The SEC is after ME!!!

18 Replies

So I am looking to partner up with another investor friend on a commercial multi family property. I have done a lot of research on if we need to file SEC paperwork to have another investor for this deal (both of us have rentals on our own).

Please correct me if I am wrong, but since we would both be actively participating in managing the investment, it is not considered a security, and we do not need to file 15K in paperwork. Instead, we are simply business partners.

Now, if I was looking to raise money from the general public (or anyone for that matter) that would NOT be actively participating in the business, then I would be considered to be selling a security, correct?

Since it is a mutual business partnership of two active members, I should be clear, correct?

If you're both participating in the management of the investment, you should be good to go with a simple business entity and operating agreement. 

@Kyle Bryant ,  That was the conclusion I came to as well. So the main focal point is that we both participate in the management of the investment. Are you aware of any limits on the number of active members or amount that can be invested?

Under what circumstances would I be in danger of a "grey" area?

I've been getting some mentorship about almost exactly this same idea from a syndicator who has done dozens of $30+ mm deals in Seattle and have gotten some feedback that might steer you a little closer to some answers. For starters, it's a pretty ambiguous area in a lot of ways, even according to the pros. And of course, to avoid the onslaught of people telling me I'm wrong, this is just my learnings as someone who's not actually done it. 

A lot of the regulations are around how you meet your investors/partners. You're generally not allowed to advertise in almost any form. And depending on how you met the person and what sort of relationship you have, you could go either way. For example, a lot of folks who stand up asking for partners at public meetups are actually violating SEC rules. 

The regulations are there to stop the general public from being taken advantage of. That's why you're allowed to advertise under certain conditions as long as you only bring on accredited and/or sophisticated investors. It can be up to you to do that due diligence as well. 

All that said, you should be in the clear since you're friends with the guy already and you're active partners. But you'll still want an attorney to review your businesses operating agreement so you might as well find an attorney who can answer your questions and draft an agreement as well. From what I've heard, a simple LLC is the best way to go. But I'm not attorney!

Originally posted by @Jeremy Marek :

@Kyle Bryant,  That was the conclusion I came to as well. So the main focal point is that we both participate in the management of the investment. Are you aware of any limits on the number of active members or amount that can be invested?

 I'm not aware of any such limits for LLCs (at least in Texas, where I practice). As long as your profits are not primarily the fruit of someone else's labor, you should be good to go. If every member is contributing to the ongoing management of the business in some way, you should be able to avoid the hassle of SEC regs.

@Ryan Evans ,  Thanks for the detailed response! It can be a rather confusing issue. The shame of it all is that the vast majority of investors like us are trying our hardest to ensure we are complying with all laws. It can be frustrating when what is right and wrong isn't easily understood in the law.

Originally posted by @Jeremy Marek :

@Ryan Evans,  Thanks for the detailed response! It can be a rather confusing issue. The shame of it all is that the vast majority of investors like us are trying our hardest to ensure we are complying with all laws. It can be frustrating when what is right and wrong isn't easily understood in the law.

It is a bit frustrating. I'm just trying to figure out how the SEC defines "soliciting" for investment partners, and can't find any real answers. I'd love to more actively promote what I'm trying to do in real estate, but don't want to go down any road that could get me in trouble later on!

Follow up question: What if I am the general partner and all of the cash investors are limited partners in an LLC (less than 10 members). None of the money was raised by soliciting but was raised from family, friends, and close connections. Would I need to go through the SEC filing? (Indiana)

Aaron Van Curen, Real Estate Agent in Indiana (#RB18000238)
Originally posted by @Chris Tracy :

@Jeremy Marek ... You had me all worried... thinking you were going to get hit with a fine.  lol

 Click-baiting slowly found its way onto BP lol

@Ryan Evans - A general solicitation is basically when you spam people with an offer to invest with you and you don't know them yet.  You can advertise under 506 (c), but you can only accept accredited investors.  Just build relationships progressively with people and document everything you do and you should be fine.

@Aaron Van Curen - I don't believe the investors being family, etc has anything to do with it.  The bottom line is do you know these people (in this case-yes) and where are they in the grand scheme of things- sophisticated or accredited and what type of an offering are you doing 506 (b) or (c)?  And no... we as syndicators don't file our deals with the SEC because it's too expensive and takes way too much time- that's the whole point of using the 506 exemptions.

But... as always... check with an attorney before you take advice from anyone in a forum.  lol

So...the SEC is not actually after you?

yeah! that is freaking brilliant title but very very deceptive!

Originally posted by @Jeremy Marek :

So I am looking to partner up with another investor friend on a commercial multi family property. I have done a lot of research on if we need to file SEC paperwork to have another investor for this deal (both of us have rentals on our own).

Please correct me if I am wrong, but since we would both be actively participating in managing the investment, it is not considered a security, and we do not need to file 15K in paperwork. Instead, we are simply business partners.

Now, if I was looking to raise money from the general public (or anyone for that matter) that would NOT be actively participating in the business, then I would be considered to be selling a security, correct?

Since it is a mutual business partnership of two active members, I should be clear, correct?

 That's called a click bait.... And its lame and pathetic attempt to get people to read your posts.. I hope BP removes your post and makes you  post a new one..

Originally posted by @Jeremy Marek :

So I am looking to partner up with another investor friend on a commercial multi family property. I have done a lot of research on if we need to file SEC paperwork to have another investor for this deal (both of us have rentals on our own).

Please correct me if I am wrong, but since we would both be actively participating in managing the investment, it is not considered a security, and we do not need to file 15K in paperwork. Instead, we are simply business partners.

Now, if I was looking to raise money from the general public (or anyone for that matter) that would NOT be actively participating in the business, then I would be considered to be selling a security, correct?

Since it is a mutual business partnership of two active members, I should be clear, correct?

Pay an attorney who specializes in this for an hour of his time.  If you mess up it will cost you a lot on the back end.  I am imagining "I heard it was ok on the internet" would not abate you from any penalties or fines however relying on the advice of an attorney may show reasonable cause.  

@Jeremy Marek there is no limit to partners as long as they have a clear, defined role and are apart of the "day to day" operations and decision making. Also, you should be able to solicit for partners as long as you are not offering a specific property. If you simple state that you are wanting to buy multi-family properties and looking for others to become partners, that in itself should be fine as long as they meet what I mentioned above. 

That said, I agree with @John Woodrich that you should hire an attorney to sort it all out and to set up the partnership.

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