How do I sell a promissory note without risking trouble with the SEC

Question

I own a note in Redding California. I located, through public records, some people who either bought notes in the past or lent money secured by real estate in the Shasta county (not the owner finance people - only people who have lent on a property they didn't sell). Shasta is the county where Redding is.

I am interested in selling the note, but NOT to any professional note buyer or real estate investor (I am willing to offer only a 7% return, so it would make sense to only the kind of people who invest in CDs and bonds - that means either retired people or people too busy to find deals). I am worried though about getting into trouble with the SEC, and, if there is such a thing, its California state equivalent.

Is there a way to market to the above referenced people without exceeding my standard quota of three felonies a day ?

I was listening a few years ago to video tapes from John Behle. They were recorded over 20 years ago. He mentioned in one of them that he once ran an ad to sell a note, and he got a call from the SEC asking him for his registration number. By the way, he also said that he is not a fan of selling notes (he hypothecates them instead to raise cash). One of the reason was, he would lose control of the note and would still be liable if the buyer screws up and loses money. Are his concerns still valid 20+ years later (i.e. now) ?

More recently, Alan Cowgill (I think - I listened to so many gurus that I can't remember for sure who said what) said that he arranges to meet with potential investors three times (through seminars/luncheons in which he does NOT ask for money) before raising money from them. In his case he doesn't sell existing notes. He raises money to invest in real estate. But I believe his tactic is still to get around SEC's regulations.

Is this three times meetings first an SEC regulation ? Obviously, the people I located through public records, I never met. And will probably never meet. So are they off the table ? For various reasons, I am not willing to organize any seminar/luncheon, let alone three, in Redding.

Note to the moderator: I believe nobody in this forum would buy a note for a 7% return. So this is not in any way a classified. I also hereby commit not to sell this note to anybody who contacts me from this forum.

Dion DePaoli · Answer

The issue is not the sale as much as your solicitation. It's your asset, you can sell it. How you find that buyer is another story. Soliciting to the public has too long of a list of requirements to get into here.

More importantly, I can appreciate your resolution to not sell the note to a "professional" note buyer. I assume that is code for, "I only want to sell this note to someone who can't properly evaluate the risk and return.". The code you speak, talks over the idea that you believe that a 7% yield is sufficient for the asset you want to sell. Maybe it is, maybe it is not but I think you have your counter-party ideas sort of backwards.

It's safe to say I have sold a loan or two and chatted with both new and experienced note buyers. The new and inexperienced have the propensity to be too aggressive with their yield and return expectations far, far, far more often than a note investor with some experience. New folks want a deeper discount because they still are not all that comfortable with the asset class. Well that and all investments should make a 30% return, or so they believe.

I suppose the other idea behind the curtain is that somehow an offer to purchase the loan of say 9% would stop the world from spinning on it's axis so quickly that you dare not take any chance to simply allow the market to price the asset. Nope, that is a risk we shall not broach. Only try and find a buyer pre-conditioned by not having any preconditioning to be locked into a magic yield number which you have nicely already defined for them. As I think of this marketing idea, I can only assume it is bi-product of the pre-cogs from Minority Report, who know the future in advance.

I poke fun at your sales strategy in good heart only to perhaps make you come to your senses. I think some of the guru overdosing has warped the portion of your plan with, well, common sense. That said, for each, their own.

The follow up post Gautam remark's that if you sell your note to another investor Dobb Frank (DF) does not apply. Gautam, the asset is a Promissory Note secured by a Mortgage or Deed of Trust...a Mortgagee does not occupy the property. Therefore, the designation of "Non Owner Occupied" doesn't make sense. That designation would be for the borrower, not the investor. You are confusing other concepts in DF with this one.

Back to the OP. A similar confusion with the SEC questions, ideas are being confused. The meetings/seminar thing described is likely to get past the requirement to know an 'investor' when raising capital for investment purposes. There is no requirement to meet or know for X period your counter-party. To that degree and with some omitted details on my part, Caveat Emptor.

Gautam Venkatesan · Answer

If you sell your note to another investor (non-owner occupant) then DF rules do not apply. Not sure why you are concerned with SEC for selling 1 note.

How do I sell a promissory note without risking trouble with the SEC

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