Thursday, July 25, 2013

Start Up Capital

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 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:  crowdfunding research, resources and news  matching consumer entrepreneurs with passionate investors  matches investors with tech companies  AngelList, where startups meet talent  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.

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