SEC regulations - Posted by Marc Donovan

Real Estate Investing
1

Posted by Marc Donovan on January 10, 2003 at 13:24:55:

““I thought his idea was exempt also because he would be creating notes against lease payment cashflows for 6 months with the option to renew. Thus, folowing into the 9 months exemption.””

There is no current transaction between the investor and the borrower, so the exemption does not apply.

“” However, one advantage it has is that you are less limited geographically as you would if you just talked to people you know.“”

I guarantee you that you already know your investors, you just haven’t asked them properly yet. Have you heard anyone bragging about their investments lately? Do you remember someone who was bragging 2 years ago?

You don’t want to make any presentations to groups of people. see http://www.law.uc.edu/CCL/33ActRls/rule502.html

"Limitation on manner of offering. Except as provided in Rule 504(b)(1), neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following:

Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and

Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising;"

““I wonder if it would then be okay to communicate via snailmail and email once a business relationship is established?””

Use the telephone for ANY OFFERS. Once the deal is complete, you may send mail about whatever you wish. Dont do the flea market idea. Its a public display and I’m sure that could get you in hot water.

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SEC regulations - Posted by Marc Donovan

Posted by Marc Donovan on January 01, 2003 at 15:16:17:

I am looking for investors to fund my RE, MH and note buying business so I have spent the last few days researching securities laws and regulations. I thought I would pass on some things I have learned. I am not an attorney so don’t take this as gospel since case law and interpretive rulings may overrule what I have discovered.

First of all - and I know it will generate some controversy here - selling notes by use of the mail, the web or e-mail without registering the notes with the SEC is illegal under SEC regs unless it does not cross state borders, and if it does not, it is required to be registered by state law. See “The Securities Act of 1933 and General rules and regulations promulgated under the Securities Act of 1933” at http://www.law.uc.edu/CCL/sldtoc.html for details.

You cannot borrow from an investor and give them a note unless the note is registered or specifically exempted from registration and you cannot publicly advertise or use the mail to solicit an investor unless you follow very specific rules and filing requirements. If your investors are all accredited investors (institution or 1 Mill net worth or $200k income) then the rules don’t apply, but advertising is still strictly limited.

There are three options if you want to sell notes to non-accreditied investors. (including notes you have bought and notes you create) 1) registration with the SEC. This is expensive since it requires a securities attorney and audited financials. 2) Regulation D - 504, 505 or 506. see http://www.law.uc.edu/CCL/33ActRls/regD.html. These require less effort, but are still cumbersome. I have filed a 504 for my company, but the attorneys did most of the work and it was expensive. 504 does not usually require audited financials but it is limited to 1 million per year. 3) Regulation A - see http://www.law.uc.edu/CCL/33ActRls/regA.html. Besides the 504, this appears to be the easiest way to go. The attorney has to sign off on the validity of the securities, but you don’t need audited financials. Its good up to 5 million per year.

In short, your goal is to deal only with accredited investors and advertising must strictly comply with rule 135 see http://www.law.uc.edu/CCL/33ActRls/rule135.html#c

I have heard others say that its OK to sell notes to the public without worrying about the SEC and that it is OK to borrow from the public as long as you deal with one investor at a time. Unless someone can show you otherwise, don’t gamble on it. If you are convicted, its a $10,000 fine and five years at club fed.

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Re: SEC regulations - Posted by Dave T

Posted by Dave T on January 02, 2003 at 22:17:10:

I tend agree with you if you are pooling investors such as might occur if you operated a limited partnership fund that invests in real estate.

But if each individual invests in trust deeds directly (that is, receives a note and deed of trust in the individual investor’s name), wouldn’t this activity be exempt from SEC oversight, even for interstate transactions?

I don’t know the answer, just asking for my own edification.

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Maybe we can skin the yet - Posted by osirus

Posted by osirus on January 02, 2003 at 16:35:50:

This was an excellent post! In fact, a part of my long term investment goals is using private lenders to fund REI. Thus, I periodically try to devise ways to acquire private lenders without violating SEC laws. The following is what I have come up with.
Advertising the following, without a securities license, would certainly be SEC violation:
“”“Earn 10% to 12% return on your money secured by real estate. Call 555-555-5555"”"

However, it is certainly not SEC violation to advertise to general public information about how to earn “10% to 12% return on your money secured by real estate”. It is free speech after all! If it were an securities violation then every person who has written book about how to invest could be construed as a securities violation.

I purpose that you write an small book about the potential phenomenal returns of lending money to real estate investors. Make sure you do not solicit any one for money in the book. Also, provide genuine information. Next, you include in the appendix contact info if they are interested in actually lending money to you. Maybe this could be turned into another profit center by charging other investors a fee to also be included in this appendix.
So now you advertise this to the public:
“”““Learn how to safley earn 10%-12% return on your money secured by real esate. Did you get screwed in the stock market? Are tired of the lying, cheating and corporate scandal. New book reveals how earn phenomenal yields, with little risk, in real estate. Call 555-555-5555"””

When people call you just send them the book. If they should happen to decide to lend you money after reading your book then so be it.

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Re: SEC regulations - Posted by MoniqueUSA

Posted by MoniqueUSA on January 02, 2003 at 07:11:18:

Marc,

Excellent post.

We also began to research this issue and sought counsel from a securities attorney. I’ll mention that we did not get the benefit of references to the specific regulations that you posted – just the summary. So thanks!

One approach the attorney recommended for finding private investors without running afoul of the SEC regs was to partner with a firm that has a broker/dealer license. In a turbulent stock market, financial advisors with the appropriate licenses are likely looking for good investments to recommend to their clients. But approaching their clients, in partnership, the attorney felt we would be within both the letter and the spirit of the SEC regulations.

Easier said than done, I know. But, an idea to consider.

Your thoughts?

MoniqueUSA

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Re: Different way to skin a cat!!! - Posted by BIGDADDY

Posted by BIGDADDY on January 01, 2003 at 22:01:23:

Marc,

I understand what your intentions are and it’s great that you are doing research on the topic, but, if it is a short term investment such as a flip or a rehab then retail just bring in your money people as Equity Partners and you don’t have to worry about all of the SEC B.S. You can structure some pretty creative partnerships to do just about anything and handle any situation.

Hope this helps.

This is not legal advice its just an opinion.

Good Luck

BIGDADDY

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Re: SEC regulations - Posted by Brandon

Posted by Brandon on January 01, 2003 at 17:57:49:

I’m not an attorney. Most of what I learned about CREI was learned at the dinner table.

It is my understanding that problems arise when you are trying to sell investments that you don’t own. If you have a purchase contract contigent upon selling a note, write up a note and sell the existing note as a principal. Same thing for partners. Tie up a deal and sell a percentage of the deal that you already own.

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Re: SEC regulations - Posted by Alex

Posted by Alex on January 01, 2003 at 17:20:52:

Mark,
Are you saying that you believe it’s against
the law for a private individual to fund a real
estate deal for you? I studied under Chuck Smith
who does this no less than 5 times per month.
All of his deals are done through a third pary
administrator, Mid Ohio Securities. Chuck Smith
was personally trained by John Ulmer who has
borrowed Fifty Million Dollars this way. Please
clarify.
Alex

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Re: SEC regulations: GREAT POST! - Posted by Marc2

Posted by Marc2 on January 01, 2003 at 15:30:07:

Marc,

Thanks for the informative post. One other application of the securities laws to real estate is in partnerships. It is nearly impossible to legally advertise for partners for business/real estate without first being registered at least with the state’s securities office, which isn’t easy by any means and has lots of regulations to follow. If you’re thinking of finding partners for your next project, be careful how you find them and who they are.

Marc2

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I’ve heard that one too - Posted by Marc Donovan

Posted by Marc Donovan on January 03, 2003 at 09:12:16:

but it is not exempt. The rules say its illegal to do such and such with the exception of these exempt transactions. And there is no exemption for a single party.

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Re: SEC regulations - Posted by JT-IN

Posted by JT-IN on January 02, 2003 at 22:28:35:

DaveT:

The investment is not really the issue, it is the solicitation for investors, or the solicitation to sell the notes, that raises the problem with securities laws.

This area is one where there is much misinformation even by experienced investors… often. The problem comes in when you place the ad, asking someone to invest… and the risks are not properly disclosed… etc, as per prospectus, that have been Registered with the SEC in advance… and sold by licensed Broker/Dealers, etc. The cost of all the above is cost-prohibitive for a small guy.

Just the way that I view things…

JT-IN

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Re: Maybe we can skin the yet - Posted by JT-IN

Posted by JT-IN on January 03, 2003 at 07:07:22:

O:

“However, it is certainly not SEC violation to advertise to general public information about how to earn “10% to 12% return on your money secured by real estate”. It is free speech after all! If it were an securities violation then every person who has written book about how to invest could be construed as a securities violation.”

While there may be no violation in the above solicitation as an ad, I foresee the problem coming in once you get a reply to the ad… The minute you begin explaining the process to a potential investor, you are soliciting for a specific investment, with risk that is undisclosed via prrospectus, and unregistered with the SEC, as I view it.

There seems to be really no middle ground, IMHO. The solution is registration and licensing, which is impracticle for a small investor. As I said previously, there are many violations that go unnoticed, and usually when noticed you will receive a “cease and decist” order. Where criminal issues become a problem is when someone gets hurt, (loses money) and files a complaint. If a pattern is prevelant, an investor is “Toast”, and hanging out big time, because there would no doubt be a multitude of securities violations from any such solicitation.
The risks are just to great, IMHO… but each to his own.

The preferred approach is to insulate yourself from direct solicitation by using a financial professional, (CPA, ATTY, CFP) who has a trusted relationship with investors and receommend you as an alternative of investment. This way they bear the risk of “due diligence” and disclosure to the investor. Cultivating this relatiuonship with an ivestment advisor is easier said than done, but in an investment climate of poor equity performance and low yielding fixed income choices, you have a story to tell with offering a 10% to 12% safe return.

Just the way that I view things…

JT-IN

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I should have mentioned that - Posted by Marc Donovan

Posted by Marc Donovan on January 02, 2003 at 09:26:59:

That’s the best solution in most deals, but you usually give up a much bigger piece of the deal to a partner. In my case, I am buying notes and borrowing against them. When these notes pay off, I get a big chunk of cash while my investor gets another note to replace the old one. Plus partners can be a real pain in the neck sometimes. And if I sell any of my notes I still must be careful with the SEC rules.

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Not really on the mark, but… - Posted by Marc Donovan

Posted by Marc Donovan on January 01, 2003 at 20:20:33:

If you have a contract to purchase, you have equitable interest, which can be sold or pledged to anyone without any worry about securities laws, regardless of the contingencies involved.

When you write a note and sell it, you have crossed the line. You have sold a security. If the purchaser is not “accredited” you must register with the SEC.

There is an exception if the note pays off in less than 9 months.

Im sure that the only people prosecuted are in cases where the investor gets burned, but can you guarantee all of the notes that you sell?

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Re: SEC regulations - Posted by Marc Donovan

Posted by Marc Donovan on January 01, 2003 at 20:31:37:

If that private individual is not worth $1 million, or has an income less than $200k, then the deal must have SEC oversight.

There are a lot of folks ignoring these laws in this industry. That’s one of the reasons for my post here. I thought you all should know.

Either read the links provided or ask a securities attorney and convince yourself one way or the other.

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Re: SEC regulations - Posted by JHyre in Ohio

Posted by JHyre in Ohio on January 01, 2003 at 18:52:09:

John Ulmer was told to cease and desist by the Ohio Securities Division and agreed to do so. The SEC laws are grey and not perfectly enforced. I’ve not heard of small investors who periodically do it getting nailed…doesn’t mean it hasn’t happened. Guys big enough to attract attention - or guys who foul up, hack off investors and then get narced on- are a different matter. In any event a “cease and desist” beats a big old fine or orange jumpsuit time. I haven’t researched the issue in depth enough to opine in detail…these are just general impressions.

John Hyre

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I view things…the same way - Posted by osirus

Posted by osirus on January 03, 2003 at 02:32:16:

“”"The investment is not really the issue, it is the solicitation for investors, or the solicitation to sell the notes, that raises the problem with securities laws.

This area is one where there is much misinformation even by experienced investors… often. The problem comes in when you place the ad, asking someone to invest… and the risks are not properly disclosed… etc, as per prospectus, that have been Registered with the SEC in advance… and sold by licensed Broker/Dealers, etc. The cost of all the above is cost-prohibitive for a small guy.“”“”

I agree with most of what you say. How ever,“solicitation to sell the notes” is a non issue in my humble opinion. The modern day real estate investor does not need to go out and solicit anyone buy their notes because note buyers are a dime a dozen. As of this date and time, you will get 8710 hits if you type “note buyer” into google. Assuming, only 10% are from unique, genuine note buyers, that leaves 871 people who are ready willing and able to buy REI notes that we never had to solicit.

I guess one of these days I will have to bite the bullet and pay an expert to thoroughly research the issue for me. I wonder how much JHyre in Ohio charges per hour? ;-D

Just out of curiousity, what did you think of my possible solution to the solicitation issue I posted in: www.creonline.com/wwwboard/messages/43609.html

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Re: Maybe we can skin the yet - Posted by osirus

Posted by osirus on January 04, 2003 at 13:28:07:

Please read my response to Marc Donavan at: www.creonline.com/wwwboard/messages/43862.html

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Re: Maybe we can skin the yet - Posted by KenS (WV)

Posted by KenS (WV) on January 04, 2003 at 07:52:39:

I think there is a lot of information to be taken from this string of posts with many alternatives. I have been pursuing the approach of using CPAs and CFPs to get to potential investors by making contacts with them and cultivating the relationships.

I am now in the midst of developing the business plan. The Census website and my State (WV) Manufactured Housing Association have been excellent resources for market demographics to assist in the business case that “Lonnie Deals” are a high return, low risk niche in my region.

I talked with Marc about this on New Years Day (what a way to bring in the new year). He is also just starting to work on his plan but has been focused on nailing down the SEC regs (and taxes). Has anyone here put together what they believe is a solid business plan? If so, is it something they would like to share? This is not a trivial effort and maybe some of the more serious folks here could trade ideas, formats, plans, etc.

Any thoughts? I am interested in working with anyone who is serious about this!

Please respond to me by post or email.

Thanks,
Ken

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You got it right - Posted by Marc Donovan

Posted by Marc Donovan on January 03, 2003 at 09:08:32:

The gist of the law is section 5 which begins each part with "It shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to … "

This has been interpreted to mean any ad, mailing, e-mail, web-site, but not telephone solicitation (don’t ask me). The rest of each rule is " to sell a security - to deliver a security - to deliver a non-conforming prospectus - to offer to sell a security - to offer to buy a security" (I think they goofed on that last one).

So if you deal directly with your investor, without putting anything in the mail and without printing any ads, you should be OK.

I don’t think you need to have an attorney refer the investor, or a licensed broker for that matter, but they can be good referral sources. The key is to only use telephone and face-to-face meetings.

Read your state laws too!

It could be argued that the ad for the book was merely an ad for the investment, since the book is a form of prospectus. I wouldn’t want to have to argue that in court.