Using investor funds to acquire out of state property/ SEC issues

[Derek Robinson]

I'm looking at using investor funds to purchase a property out of state.  I was talking with an investor friend of mine that is terrified of doing this, as he's been advised by his attorney that this involves issues with the Security Exchange Commission.  I spoke with my attorney, who reached out to a colleague that deals with SEC.  They said to do this properly, I would rack up 10k to 15k in legal fees to be compliant with SEC.

According to my attorney, two ways around this would be (1) have investor funds tied to me personally via a promissory note. Funds should not be tied to my LLC or contingent on the success or failure of the property in question. (2)Form a partnership for the property, and each investor has a share of the profit and ownership stake.

Anyone run into this kind of thing?  Are people using investor funds out of state all the time and what the SEC doesn't know doesn't hurt them?

[Jeff Greenberg]

Sure as long as the deal is successful, everyone is happy and the sec is none the wiser.  If things go south and your investors want their money back, all they have to say those three letters SEC and you will quiver in your socks.

I agree with your attorney.  A personal note to you that is not based on any profit or a partnership where the investor has equal rights to make decisions.  The profit or loss does not depend solely on you.

I am not an attorney, so it is good that you consulted one.