Will I be in trouble with the SEC??

Question

I want to buy a 16 units multifamily but the majority of the funds for downpayment will be raised from investors. If I raise $400,000 from 200 investors, would this create an issue with SEC laws ? The approach will be a manager-managed LLC with a general partner and 200 limited partners. Thank you

Scott Mac · Answer

[1] A $2,000 a share buy in seems like you might be dealing with people the SEC says you can't deal with.

[2] and 200 investors will be a huge PITA to administrate over time.

[3] and having to ask about SEC laws online piece-meal means you may not understand the law(s) enough to avoid stepping into a jail cell.

(I know I didn't answer your question directly, but these are just my initial thoughts on it.)

You can learn the laws--everything is online (it is complicated--but it is do able), and there are attorneys in here that can help you with the legalities of it once you are ready to go live with it (for a fee).

Just my 2 cents

Jonathan Carrera · Answer

@Scott Mac 👍

Chris Levarek · Answer

@Jonathan Carrera We've done a 16 unit multifamily syndication. If the deal makes sense, syndication can be done on any size.  Running a business is looking at margins and expense ratios, same applies for the costs here. What I mean by that is, if the profits/returns justify the legal costs, then go for it.

A general rule of thumb is over 10 investors, it's going to be a security and warrant a properly structured entity for syndication. If it looks like the other investors have no involvement, its a security. Since this is a smaller deal, you could partner with say 1-5 investors to acquire the deal.

This could then be treated as a joint-venture if properly defined and thus not need syndication or warrant SEC attention. Not to mention, save on legal costs. A joint-venture might run, $400-1000 if custom. Syndication documents can run $2500-$15000, (if custom more on the higher end of that spectrum).

Read up on the Howey Test, if the transaction meets the below, it's a security. Under the Howey Test, a transaction is an investment contract if:

• It is an investment of money
• There is an expectation of profits from the investment
• The investment of money is in a common enterprise
• Any profit comes from the efforts of a promoter or third party

•

Rick Martin · Answer

@Jonathan CarreraIt sounds like you would need to set up a regulation D. You would definitely need an SEC attorney, and it wouldn't be worth the cost for deal that size.

Andrea Lane · Answer

Jonathan

There are many regulations around what you can and can't do.  If your investors are not accredited there is a limit of 35 in a rolling 90 period.  You should contact a real estate lawyer who is familiar with the regulations.

Account Closed · Answer

@Jonathan Carrera Call an SEC/RE attorney - HIGHLY recommend Dugan Kelley.  He has been our attorney for all of our capital raises/acquisitions and he's exceptional.

Shiva Bhaskar · Answer

Hi Jonathan, this may be possible, but I'd definitely consult with an attorney who handles SEC and syndication issues first. I've done syndication before, and am happy to share the name of our attorney if that is helpful. He did a solid job for us.

Jonathan Carrera · Answer

@Chris Levarek. This is great information. Do you have more information to set-up a cost effective “regulation crowdfunding” and accept capital from non-accredited investors? And the most cost effective funding portal ?

Thank you

Jonathan

Will I be in trouble with the SEC??

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