I often see forum postings from real estate investors looking to raise their own investment funds. These are often newcomers that are frustrated by their inability to obtain financing for what they’re sure are smoking hot deals. The banks have told them ‘no,’ hard money lenders laughed in their face, private lenders turned them down, and friends and family members have told them they’re crazy. There has to be some easy way to raise capital. Right?
Thinking that they’re being creative, resourceful, and acting like a true entrepreneur, they set out to find people to back them. They spend hours, if not days, crafting a perfect pitch to attract investment funds. They post internet and newspaper ads promising investors a great return secured by real estate. They’ll advertise a rate that is significantly better than the paltry yields offered by banks. Brilliant idea – or is it?
Big Brother is Watching
The moment that wanna-be tycoon placed that ad where it can be seen by others he or she violated a major securities law. By posting a solicitation for money and promising a return that individual just made a public offering. That offering now falls under the jurisdiction of the Securities and Exchange Commission and is regulated by the Securities Act of 1933. That offering must be registered and a number of requirements must be met regardless of how small the amount of money involved.
I know this from first-hand experience. I too had that brilliant idea as a new investor. I had a great investment opportunity and was determined to raise the required capital. I was fortunate in that I worked in the financial services industry at the time and had access to people who actually understood how to do this. I had the investment opportunity and I had access to people with money so I took the steps to do it right.
Exceptions to Regulations
The regulations do allow for certain exemptions from the onerous and extremely costly filing requirements. These exemptions do not mean that you can just proceed with your plans; they must meet some very stringent requirements that are best left to professionals. This is not a job for do-it-yourselfers and there is no fill-in-the-blank legal form you can buy. With that in mind, I retained the services of a competent attorney and created a limited partnership. Because I was soliciting high net worth individuals that would be considered accredited investors, we created a private placement offering. Since it involved fewer than thirty-five investors and sought to raise less than $1,000,000, this was a filing that fell under the Regulation D exemption of the Securities Act of 1933.
Ultimately the investment got off the ground and it was somewhat successful. I say somewhat because it earned a profit. However, that profit was not commensurate with the amount of effort involved. The greatest return was actually earned by the attorney that drew up the agreements. The total fee involved was just short of five-figures and more than any of the investors earned on their investment.
So if you’re thinking that it would be easy to just raise your own money by placing an internet ad somewhere – think again. That ad may result in a letter from your local SEC office that begins with ‘Greetings’ and ends with you wishing you never thought of that ‘brilliant’ idea.
The government solution to a problem is usually as bad as the problem. – Milton Friedman, Economist
Photo Credit: Scott S.