Denver, CO · Member since 2013 · 10 posts · 1 vote
Hello,
I have a small real estate business where I own a few rentals and do some fix and flips. I want to start borrowing money from friends and family in order to grow my business. My question to you is if I need some sort of real estate or investment company licence to do this? Also are there any rules regarding raising investment money like this and do I need to make sure the investors can "afford" the investment or are somehow "accredited"?
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
13y
The concern is the investment a "Security" Under federal law, if the investors are passive you have to jump through all kinds of hoops to comply with securities laws. There is no exemption for family, friends or the fact that you are only borrowing $1.00. The gurus saying 1 investor 1 property is not a security is Bull poop.
If the investors are active in the business it is not a security. But how active, how much authority? That is a gray area.
So the question becomes when does it become an issue that will be enforced.
With family and friends it will likely never be an issue unless and until someone loses substantial money.
Now state security laws vary, but many follow the federal regulations. Maryland for example is close to the federal regulations but has a $150,000 exemption. If you are only raising $150K in a year no problem. That is as long as everyone is investing in and from Maryland. As soon as you cross state lines it becomes a Federal issue. Good luck - Ned
Search the site for securities laws and you will find lots more info.
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
13y
The concern is the investment a "Security" Under federal law, if the investors are passive you have to jump through all kinds of hoops to comply with securities laws. There is no exemption for family, friends or the fact that you are only borrowing $1.00. The gurus saying 1 investor 1 property is not a security is Bull poop.
If the investors are active in the business it is not a security. But how active, how much authority? That is a gray area.
So the question becomes when does it become an issue that will be enforced.
With family and friends it will likely never be an issue unless and until someone loses substantial money.
Now state security laws vary, but many follow the federal regulations. Maryland for example is close to the federal regulations but has a $150,000 exemption. If you are only raising $150K in a year no problem. That is as long as everyone is investing in and from Maryland. As soon as you cross state lines it becomes a Federal issue. Good luck - Ned
Search the site for securities laws and you will find lots more info.
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
13y
Originally posted by Ned Carey:
The gurus saying 1 investor 1 property is not a security is Bull poop.
Ned -
I'm not arguing (I'm definitely no expert in this area), but if that's the case, how do HUD, Fannie Mae and other lenders get away with providing mortgages to homeowners? Wouldn't they be violating securities laws if that was the case?
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
13y
J Scott I was referring to private lenders.
You ask a question that I have not been able to find the answer to. Why is it OK per securities law for institutional lenders to lend without it being a security? I don't know. I believe it is buried in the law somewhere about exemptions for registered financial institutions or something similar.
My original comment is based on the definition of a security from the 1933 securities act
he term ‘‘security’’ means any note, stock, treasury
Note that "NOTE" is the first word. Also in Maryland any mortgage longer than 9 months is defined as a security.
Often Gurus say "as long as it is one investor there is no problem. Pooling money is a problem" The term "Pooling" is used regularly by these guys, however nowhere in the securities act of 1933 is the word "Pooling" used. It is made up guru gobbledegook. - Ned
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
13y
Ned Carey A mortgage from a lender to a borrower is exempt as a security, but pledging an interest in a note to an investor who is not a party to the note is. Secondary market mortgages are funded by a direct lender and purchased by a wholesaler who blocks the loans which become the collateral for securities, bonds sold and they become securitized.
Regulated depository institutions in banking activities are exempt. Investors make time deposits (CDs) on an insured account and is basically a loan to the bank, the banks can make loans, but those loans in the bank's name are not pledged for the CDs.
If I had a faucet factory and I got more than 3 investors to make me a loan secured by company assets, or unsecured, that note is in essence a bond, a debt instrument issued by the company and is a security.
If a mortgage broker accepts funds from more than 3 investors to the lending business and then loans the money out in it's name and then gives the investors a security interest in the notes made, that broker just provided a security, a bond. If the investors are part of the lending business, partners they are direct lenders. If a broker makes the loan in the name of an investor, it is not securitized but a direct loan by that investor and may be serviced by the broker.
3 is not always a magic number either, need to check at the state level.
"Pooling" is addressed with respect to mutual funds and can be considered a security with 3 or more investors, qualification of investors also becomes an issue.
Immediate family members are also exempt in lending. :)