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In this episode, we're joined by Amy Wan, founder and CEO of Bootstrap Legal, a company that automates real estate syndication legal documents. She's also co-founder and CEO of Sagewise, a legal blockchain company, and co-host of The Law and Blockchain Podcast.
Today we discuss how Bootstrap Legal automates and streamlines the creation of PPMs, subscription agreements, and other documents involved in the syndication process, when to get your CPA involved to review docs, the legalities of raising capital as a business, how setting expectations is a key to success, and much more.
Amy has worked as general council of one of the first real estate crowdfunding platforms at the time. There was a lot of novel work around new regulations that you could use to raise capital. From there, she moved to a boutique firm that specialized in real estate syndication. Today, Amy is the founder and CEO of Bootstrap Legal.
Document Automation
Bootstrap Legal automates all the documents you would need for a standard syndication. This includes a PPM (Private Placement Memorandum), which is a very long document that covers all the different risks of investment. Bootstrap Legal will produce the first draft of the general operating agreements, usually for two entities, the managing company and holding company. Both of these entities need operating agreements. It also automates subscription agreements and any other applicable forms.
Clients don't really know on the back end that docs are being automated. Every deal is paired with a law firm or an attorney because document automation and AI are great and extremely useful, but not fully comprehensive. The automation can usually take care of about 80% of what's necessary. All deals have unique features that must be reviewed by a human attorney.
Documents and document automation are great and important, but they don't cover everything related to syndications. Clients really need the counseling from an attorney about specific, unique, or one-off issues that may arise. The document automation really just reduces the cost and isn't a substitute for legal advice and council. The automation reduces the transaction cost, as legal representation isn't required to write the entirety of the documents. It's also faster than having an attorney sit and bill for writing the draft of a document. The automation portion of the draft documents also do not have many mistakes.
Involving a CPA
If the deal is standard, Bootstrap Legal uses standard tax language that has been previously vetted by a CPA. To the extent the deal is more novel, interesting, or unique, Bootstrap Legal will recommend consulting with a CPA.
Legalities of Raising Capital
The general rule is that, if you're raising money for yourself or your business, that's always allowed (while still complying with securities laws, obviously).
There have been some creative ways popping up to raise capital - people aren't necessarily raising money for themselves, but they're raising money for others, other GPs, other deals. This is taking advantage of the issuer exemption, but this isn't how the issuer exemption actually works. You actually need to be a part of the business or deal on a day-to-day business other than just investor relations or raising capital. Everyone needs to be working together and bring a unique skill to the table - including all being listed by name in the legal documentation associated with the deal.
The issuer is the general partnership entity. In this industry, there is terminology that is not totally understood. The GP/LP terminology, for example, is thrown around to describe roles, but technically the syndication is often under an LLC structure. The issuer is the entity that holds title to the property, and all the investors contribute to this entity. This issuer entity is owned by another entity, the managing entity, where the sponsors and general partners sit.
Risks
People raising money for other people technically need a broker-dealer license registered at the federal level. There are also securities regulators at the state level. The regulators generally just want you to cooperate with them - this is not the same on the litigation side. If you find yourself being sued, these attorneys there have no incentive to be nice or cooperate. Remember, that if you're the person raising capital, you have a lot of risk. It is inherently risky and difficult to comply with securities laws in this activity.
If you're raising capital for another, you are exposed to a lot of risk, because you're doing things non-compliant with securities law. To the extent that you're part of the GP group, sponsorship, or management entity, you actually have a lot of risk too. Joint and several liability, a law concept, states that anything that affects the overall entity can come back to you. Anything that happens to a capital raiser on your team can come back to your deal. You really want to be careful who you associate with.
As an LP you should still care because either of the entities could be sued. The money used to pay for legal costs is coming from the syndication itself, so you have lower returns. Setting yourself up with the proper legal council and the proper CPAs is important in the beginning to avoid any of these issues down the line. Transparency and over communication with investors is better than ghosting them when things go bad - that's when investors start talking to attorneys.
