Raising capital without being subject to SEC syndication

11 Replies

During studying for the CPA exam over a decade ago, I first encountered SEC rules for raising capital and syndication. But I'm not interested in syndication. I am reasonably proficient at finding local friends to invest in deals. But no where have I been able to find guidance on raising capital while "avoiding" SEC solicitation rules. Has anyone run across a great book, video, or resource on this topic? Am I able to solicit "friends" on Facebook or LinkedIn or biggerpockets for that matter without risking SEC conflict. Most on Facebook are at least acquaintances, but what level of familiarity must I have with someone? I never seek more than a few investors from friend pools. Is there a limit on the number of people I can seek as investors? I set up separate entities with GP/LP structure on deals.

I am not a syndication/securities attorney. First I think at the end of the day you will be selling a security unless you only plan to reach out to 2 or 3 people and do the deal as JV or partnership.

506(c) allows advertising/solicitation only but the investor must be accredited. If you need a syndication attorney, shoot me a message and recommend someone for you. 

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Scott I’ll ask your question a different way.  “Back when I got my driver’s license, I learned about the rules of the road.  Now I have a new car I’d like to test out—is there a way I can drive it without following those pesky rules?”

As a former police officer I can answer that with a fairly confident "no." As a fellow real estate investor who funds all deals with investor money, I can also answer "no."

The regulations surrounding the raising of money simply state that if you sell securities, the securities must be registered unless they qualify for an exemption.  And, securities are inconveniently defined as raising money from others.

Registering your securities is prohibitively expensive, so your only option is to qualify for an exemption, which is how nearly all operators raise funds.

Qualifying for an exemption means that you have to follow a specific set of rules, and there are things you can do and things you cannot do, and there are investors you can accept, and investors that you cannot.  Research 506(b) and 506(c) here on BP and you’ll find plenty of guidance.

The bottom line is, you can raise money, just have a lawyer that specializes in this field help you and it won’t be all that hard.  Follow their advice and you’ll be fine.  Their advice might also tell you that if you and a few good friends (who do not have to be accredited) want to collaborate on a real estate deal you can do it with a simple partnership agreement and that’s it.  If they are just Facebook friends, Instagram followers, etc., that wouldn’t qualify for the type of friends I’m thinking of.  You’d have to follow the securities framework.  But every situation is different and some lawyers might have a different tolerance for practical risks, so your mileage may vary.

Thanks for the input so far, but to rephrase, I guess I'm really asking if anyone has any resource on PROPER ways to structure deals to avoid selling a security. I already know my GP/LP structure currently in use is not the best. Really just looking for answers for work arounds. And as a CPA having worked in tax for 15 years, there are certainly work arounds!

@Scott Jenkins

Your best resource will always be an attorney that is familiar with these matters. I have some referrals if you’d like or you can find some here on BP. Great folks to meet and know. The legal fees are worth it to ensure you’re in compliance!

@Scott Jenkins

As @Brian Burke eloquently stated, if you have passive investors, you're entering the world of securities. If you're looking to avoid syndicating then all partners in a partnership must have some sort of active roles. This may only work with the people you know, not social media friends. Note, this is only my opinion and isn't a legal advice. My suggestion is to connect with several securities attorneys (plenty here on BP) and local RE attorneys and speak about the structure.

I would speak with a Syndication/Securities attorney. You still need to be even careful as some JV agreement could be considered selling securities depending on how structured and the group came together. 
506(c) are not bad.

Originally posted by @Scott Jenkins :

Thanks for the input so far, but to rephrase, I guess I'm really asking if anyone has any resource on PROPER ways to structure deals to avoid selling a security. I already know my GP/LP structure currently in use is not the best. Really just looking for answers for work arounds. And as a CPA having worked in tax for 15 years, there are certainly work arounds!


@Scott Jenkins

The other responses on this thread have given you correct guidance. There is no workaround for selling securities without following securities laws and there are plenty of people in jail, or with ruined reputations after being prosecuted, who have tried.

When you are selling passive interests in your company to investors, you are selling “investment contracts”. Investment Contracts are securities. If you are selling securities, you have to “register” your offering (i.e., get pre-approval from regulators”) or qualify for an exemption from registration. Each exemption has a set of rules. The rules protect you and your investors.

For instance, having a PPM provides the Investors with all of the risk disclosures and material facts they need to make “informed consent”. They agree to “assume the risks” by completing a subscription agreement. Your securities attorney then files notices with the SEC and state securities agencies, informing them that you are claiming the exemption. And best of all, you can be reimbursed by your investors for all of the upfront expenses you incur for providing the documents that protect you. Why wouldn’t you want that?

You've already received great advice/guidance in this thread.  I'll just opine to say that small deals with a bunch of semi-active partners and nobody clearly in control should be the definition of hell in the dictionary.  Save up your money and do things properly or just avoid said hell altogether.  

@Scott Jenkins you've gotten advice on this thread from some highly experienced people who have been around for a long time, and doing business right.  Do yourself a favor and find yourself a good securities attorney to discuss this with (hint, one may have responded to this thread).  A 15 minute consultation phone call with them will give you more perspective than you have ever considered.  

There are a handful of good ones on BP to connect with.  It is simply not worth the time, money or brain damage to try to create a work around.  You will find a good securities attorney to provide you so much value beyond the cost of creating the documents.  Also, consider the perspective of your potential investor partners:  Who would want to invest with you if you are cutting corners and trying to work around the law before you even start?  

I feel like there are a lot of mixed up concepts here. You're trying to avoid "SEC solicitation rules"--which is easy--just don't generally solicit anyone you don't already have a pre-existing relationship with. I think the question you're really trying to ask is "how can i raise capital without having SEC rules apply" which is an entirely different analysis, and frankly, difficult based on what you're describing. SEC rules encompass many different topics. Happy to have a short chat if you need.