging boards about the new rules and how it can apply, and there'll be a lot of further discussion and it's something to comment here there and again, we're not giving legal or financial advice here, certainly not. However, we're certainly able to discuss it as that and that's for our human understanding, for us to conceptualize what's going on here. Let's take a relevant challenge example here. And people just say, oh, I'm not. They just simply claim that this is not the case. Has that been? Is there any SEC guidelines or rulings or whatever they call that? And they basically somebody makes a claim and then they give an opinion on that. Has those claims about basically anyone that's a real estate saying, oh, I'm not doing the security? Have those been reviewed and given the okay yet? Or this is just an interpretation that it's still? I could be subject to SEC scrutiny.
Michael:So I just want to make sure I understand the question. Is the question that whether it's clear whether these rules are going to apply to real estate funds or not. Is that the question.
Johnny Nelson:That's maybe a more salient question. Yeah, I mean it was slightly different, but go ahead and elaborate on that.
Michael:Okay, so the answer to the question I just asked is yes, they don't apply to real estate funds just because real estate.
Johnny Nelson:At least that interpretation is, or that the way that's been you're explaining it is on very solid ground. Is what you're saying?
Michael:Yeah, that's how I read it and that's how I've spoken with the, so I'm not a regulatory expert but I've spoken with the regulatory experts in my firm and they agree. It's pretty clear it just applies to registered investment funds and funds exempt under these rules. So real estate funds wouldn't pick it on the thread.
Johnny Nelson:They'll bet, but kind of the way I asked it. Maybe it's a crappy question. I asked crappy questions at times.
Michael:Guilty is charged.
Johnny Nelson:Questions are hard, yeah, especially about the stuff you mentioned ago, like you're kind of walking with a different fund, like whether it's this exemption? You know the hedge fund, the securities, you know real estate, and you said you said they cut my ear like hey, I am not selling the security, I'm actually selling real art, we're selling shares of real building here. So I'm not exempt, I'm not under those, those guidelines or those rules, right? So, I guess, or maybe I may miss her, but please go ahead.
Michael:Yeah, so so there's. I guess there's two things. I think maybe what you're getting at is whether real estate is a security, is that is?
Johnny Nelson:that what we're getting at. Okay, that's what I heard, that I thought I heard you say Okay, that's interesting. Okay, what? Yeah, I see Right.
Michael:Right. So I guess, like just kind of close the loop on this. If you are a real estate fund and you're selling securities, then then you're subject to to the securities laws in general, including the laws we just mentioned. And it just so happens to be that the SEC decided that funds that sell securities but are themselves invested only in real estate that they're not going to be subject to these laws.
Johnny Nelson:Interesting. Okay, all right. Thank you for clarifying that.
Michael:I think there's a separate question as to you know, is what you're selling a security at all? So if you are an investment fund or syndication, regardless of what you're investing in whether it be real estate or securities yourself, if you have, you know, an LLC or a limited partnership where you're accepting outside capital, passive outside capital, then you are selling securities to them. Yes, so that is. I think maybe that's what we're getting at here. That was it.
Johnny Nelson:That was it. That was it.
Johnny Nelson:Thank you for wandering through that with me, and coming down to the net, which I was, obviously the attorney, like you, you have expertise in that, like so what is the core question here? And you're like very, very adroitly, you know, came to that, that, that, that question. So thank you for you know, drilling in on that, that's, that's awesome, yeah, so amazing, sweet. So talk to us about so that's so. We just walked through, obviously you know kind of the stages of our podcast here and talked about the new SEC rulings which, like you said, kind of you know many people are interested and curious about here. What is on the fund side? You see, we're kind of not now we're talking like high-level. Do you see a bright future for the fund space? You know and again we could keep to the you know, just the real estate space or more more broadly, do you see that continuing as it is? Do you see like clamp downs and that question kind of stands from a?
Johnny Nelson:You know there's a lot of turmoil in the marketplace. You know the whole reason of doing a fund, of course, is, you know, being able to, you know, get additional capital for projects. You know things dreams people want to see and do and accomplish. You know that's kind of that's the house. Simply, I look at it like I have these dreams, I have these visions. I want to do big things. Funds are very powerful tools and of course, they're subject to regulatory constraints and laws and you know all those kinds of things. But do you see the tool of a fund being again more broadly used, less broadly used? Creative innovations happening to give us your thoughts as you look at the landscape and you see new and challenging things coming.
Michael:Yeah, so I obviously see at least a reasonably right future for funds. Sorry, I wouldn't be a funds lawyer, you're trying to cash out like next two years.
Michael:But there's, you know, there's, there's, there's opposing forces to some degree here. So on one hand you have, for example, the recent rules that just got handed down by the SEC, which you know just to kind of recap a tiny bit here that the new rules for these funds that they apply to essentially require funds to disclose more information and not do certain things unless they disclose those things to limited partners.
Johnny Nelson:So that's what prompted that. I know it's a little bit of a tangent. What prompted this? Like they just people, I mean, obviously you could read the news and some other things in your view but what prompted this new, this hand down of these new regulations?
Michael:You know, I don't know exactly what prompted them, but I suspect it's the fact that, you know, a lot of just everyday retail investors end up investing in funds and syndications and they have no idea what they're doing. And so the SEC wants, you know, wants to kind of shine some sunlight on the problem and, and you know, offer some sorts of investor protections.
Johnny Nelson:And I guess it's like a proxy of like because it's growing in popularity. Then they have. They felt that this is some some additional buttressing of the rules and some guidelines and some transparency. Do they do that? I think?
Michael:so I mean I you know I don't work at the SEC, so I don't know for sure, but that seems very reasonable. So, on the side of, I think funds are going to become more popular and more of a thing you know about. A little over 10 years ago, you know they passed the law that enabled 506C, which 506C is you know.
Michael:If you follow me on Twitter, you're probably tired of hearing about 506C, but 506C is is basically a law that allows syndicators and fund managers to raise money publicly. So you can post on Twitter, you can talk about it on this podcast, you can take out advertisements, whatever you want for your funds or your syndication, as long as you verify that each of your investors is an accredited investor. And if you don't do that, then you just have to kind of be quiet about your offering. You can talk to your friends, your friends of your friends, but you can't post publicly. So what has happened is that there's been quite the proliferation of investment funds, because now you have people who maybe they have a big social media following or they just have some big public image in general and they're now able to raise capital for investments that they wouldn't have been able to before, because they can raise awareness on social media channels or elsewhere.
Johnny Nelson:That's amazing, really it's amazing. It's like, oh, yeah, I could write the facts and write their obvious, but like, oh, that is fundamentally different. Yeah, with social media, like the public of social media, the law, and then actually now can you plug it in and, like you said, it's proliferating and your average person that didn't grow up on Wall Street or wasn't super connected in that space can now start a fund with getting in touch with an attorney like yourself or whatever, and set this thing up.
Michael:Yeah for sure. Now the law has definitely enabled a lot more people to get into the arena, as they say, and with that there are some people who are rather unscrupulous and just want to fleece their investors. And it's hard for limited partners, hard for passive investors, to know what any of this means. Like a lot of investors might not know what a side letter is. And just quickly for the audience, a side letter is a special deal between the GP of a fund or an SVV and a single investor. So I could say okay, my fund charges 2% management fee, 20% carried interest, but Johnny, I'm only going to charge 10% carried interest for you. So it's like a deal on the side.
Johnny Nelson:And typically there's like some incentive for both sides, like I'm going to bring you know a nice big check, you know right.
Michael:That's usually the incentive.
Johnny Nelson:Yeah, most of the other investors. However, the SEC is saying you can do it, but you got to disclose. Is that what? Basically, more or less what's happening?
Michael:That's the main thing. Yeah, if there's a side letter with a material economic term, then they want that to be disclosed to investors. That's, I think, like in my practice. I think that's going to be one of the things that we're you know, it's one of these things where now we're going to be like okay, like how are we going to do this now, like what's the best, what's like the best way, like the best game theory for side letters now, because side letters used to be all just give them a side letter. Like give them a side letter. You know, it's between I've written so many side letters, but now we kind of have to think like do we want to do side letter now?
Johnny Nelson:How does? What are the optics of this, right, you know? So I mean like you're just between you and them and you kind of could say what you wanted and it was, you know, you know, a win-win on. Just focus on that side. Now, more, more eyeballs are looking in on this thing and you have to, like, you know, is this even worth it to do a side letter? And or, how do we structure this and what kind of language do we use? Right, make sure that people are like they're not getting, you know, they're not getting cut out of the goods, right?
Michael:Yeah. Yeah, that's right. I mean there used to be a way. I mean there still is this way for other investors to look at side letters from other people. It's this thing called the MFN, which is a most favored nations provision, and what that is is that's two people in the country know about that.
Michael:Yeah, and I mean it's important. It's important. If you're an LP, you want to know about the MFN for sure. Regardless and this applies in real estate funds too this is not a legal concept, it's like a contractual concept. And basically what an MFN is is you say, okay, like I'm a big LP, I'm putting in, you know, $5 million. I want this MFN right. And what the MFN right is is it says if anybody else comes into the fund and invests the same amount as me so $5 million or less I get to see their side letter and all those side letters become a menu for me and I get to pick out all the provisions that I like. And now they're on my side letter. So, if you're an LP, ask for an MFN provision, see if it works.
Johnny Nelson:Fantastic advice, michael, and that was a beautiful segue where my mind is going to take the final chapter of the podcast or the final segment, and then it is. Let's both step into you. You're the other guys, you're sharing the good stuff here. Let's step into the shoes of an LP and, like you've said online and even hinted out here a couple of times, it's growing, funds are growing, syndications are growing, they're popular, but also they're complicated. There's a lot of structure, there's a lot of rules, there's giant documents, there's private placement memorandums, ppms and all these things. Your average investor most likely doesn't have the time or the knowledge or whatnot to really digest everything that's happening. What are your recommendations as a lawyer that has seen so much in this space? What kind of education, what kind of things do they need to understand and assume this investor is a busy professional? Go?
Michael:Go At the most basic level. Your primary job in my opinion, but not in my legal advice opinion is to just make sure you're investing with people you trust. So try to figure out what the GP is like or what the GP team is like, and whether you trust them or not, Because at the end of the day, that's the bedrock for all of this. Unless you're a trained lawyer or you're an investor who has a lot of experience reading these documents, you're not going to read 300 pages of documents and understand what's going on.
Johnny Nelson:It's not human. I love what you've just said. Essentially is this group of people trustworthy, and it's a little bit tribal and also very primitive, but also it's really the best advice. That's how you, to your short circuit, you bridge over so much of reading the documents and understanding and reading Brian Berks, the limited partner book and all these giant book knowledge.
Michael:That's a great book. It is a good book. I just recommended that book to somebody last week. That's a good point.
Johnny Nelson:Read them, yeah, watching like 100 hours of YouTube. Okay, fair enough. So Brian Berks, he does have an amazing book. What's the title? Again, I'm blanking.
Michael:The Hands Off Investor.
Johnny Nelson:That's it. The Hands Off Investor is incredible.
Michael:It's great book.
Johnny Nelson:And it goes really deep. You don't necessarily have to digest the whole thing at once, but it really covers everything. If you have time to read that, incredible. But to Michael's point, if you really are just want to get to, maybe you're super busy. You have a big family, a full-time job and you don't have all the time perhaps to read and understand all these things. The level of trust is your winning hand to play Trust in a team. Somebody else has invested and you asked them multiple people how did this go? Have you had a good experience? Are they communicative? What have been the returns? A set of basic questions to cover a lot of your own time. And we both recommend to get knowledgeable and get educated in the space, but also don't let it be a hurdle to start investing as well. So there's kind of a tension there.
Michael:Yeah, I totally agree, although, now that you've mentioned this book that I'm obviously so excited about, I would say, if you're going to be putting your money into a private vehicle, you should do some homework, unless it's like your brother or something that you really trust with your whole being. Don't write a $100,000 check without understanding how investment funds work. I would not do that, even if it's simple as reading one or two books, just so you know what is ridiculous on its face or not. So I've been starting this investment network where people submit deals and then we'll send them to investors and we don't take any money or anything. But we see some outrageous stuff from time to time.
Johnny Nelson:You guys discussed that. I did actually want to touch on that if we had time. We'll wrap it up real soon here, michael, but again it's a nice flow of LPs. So we talked kind of this final stages again kind of focusing on that as a limited partner, as a private investor. So we talked about a general recommendation of trust, a little bit of nuance there of how much to educate, how much to trust. We recommended a book and then this final thing that you guys are kind of especially on this kind of something that you've launched, is this investor group. Do you guys like tear deals apart? Do you like critique it? What does that look like? Just give people a sense of what they're going to jump in there.
Michael:So for us we just do like a very high level sniff test, so we're not going too deep. It's mostly is this ridiculous or not? And sometimes it's ridiculous and if it's ridiculous we don't send it through. Otherwise we do send it through and LPs can do their own further diligence.
Michael:But there are certain things that are pretty standard in the investment fund industry, like you'll have something like a 2% managed fee and a 20% carried interest.
Michael:I mean, that's why funds if you're in the fund space, you've heard the phrase two and 20 a million times and that's just what the most standard fee structure is, which essentially means that GP gets a 2% recurring fee for managing the fund and 20% of the profits. And sometimes you'll see stuff where it's like the GP gets 50% of the profits immediately or gets like a 4% management fee, which are things that I've never seen in my job but that somehow some GPs think that they should be getting away with, and some I mean getting away with might be too strong because it's a marketplace of willing participants. But personally, if I saw a deck with a 50-50 profit split immediately with no pref, even then I would not feel comfortable sending that to my sister to look at, for example. So we're basically just taking a look. It's not an intensive review, it's not an endorsement or anything, but it's just like is this absurd or not?
Johnny Nelson:And more deals. Yeah, elaborate, but so where do the deals come from and what kind of deals are you looking at? Like just anything and everything.
Michael:And then, like it is kind of everything, anything and everything at this point.
Johnny Nelson:Where do you source them from?
Michael:I have an Airtable forum and people will submit these deals. It's mostly funds and syndications. We've had actually a few startups. One recently is investing in a new system of propulsion through space, so that's pretty cool. So people like submit this forum and then I have a call with every single one of these GPs just to get a sense of who they are. Are they a robot or not? We've had no robots yet, but that doesn't mean I'm not going to keep checking. We're close.
Johnny Nelson:I have a series of AI trip questions here, to make sure I can flush this out quickly or not, right?
Michael:Yeah, I guess I should say I haven't determined anyone to be a robot, maybe one's been a robot.
Michael:And then we take a look at the deck and I have a list of 20 questions so I can easily see whether anything they said is kind of off market. And then if the deal is not it doesn't raise any serious red flags then we'll send the deal to a subset of LPs based on the asset class the LP wants. We make sure that the minimum check sizes align. So if the fund's minimum is 500K, we're not sending it to anybody who has not indicated that they'd entertain a check of 500K. And then there are some other toggles, like if the fund only accepts those qualified purchasers we talked about the super rich people we only send to those LPs and then that's basically the end for us. We don't take any money, we don't take a cut of anything. We're just kind of connecting people and then writing off into the sunset and letting them take it from there. So it's really kind of just an informational free service as opposed to a business at this point.
Johnny Nelson:Awesome, cool. Well, that's a good place to wrap it up Anything that you want to share with the audience about what you do, how to connect with you, or anything else you want to share that you're trying to grow or get out there.
Michael:Yeah, if you want to learn more, I have a YouTube channel which is just called the Inventor. I'm the investments lawyer. I have a Twitter where I'm the investments lawyer. It's investing underscore law. That's basically it. If you know anybody, or if you are looking to raise capital to invest in something, then I'm your guy and that's about it for me.
Johnny Nelson:So good, so good. Michael, thank you for sharing all that knowledge. We had a wide ranging discussion. I enjoyed it a lot. We went to good places, we shared good knowledge. We dug into some technical things here, or you did so. That was a lot of fun. So until next time, everyone here at the Investing Stuff you should know podcast. Thank you for joining. Thank you for participating, michael. I'll let you give the final handoff.
Michael:All right, cool, I don't have anything more to say. I appreciate you having me on, man. Keep doing what you're doing. Awesome man, all right, thanks.