New rules have just been published by the Securities and
Exchange Commission (SEC) that are designed to allow entrepreneurs to advertise
and do general solicitation for investors. These rules also apply to real
estate investors who borrow funds from private lenders.
In the past, these
activities have been prohibited by the SEC. This prohibition makes it difficult
to stand in front of an unscreened group of prospective investors, and announce
“I am looking for funds.” In effect, the SEC considers that you are doing a
general solicitation for a security.
The SEC defines a security as “any note … bond, debenture,
evidence of indebtedness, certificate of interest or participation in any
profit-sharing agreement,” and considers private lending for a real estate
investment to be a security.
I attended a recent meeting on this topic, organized by
Seattle Angel investor Josh Maher. The topic was addressed by
local Seattle attorney Bill Carleton, a member of Angel Capital Association. He
also has an excellent blog on investment capital at www.wac6.com where you can find more specific
information on SEC rules and regulations.
The new rules proposed by the SEC impose additional filing
requirements, submission of all advertising materials to the SEC, requirements
to qualify investors, and penalties for missed deadlines or failure to comply.
Mr. Carleton felt that this would add to the cost and burden of preparing exemptions
and syndications for entrepreneurs like us.
There are certainly legal and practical ways for
entrepreneurs to “stay under the radar” of the SEC, and Mr. Carleton suggested
that either the existing 506, Regulation B or D exemptions would be preferable
to what is currently proposed as Regulation C by the SEC.
There are other sources of start-up capital for
entrepreneurs, new businesses and real estate investors, that you might want to
explore. Here are a few that were mentioned at the meeting I attended:
http://www.thecrowdcafe.com/ crowdfunding research, resources and news
https://circleup.com/ matching consumer entrepreneurs with
passionate investors
http://techcrunch.com/ matches investors with tech companies
https://angel.co/ AngelList, where startups meet talent
http://seattleangel.com/ the angel incubator in Seattle
Many real estate investors file an exemption with the State
Department of Financial Institutions (DFI), and only use one private lender on
an investment property. Others work only with equity rather than debt partners.
Others stick to family and friends when borrowing funds, and only those that
qualify as accredited investors. I am not an attorney, and this article should
not be construed as legal advice.
If you are raising money for your real estate investments,
it makes sense to discuss legal issues with your real estate attorney first.
Photo courtesy of freepictures.me
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