Investors Don't Invest in Deals: Shams Merchant on ChatGPT, the 506(c) Default and What LPs Actually Check

Shams Merchant structures syndications and investment funds for clients across the country. He also runs his own fund-of-funds, allocating LP capital across about fifty sponsors, which means he sees both sides of the table: he writes the documents, and he reads other people's documents deciding whether to invest.

That vantage point is what makes this episode useful.

On AI: he gets the ChatGPT question weekly now. His answer is not that the technology is bad, he uses it heavily. It is that a model has no access to which structures have actually been tested and litigated with the SEC, and no discretion about what belongs in a document and what does not. You are not paying for a stack of paper. You are paying for someone whose malpractice insurance stands behind the decision.

On what LPs check: they can spot AI-drafted documents immediately. They ask who your law firm and your CPA are, because they want to know who is backing you. They do not want a five-hurdle waterfall nobody can follow. They do not want seven stacked fees. They want clawbacks, so a disposition fee disappears if the deal misses its return metrics. And they want a GP contribution that is real cash out of your pocket, not an acquisition fee recycled back into the deal and called skin in the game.

On 506(b) versus 506(c): Shams defaults to C for nearly everyone. B only makes sense on a small raise, or when you have spent a decade building an investor base deep enough to fill the round from existing relationships. His words: you only know so many human beings.

The last stretch is the one that will stay with you. Shams thinks there will be meaningfully fewer lawyers within a few years, that one attorney with good tooling can run a two-hundred-million-dollar deal, and that AI already redlines a standard contract better than a first-year associate. Ed pushes on the obvious problem. If nobody hires juniors, where do the seniors come from?

Books mentioned this week
The Price of Tomorrow by Jeff Booth
https://www.amazon.com/Price-Tomorrow-Deflation-Abundant-Future/dp/1999257421?tag=clarkstholdin-20

The Eight Secrets to Powerful Manifesting by Mandy Morris
https://www.amazon.com/8-Secrets-to-Powerful-Manifesting/dp/1401969550?tag=clarkstholdin-20

Connect with Shams Merchant
Commercial Real Estate Law Group (CRE Lawyer) at MW Law, with offices in Dallas, Houston, and Fort Worth and a national practice.
Website: cre.law
LinkedIn: linkedin.com/in/shams-merchant
As he says at the close: Google "Shams Merchant," it is all public.

Connect with Ed Mathews
Website: clarkst.com
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