Demystifying the SEC and How it Regulates Real Estate Deals

by | BiggerPockets.com

Hey there, BiggerPockets! As you may know, I have a book coming out soon called Raising Private Capital. In it, I talk about doing deals with debt, which is borrowing money via a loan for the deal. I also talk about taking on equity investors, which gives those who invest with you direct ownership of the LLC that owns the real estate.

The SEC

Many real estate investors want to get into larger deals by raising equity investments from their investor database. This is very common on apartment building deals, commercial projects, and even projects involving single-family homes. Although these deals can be exciting game changers for your business, many investors get stuck out of fear of breaking rules with the Securities and Exchange Commission (SEC). There are plenty of misconceptions out there around the SEC and how it plays into the world of real estate investing.

Related: Real Estate Crowdfunding: An Introduction

Securities

For the SEC to get involved, your deal needs to be considered a security. If you don’t meet all the definitions of a security, there are no actions required to keep the SEC happy. If your deal does qualify as a security, there are further steps to take, and you should consider hiring a good SEC attorney to help you navigate the process.

Related: 4 Rules of 1031 Exchanges Every Investor Should Know

Many real estate transactions do not meet all the definitions of a security and don’t qualify as one to the SEC. Unfortunately, there is plenty of confusion and bad information out there regarding what securities are and what they are not. This has caused investors to stay away from these types of deals altogether. This is a shame, because these types of investments can be very lucrative for you and for those who invest with you.

In today’s video, I analyze which deals qualify for regulation by the SEC and which ones don’t. You might be surprised by what doesn’t require SEC oversight. Check out the video to learn more!

raising-private-capital

Did you watch the video? What do you think?

Tell me your SEC questions below!

About Author

Matt Faircloth

In 2005, Matt founded The DeRosa Group along with his wife, Elizabeth. At the time, the two person company owned and managed two assets – a single family home and a duplex. Over the last nine years, they have grown the company to a 12 person team owning and managing over five million dollars in residential and commercial assets throughout the central NJ and Philadelphia area.

One of DeRosa’s mantras is “to make money while making a difference.”

9 Comments

  1. Matt Micks

    Great video, definitely cleared some things up for me. I do have a specific question:

    I am going 50/50 into a new construction deal with my brother. We would be considered “active” as we are both doing a lot of the work. However, each of us is also responsible for raising the down payment for the loan and are turning to private investment. Each of these private investors will be passive. Since these investors will get an equity share of the property and expect profit, does our deal count as a security?

    If yes, what if my brother and I each form our own LLCs to take the other investors money, and then we do the deal with 2 LLCs? Does the SEC get involved here?

    • Matt Faircloth

      Hey Matt,
      If your investors put in money, expect a profit, are completely hands off, then the only way you avoid SEC regulation is to borrow the money from them. That puts them on the other side of the transaction. If you can’t convince them to position their money as a loan, then you are security, even if you and your brother both do separate LLCS (which wouldn’t make sense to do anymore if you are already a security).
      Hope that helps!
      Matt

  2. Michael Temple

    Very helpful video. Number 3 on your list really answered a lot of my questions. I pre-ordered your book and I am hoping you discuss the elements of how we can advertise and find the people that meet condition 3, i.e. just a private lender without running afoul of the SEC.

    I am guessing the second you start offering lunch and learns, advertising, etc. for private money you trigger a whole new set of potential SEC rules to be wary of.

    We had a local investor years ago that is still rotting behind bars for running afoul of the SEC. Now in his case, I do believe he had many, many other problems besides just advertising problems. He was cross collateralizing loans on multiple properties and doing a Madoff thing where new investors were paying off the “returns” of current investors, etc. so I realize it wasn’t a straightforward issue, but I do remember he did get in some hot water when he started advertising for investors, but that isn’t, strictly speaking, what landed him behind bars.

    • Matt Faircloth

      Hey Michael,
      Glad it helped, and thanks for the support on the book!
      Lunch and learns are not a violation at all and can actually help you establish a pre-existing relationship with your investors. As long as you present it as a learning, not a pitch on one of your deals, you are ok.
      Matt

  3. Len Grosso

    Matt.
    I really like the way you explained this SEC requirement. Ever notice how some explanations do little more than cover the important facts with snow?
    Well, you have a gift for not doing that!
    It’s something I am highly aware of. Your book is on my immediate list now.
    Len

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