Business Entities - SEC Registration??

Question

If I were to create a firm (an LLC) that wanted to buy real estate in. Limited Partnerships are generally seen as the go-to business entity for tax and liability purposes. Naturally, the LLC would charge management fees as the general partner but would I (or the firm) need to register as investment advisor with the SEC to charge and collect those management fees?

I know for any of this I will use any attorney but I was just curious if anyone knows offhand.

Thanks!

I know for any of this I will use any attorney but I was just curious if anyone knows offhand.

Thanks!

Jillian Sidoti · Answer

I know I am late to the party, but I am a securities attorney, so maybe I can help.

Here is the test. If you answer YES to all of these (regardless of number of investors) you have to do some work to be compliant:

1. Is there an investment of money?

2. Is there more than 1 investor?

3. Do the investors expect profits on their money (dividends, distributions, or interest)?

4. Are you in control of the property/project/entity?

Let me know if I can help further!

Jon Holdman · Answer

Not an attorney.  You might want to see one.  SEC registration (and state, too) is relevant when you're taking on investors.  If you're just creating an LLC to use your own money and credit to buy properties, then, no securities registration is needed.  If you are going to be taking investors money, then you definitely need a securities attorney (and a pot of cash to pay for him or her.)  Registration is one step, but there are a number of others.

Note a couple of things, though.  For one, an LLC is usually a pass through entity that has no tax effects whatsoever.  You can elect to be taxed as an s-corp, which may make sense if you're doing fix and flips.  Not for buy and hold, though.  Second, if you want the LLC to own the properties, getting loans is a more difficult process.  For the most part, 30 year fixed loans are limited to individuals, so you will need commercial loans.  And you probably will have to give a personal guarantee.

An LLC and a limited partnership aren't exactly the same thing.  Commonly, though, these days LLCs are used where a limited partnership might have been used in the past.

Justin Pierce · Answer

John,

There are a lot of things not stated here that could creat an obligation to register with the SEC.  The type of entity you creat really doesn't matter to the SEC.  It is the actions you take.  You would certainly want to talk to an attorney If you are offering a rate of return, if you are advertising to strangers to solicit money, if you are not participating as a principle in the project and more.

If you are partnering with people you know in a joint venture situation, you have a couple dollars in the deal and a percentage of the profit or loss then you may be ok.

Most importantly, don't every listen to any legal advice you get from me, I'm not a lawyer.

I would talk to a securities lawyer about your detailed plan.

Good luck.

Bill P. · Answer

@John Graham

Part of the solution comes from the state securities regulations that you are domiciled. For example, if you focus on same state investors than you can be exempted from the SEC. However, your state securities regs have exemptions too.  For example, in Ohio, if we don't use general solicitation and limit our investors to 10 per year per entity, we can be exempted from regulations. But we still need to follow good practices on the dissemination of information. To meet that requirement, we use a PPM in the same manner as if we had to have registration. In this business, you can never give your investors too much info. I don't know if that helps you form a better program but you need to REALLY understand the rules for your area. This can be especially true for your area where you have to comply with DC, MD and VA depending where the business ids located. I don't envy you.

John Graham · Answer

Thanks! I understand what you mean. I am sorry I wasn't clearer with words. What I wanted to say is that the LPs would buy the properties but I would create an LLC to act as the General Partner. It would be that LLC that would collect the management fees from the LP.

I would look to take on investors so I believe the magic number for mandatory SEC registration is 15 investors. Really looking for confirmation by any involved on the securities end.. Also each LP offering would need to be registered with SEC, I am fairly certain. Thanks! @Jon Holdman

Boy oh boy sounds like I am creating a hedge fund or private equity fund!!!

Business Entities - SEC Registration??

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