For context followed by my question:
Lately I've sort of stumbled into a plethora of offers for backing the deals I find. Completely SFH, essentially wholesale deals that make more sense to keep them sell sometimes, and I have no desire short term for large MFR / syndication work.
My partner / brother in law is also REALLY well connected to money partners looking to lend.
I have not found this specific conversation here on BP so here goes...
So here’s where I ask my question(s):
Could my brother in law keep a separate LLC that collects private funds, and issues a note on the properties that we want to fix & flip, or Brrrr?
Can he / we NOT publicly advertise but privately discuss raising private money without the risk and liabilities of the SEC stepping in or whatever else the regulations require of official Syndication work?
Or are there ways that are more simple such as simply transferring larger sums of cash?
Or... would you consider getting into joint ventures or other partnerships with limited partnerships that can be bought out so as to pay off original money backers and allow for less complications?
We would not be necessarily asking accredited investors. We certainly are not yet in that class ourselves.
Thanks in advance if you take the time to dialogue.
Without knowing a lot more details, private lending one-to-one is not a security (one lender on one note against one property). Your trouble starts when you start POOLING money from PASSIVE investors who RELY ON OTHERS to generate a profit (your BIL). That's the 2-minute version of what's a security. The 1-to-1 takes out the pooling element.
Hope this helps.
thanks for the great insight. Makes sense.
Selling interests in a project that is actively managed by another where the "investors" don't have decision-making authority is almost always going to be a securities offering. Some attorneys will take the position that debt fails the "common enterprise" test for a security from the famous Howey test. Practically this won't really matter if you're pooling funds from multiple sources.
Reg. D, Rule 506(b) allows up to 35 non-accredited investors who are "sophisticated" to enter deals. The SEC recently changed the interpretation of an accredited investor too to allow for certain FINRA-based tests to be taken as a proxy for accreditation so the investors could take and pass those as well to be accredited.
Given the information you presented practically the investors will need to be accredited, you'll need to use an exemption that allows for non-accredited investors, or you'll need to target your offering at investors who have taken these FINRA tests. Another option is to give them major decisions control in a JV agreement, but that may not fit for what you're trying to do for whatever reason.S
Summary statement....talk to a knowledgeable securities attorney.
@Bryan Hancock forgive the late, very late "thank you" response...but a sincere thank you. This was insightful and if anything took me some time to digest and re-read. Thanks again.