Partners

11 Replies

I have two investors who are friends and want to invest with me.  They will be passive investors and I will be finding the properties, re-habbing them and working with all other people involved.  Since I will be using my labor and knowledge and their financing how should I structure the division of profit.  It will be my full time job and they are still employed at their jobs and won't be doing any of the looking or labor.

Technically, what you're offering to your friends is considered a security, and is governed by SEC regulation.  To comply with SEC rules, you'd have to jump through a lot of hoops and pay a bunch of money to do this legally.

If you didn't do thing the "right way," you may get away with it, but if the deal goes south and one of your friends loses money and decides to come after you, things could get ugly (for you).

Talk to a good securities attorney if you have any concerns...

I may be wrong...but I thought if two (or more) people together form an LLC as partners and each has specific roles and obligations written into the operating agreement...you have avoided the securities issues. If you have an existing property or LLC and offer to sell shares of your company or property with an equity investor and offer to share the profit, you are now straying into the SEC's realm.

People partner every day for all sorts of things. I hope not every one of them is governed by the SEC.. From what I understand it's all about how it's set up at the beginning... I could be wrong too though.

Originally posted by @Eric Bowlin :

I may be wrong...but I thought if two (or more) people together form an LLC as partners and each has specific roles and obligations written into the operating agreement...you have avoided the securities issues. If you have an existing property or LLC and offer to sell shares of your company or property with an equity investor and offer to share the profit, you are now straying into the SEC's realm.

People partner every day for all sorts of things. I hope not every one of them is governed by the SEC.. From what I understand it's all about how it's set up at the beginning... I could be wrong too though.

 You have stated two separate situations.  If the role are split up with equal votes it would be a partnership. Putting up the money is not an active role. If someone puts up the money with no control the Sec jumps into play.  You could purchase the property with his name on the title, and if things go south, he gets the property. I am not a lawyer, please seek legal advice.

What other people do and get away with should not be of concern to you.  I don't think that would make you feel better, when facing the music.  There are many discussions on BP that will help you to blacken in the grey line drawn by the SEC.

Medium sig  3 Jeff Greenberg MBA, Synergetic Investment Group, LLC | [email protected] | 805.372.1799 | http://www.synergeticig.com | Podcast Guest on Show #115

Thanks @Jeff Greenberg  for the info.

I have done a lot of reading online about this topic and I'm really never any closer to an answer. Things are even more confusing since they legalized crowd-funding. It's legal to fund through a crowd online but I cannot have a passive partner. You can lend to me at any interest rate but as soon as I offer any percent of the profit it gets regulated.

For decades everything has been set up to create large 'barriers to entry' which keeps small players out and keeps big players doing well. But that's the topic of another discussion. Guess this is why I've never taken the leap to have an equity partner. 

I'm going to start searching through the forums for some info on this topic, but if you have any particular threads you can recommend it would be much appreciated.

Originally posted by @Eric Bowlin :

I have done a lot of reading online about this topic and I'm really never any closer to an answer. Things are even more confusing since they legalized crowd-funding. It's legal to fund through a crowd online but I cannot have a passive partner. You can lend to me at any interest rate but as soon as I offer any percent of the profit it gets regulated.

Three thoughts:

-  The OP mentioned that the money guys would be "passive investors."  That's where the SEC regulations come into play.  As Jeff said, if they were an active part of the business/project, with voting rights, etc., that would likely not be considered a security.  But, that's not what the OP said or alluded to.

-  Crowdfunding has been legalized, but it's still required that investors be accredited (they meet the legal definition).  Most of time, when people talk about partnering up to buy properties, they aren't typically accredited.  I'm assuming that the money guys referred to here are not accredited.

-  As far as a single person lending money at a fixed interest rate, there are some people who believe that still meets the definition of a security (though the general consensus is that it doesn't).  But, that's based on SEC definitions and case law, and as we all know, when it comes to government regulation and case law, things don't always align with common sense.

If you're looking for black and white answers related to when the SEC defines an offering as a security, unfortunately, you won't necessarily find them.  I agree it's ridiculous...

Each state enacted different twists on the definition of what is a security.  For example GA and SC (maybe it's NC) say a lender who's getting a 1st security deed is not a security so no Reg D filing for an exemption is needed.  But places like OH and either WA or OR it's 3rd rail time.  Any borrowing needs a Reg D filing.

Jillian Sidoti is a well known SEC Attorney and runs around $10k or more per Reg D / PPM filing.  So your deal needs to be large enough to cover this fixed upfront cost.

So it only seems that the definition of what is a security and how do you borrow seems capricious.  It just varies state by state.  It's simple just you have to figure out what your state requires.  Here in GA, no problem doing deals with passive lenders who get a 1st security deed as long as you don't advertise and it's just one lender not a pool.

Curt Smith, Sweetgum Properties | [email protected] | 678‑948‑7151 | http://GaREIA.com

Nelson:

There are exemptions to the registration requirement which you and your friends almost certainly qualify under. Please bear in mind that I'm not a lawyer and therefore am not qualified to provide legal advice. I can only share my experiences. You should consult with an attorney in your home state. They will know how best to structure your business from a legal standpoint. Typically, properties are purchased through an LLC. That LLC will have an operating agreement which will lay out everyone's rights and obligations.

I am a partner in a Crowdfunding portal so i'm quite familiar with the registration requirements.  From the way you explained your current opportunity, you're doing something altogether different.  You're doing a traditional private placement.  

I see mention of following State requirements, and that is well and good as long as the property and all of the investors are in the same state. Cross the border and enter the Feds.  There are Fed regs that the States will also accept. For another thread.

Medium sig  3 Jeff Greenberg MBA, Synergetic Investment Group, LLC | [email protected] | 805.372.1799 | http://www.synergeticig.com | Podcast Guest on Show #115

Hello, I'm searching for partners to rehab and flip houses with. If you interested lets discuss more about it.

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