3 Important Things to Consider When Raising Private Money for Your Deals Today


“Ordinarily, I’d take you in my court and try you and hang you.”

Judge Roy Bean

What do broken windows have to do with real estate investors?

Under the new SEC chairwoman, it seems more than just more rehab costs! Knowing the line between what is not and is a security goes along way for most investors. If you raise private money or seek joint venture partners I encourage you to review the rules for raising private money and ensure great record keeping. The new policy of aggressive enforcement likely is a result of several factors. First, the public outrage at the Bernie Madoff Ponzi scheme, and second some aggressive changes that flow from the JOBS act put tremendous strain on the SEC. They have elected to come out swinging!

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#1. The New Sheriff in Town

SEC chairwoman Mary Jo White took the rains over at the SEC in April of 2013. Amidst all of the changes in the flow from the JOBS Act, she recently announced a new enforcement attitude in a speech in October. I think anyone raising money for any reason needs to take heed.

Consider her remarks:

“…Instead, they want someone who understands that even the smallest infractions have victims, and that the smallest infractions are very often just the first step toward bigger ones down the road.

They deserve an SEC that looks at its enforcement mission in exactly that way.

This approach is not unlike the one taken in the nineties by then New York City Mayor Rudy Giuliani and Police Commissioner Bill Bratton, back when I was the United States Attorney for the Southern District of New York.

They essentially declared that no infraction was too small to be uncovered and punished. And, so the NYPD pursued infractions of law at every level – from street corner squeegee men to graffiti artists to subway turnstile jumpers to the biggest crimes in the city. The strategy was simple. They wanted to avoid an environment of disorder that would encourage more serious crimes to flourish.They wanted to send a message of law and order.” (See full transcript here)

#2. Compliance Record Keeping is More Important Than Ever as a Consequence

The “broken window policy” makes it imperative to review the rules and keep excellent records. Historically, you might see people make offers for a passive investment that violate the general solicitation rules at your REIA meeting without any negative consequence. I would suggest this approach is too risky under the new regime.

#3. Offering Member Managed Entity Investment Works for Most Investors

Remember that if you form a member-managed LLC, it keeps the SEC on the sideline.  A group LLC that all participate in management decisions is NOT a federal case generally. However, keep good records in the instance of a disgruntled member. They could cry wolf and the SEC is likely to come running with the new sheriff in town looking for broken windows.

Photo: bernat…

About Author

Douglas Dowell

Douglas Dowell J.D. is a commercial and multifamily investor. His blog will focus on legally raising private money, risk mitigation with due diligence and management science. He is also an avid student of success principles with a focus on modeling success factors.


    • Douglas Dowell

      Hello Ben and happy holidays!,

      I think for me private money is a responsibility that has an opportunity attached. The effort of the pitch, the myriad of compliance issues and the investor management issues are not a small issue. The key question is it worth it to YOU?

      The opportunity is huge with 5 trillion with a T in 401k SDIRA money on the streets you can partner your way to a much higher net worth. I think its actually fairly strait forward to master the rules and stay compliant with great record keeping. My article is actually aimed to urge strict compliance…not to suggest its no longer worth the effort.

      The best advice that seems to prevail is partner with an experience operator, Lawyer up, and CPA up and your golden!

  1. Some states have regs that state that lending on real estate liens is not a security or some wording to that effect. GA and NC at least have these exemptions to reg D.

    No pooling, no advertising, just friends family and associates and only creating one lender one property one lien in GA avoids a need to do a reg D is my understanding of GA. So far I’ve only heard of a few states that have this exemption.

    My understanding that this is a viable process: buy and fix with cash, post rehab have your RE lawyer create a 1st lien note with terms that one of your entities holds. After 6 months of your renter paying you sell the note. Now you are selling a note. Certainly in GA and I think NC this is exempt from needing to register a reg D.

  2. Another great article Doug!

    I think the key here is all in how people react to it. For some, it will scare them into doing small deals their whole life while others will follow these rules and move forward with large syndicates and development projects.

    I think it comes down to the individual person and what their life/goals/outcomes/mindset looks like!

    • Douglas Dowell

      Thanks Nick and happy holidays!

      I think your point is spot on….the mindset and an individuals comfort level of this task are very important. If you view this as begging for help from people its never gonna fly. However, if your accurately offering an opportunity for an investor then its a huge win. If you are willing to create an investor relations and accounting system than no sweat.

      Its not for everyone…and I believe it requires a level of commitment. All things in life have a price to pay.

  3. Hi Doug,

    Although I agree with points 1 and 2 (and here’s a recent New Yorker article on this point: http://nyr.kr/18y7iCE), there are a few problems with your third one. A member-managed LLC interest is a “security” and its offering requires either an exemption or registration. These being direct real estate investments, it is usually easier to meet the exemptions that pertain to the Investment Advisers’ and the Investment Company Acts, but the ’33 Act registration issues are still there. It would be well beyond the scope of a comment to go over all the exemptions and the interplay of all these rules, but I thought I would correct this point for readers. I think the bottom line should be: be mindful of these issues when raising funds, especially by public means, and talk to an experienced securities lawyer.

    I am a securities lawyer and co-founder of a RE online investment platform, so I have gone over these issues ad nauseam.

    • Douglas Dowell on

      Hello Stefano,

      As this article is geared toward Federal jurisdiction, it seems to me Sec. V. Howey is most relevant.

      So I proceed under the assumption that if the investment is:

      1. investment of money due to
      2. an expectation of profits arising from
      3.a common enterprise
      4.which depends solely on the efforts of a promoter or third party

      It seems to me a member managed LLC defeats the fourth prong of the test. Perhaps Howey has been modified? Overturned?

      Please correct me if I am wrong that Howey is still the test on whether a member managed LLC is defeats the Test for Federal law?

  4. Adding that: some national trainers offer Joint Venture agreements where both parties are active players is another tactic to bring a lender onto a property avoiding SEC reg D. I’m not suggesting that a JV agreement is a perfect solution and the devil is in the wording of the JV and if it both discloses risk and states how things are handled if problems come up.

    • Douglas Dowell on

      I think that’s a great alternative as well Curt,

      However, careful execution is needed in my opinion. Back to the Howey test fourth prong. I think how it is operated is important if you fail. I would venture to guess seldom is a joint venture a problem if it meets the economic goals. However, good lawyers can use unfavorable facts. If you make all the decision unilaterally and have the joint venture only affirm the action could most definitely lead to trouble.

      Check out this law review article on point:

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