How to Raise Money for Your Next Deal—Without Legal Issues
I am sitting on an airplane. My family is with me. We are flying to Hawaii. Tonight we are going to see a good friend, Darren Sager. It’s been a while and we are excited! And in another two days, we’ll see another good friend, Brandon Turner. We are notably less excited about Brandon, as you can imagine, but have made peace.
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We are meeting in Hawaii to mastermind. All three of us have been increasingly active in real estate over the past year, and once in a while, a getaway like this is necessary.
Now, while we are here to work out some plans, at least one day will be more play than work. Darren turns 50 next week!
Overall, this trip has a bit of a surreal flavor for me. You see, I like clarity. I like definiteness. There is nothing less appealing to me than lack of definiteness. And yet, that’s exactly how I feel. I feel like I am stuck in no man’s land. Darren, let’s face it, is an older guy. I mean, a quite good-looking and accomplished, but an older guy.
Brandon is just a baby.
And then there is me—at 43, neither this nor that.
What am I? How do I fit in? Am I not old yet, or am I not so young anymore? Am I just starting, or am I finishing?
That feeling of not knowing your place that I am trying to describe is prevalent among new investors. I certainly felt it in my day.
So, today, with some very simple advice, I am trying to clear up that feeling for you newbies as it relates to one of the most important aspects of REI: raising money. When you are done reading this article, you will have clarity!
To Preface This Discussion
In the world of real estate investing, we have two main hurdles to clear: finding deals and finding money to finance those deals. Both are challenging, and both are often used as an excuse to not get into the game. There was a time not so long ago when finding deals was easy, but funding was hard. Some people used that as a reason to stay on the sidelines. Today, funding is everywhere, but good deals are not.
I am telling you this to forewarn against excuses. Excuses are easy to find in any cycle if you look hard enough. The question should never be why should I not do this; the question is how can I do this?!
How to Raise Money
This is where I tell you that I am not a licensed professional and cannot offer specific legal advice. I am going to outline to you my understanding of the laws in very generalized terms. But, please, seek professional advice from a qualified licensed professional.
That said, as you should know by now the SEC is rather specific as to who you can and cannot ask, why, and how. But, the reality is that if you don’t ask you don’t get, and that’s not an option. With this in mind…
What Does SEC Want?
What the SEC really has a big problem with is a combination of these words: general solicitation. Now, this is not always an issue, but to be totally clear of any wrongdoing, if you can simply avoid doing things that can be described as general solicitation, you should be just fine.
To me this easier let’s consider this one word at a time. What is “general”?
Well, the easiest way to understand that is in terms of relationships. If there is no pre-existing relationship, then the relationship is general.
What is “solicitation”?
Well, asking for money is solicitation.
What is general solicitation?
General solicitation is you asking for money from people with whom you do not have a standing relationship.
If you do not do something that is both “general” and “solicitation” at once then you should be fine.
How This Works in Real World
Suppose you are at a party and someone you hadn’t previously met asks you what you do. And you answer that you pool money together from people to buy large apartments and that you’ve been really busy lately because you are under contract to purchase another asset.
Now, since you don’t really know the person you are speaking to, this relationship should most likely be considered general. You are OK, though, because first of all, you are not making a public announcement—you are speaking to one individual. Secondly, you are not triggering the conversation, but merely answering a question posed to you. And lastly, there is no solicitation going on here. You are not asking for money. You are not offering up an investment opportunity. You are simply telling this person what you do.
So, you should be OK.
The following weekend you get together for a brunch with three friends and you proceed to tell them about the opportunity to invest in your deal. This time, you actually are offering them to invest. However, this is totally legal as well, because you are talking to a group of friends—people with whom you’ve had a standing relationship.
Remember, what gets you in trouble is the “General + Solicitation.” You can have general conversations without soliciting, and you can solicit from pre-existing relationships. You just can’t solicit money from strangers, at least not under Reg D 506b.
What About Social Media?
Well, I am not a huge fan. It’s true if your post on Facebook goes out under the setting which permits only your friends to see it, then I suppose you can argue that you are talking to people with whom you have a pre-existing relationship, making it OK to solicit. I get uneasy with this, though. How well do you know your FB friends? Have you had meaningful contact with all of these people?
Do you see the thin line?
You have to ask for money if you are going to succeed in real estate investing. But, next time you are about to ask, or about to make that post on a social network, just remember—what gets you in trouble is general + solicitation.
Any questions about general solicitation?
Ask them below!