Mortgages & Creative Financing

Demystifying the SEC and How it Regulates Real Estate Deals

Expertise: Real Estate Investing Basics, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Landlording & Rental Properties, Business Management, Personal Development, Flipping Houses, Commercial Real Estate
161 Articles Written

Hey there, BiggerPockets! As you may know, I have a book coming out soon called Raising Private Capital. In it, I talk about doing deals with debt, which is borrowing money via a loan for the deal. I also talk about taking on equity investors, which gives those who invest with you direct ownership of the LLC that owns the real estate.

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The SEC

Many real estate investors want to get into larger deals by raising equity investments from their investor database. This is very common on apartment building deals, commercial projects, and even projects involving single-family homes. Although these deals can be exciting game changers for your business, many investors get stuck out of fear of breaking rules with the Securities and Exchange Commission (SEC). There are plenty of misconceptions out there around the SEC and how it plays into the world of real estate investing.

Related: Real Estate Crowdfunding: An Introduction

Securities

For the SEC to get involved, your deal needs to be considered a security. If you don’t meet all the definitions of a security, there are no actions required to keep the SEC happy. If your deal does qualify as a security, there are further steps to take, and you should consider hiring a good SEC attorney to help you navigate the process.

Related: 4 Rules of 1031 Exchanges Every Investor Should Know

Many real estate transactions do not meet all the definitions of a security and don’t qualify as one to the SEC. Unfortunately, there is plenty of confusion and bad information out there regarding what securities are and what they are not. This has caused investors to stay away from these types of deals altogether. This is a shame, because these types of investments can be very lucrative for you and for those who invest with you.

In today’s video, I analyze which deals qualify for regulation by the SEC and which ones don’t. You might be surprised by what doesn’t require SEC oversight. Check out the video to learn more!

raising-private-capital

Did you watch the video? What do you think?

Tell me your SEC questions below!

Matt Faircloth, co-founder and president of the DeRosa Group, is a seasoned real estate investor. The DeRosa Group, based in historic Trenton, New Jersey, i...
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    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied about 2 years ago
    Great article/video Matt!
    James Gorman IV Investor from Gig Harbor, Washington
    Replied about 2 years ago
    Great article/video thanks. Hard to believe we used to be free Americans now we a regulated. Why is it that the SEC did not regulate well the Big Banks in 2006 thru 2007 ? Your thoughts/comments/remarks ?
    Matt Faircloth Rental Property Investor from Trenton, NJ
    Replied about 2 years ago
    Hey James, Good question. I believe that what the big banks were up to was outside of the SEC regulations and technically it was legal based on the regulations at the time. The SEC governs the sales of securities and disclosures of investment companies to their investors. I don’t think that the activities that resulted in the crash of 2008 had anything to do with that. Just my sideline observer opinion though LOL. Matt
    Matt Faircloth Rental Property Investor from Trenton, NJ
    Replied about 2 years ago
    Thanks Andrew! Hope you are well.
    Matt Micks
    Replied about 2 years ago
    Great video, definitely cleared some things up for me. I do have a specific question: I am going 50/50 into a new construction deal with my brother. We would be considered “active” as we are both doing a lot of the work. However, each of us is also responsible for raising the down payment for the loan and are turning to private investment. Each of these private investors will be passive. Since these investors will get an equity share of the property and expect profit, does our deal count as a security? If yes, what if my brother and I each form our own LLCs to take the other investors money, and then we do the deal with 2 LLCs? Does the SEC get involved here?
    Matt Faircloth Rental Property Investor from Trenton, NJ
    Replied about 2 years ago
    Hey Matt, If your investors put in money, expect a profit, are completely hands off, then the only way you avoid SEC regulation is to borrow the money from them. That puts them on the other side of the transaction. If you can’t convince them to position their money as a loan, then you are security, even if you and your brother both do separate LLCS (which wouldn’t make sense to do anymore if you are already a security). Hope that helps! Matt
    Michael Temple Rental Property Investor from Toledo, OH
    Replied about 2 years ago
    Very helpful video. Number 3 on your list really answered a lot of my questions. I pre-ordered your book and I am hoping you discuss the elements of how we can advertise and find the people that meet condition 3, i.e. just a private lender without running afoul of the SEC. I am guessing the second you start offering lunch and learns, advertising, etc. for private money you trigger a whole new set of potential SEC rules to be wary of. We had a local investor years ago that is still rotting behind bars for running afoul of the SEC. Now in his case, I do believe he had many, many other problems besides just advertising problems. He was cross collateralizing loans on multiple properties and doing a Madoff thing where new investors were paying off the “returns” of current investors, etc. so I realize it wasn’t a straightforward issue, but I do remember he did get in some hot water when he started advertising for investors, but that isn’t, strictly speaking, what landed him behind bars.
    Matt Faircloth Rental Property Investor from Trenton, NJ
    Replied about 2 years ago
    Hey Michael, Glad it helped, and thanks for the support on the book! Lunch and learns are not a violation at all and can actually help you establish a pre-existing relationship with your investors. As long as you present it as a learning, not a pitch on one of your deals, you are ok. Matt
    Len Grosso Investor from Santa Rosa, California
    Replied about 2 years ago
    Matt. I really like the way you explained this SEC requirement. Ever notice how some explanations do little more than cover the important facts with snow? Well, you have a gift for not doing that! It’s something I am highly aware of. Your book is on my immediate list now. Len
    Matt Faircloth Rental Property Investor from Trenton, NJ
    Replied about 2 years ago
    Thanks for the comment! I really appreciate your compliment to my clarity, it’s something I try very hard for. Glad you are on the look out for the book, tomorrow is the release date! Matt
    Jacob Ayers Rental Property Investor from Houston, TX
    Replied about 2 years ago
    Great video, Matt! Looking forward to the new book. Congrats!
    Matt Faircloth Rental Property Investor from Trenton, NJ
    Replied about 2 years ago
    Thanks Jacob!
    Andrew Bourland Residential Real Estate Broker from Macomb, Michigan
    Replied about 2 years ago
    Matt, Does your book talk about the language used in setting up deal with debt based investments? If not do you know f a source that covers the proper language? Andrew
    Matt Faircloth Rental Property Investor from Trenton, NJ
    Replied about 2 years ago
    Hey Andrew, Thanks for asking. The book covers all the details of structuring both debt and equity investments. I go into how to set them up, the documents you need, what to avoid, and how to best exit from the deal. All the terms for these types of deals are covered also. I hope that helps! Matt
    Savraj Aura
    Replied about 1 year ago
    Hi Matt, could you please link where the SEC has those 4 points. I've been searching but cannot find them on the labyrinth that is the SEC's website.
    Joseph Menafra from New Hampshire
    Replied about 1 year ago
    Thanks for that clear and concise video, definitely helps clear things up from a high level view and answered the questions I had. Well done!
    Derrick Jones from Moreno Valley, CA
    Replied 12 months ago
    Hello Matt, Thanks so much for your video. I am a newbie the the field of real estate investing and I am in the process of learning all the ropes before I get started. I learned about you through BP and have since been watching your videos and podcasts. I just finished reading BRRRR and your book Raising Private Capital is next on my list of reads. Part of my business plan is to solicit private funds from investors in the form of loans and repay the loans plus interest via cash-out refis. Am I correct in understanding that the 3rd condition of your video indicates that my soliciting loans for this purpose does not require SEC regulation even though 1st, 2nd, and 4th conditions would apply? Thanks in advance for your clarification.
    Noble Willis Investor from Nashville, TN
    Replied 4 days ago
    Hi Matt, Would this apply to this scenario? An LLC has purchased a property with it's own capital. Now the LLC is selling units/shares of economic interest to investors, basically allowing the original LLC investors recoup their money in the original deal. Since it's two different deals, and the LLC already owns the property, would there be a separation/examination of each "deal"? First one acquiring property and second one, selling units/shares to investors?