Legality of Private Money & SEC

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Legality of Private Money & SEC

Ken Latchers
Hatfield, PA · Member since 2012 · 1k+ posts · 629 votes

Given the SEC rules, I see some real estate course gurus who seem basically to pursue private money as follows:

1) You contacted us about our course (perhaps through one of thier spams, facebook or LinkedIn postings.

2) Therefore, we "know" you (and did not get you directly through the now-illegal advertising such as newspaper ads). NOTE: I noticed statements to this effect (you know us because...) in their emails

3) How would you like to become one of our private money lenders? Why, here is a great 16-unit apartment and you could get up to 15% by jumping in now...

Is this REALLY fulfilling the SEC requirements/exceptions (REG D, etc.)

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
14y

Trouble is the penalties for securitiies violations are much stiffer than speeding tickets.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    Not at all IMO, the initial contact was arising from a solicitation and the "known to us" is usually past business dealings,or an introduction by a third party you do business with, not a hand shake through an e-mail! Stay away IMO.

    1Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    14y

    I absolutely agree with Bill Gulley. This is an area where the Gurus are especially bad. Some of them teach things that are clearly illegal and not even in the "Grey Area" Usually with no warning that SEC could be an issue.

    The problem is Lots of people get away with it. But that doesn't make it legal. Investors should recognize the legal risk they are taking raising private money.

    I liken it to speeding. Lots of people drive over the speed limit and get away with it. That doesn't make it legal and you are taking a risk you may get caught.

    1Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    Trouble is the penalties for securitiies violations are much stiffer than speeding tickets.

    4Reply
  • Ken Latchers
    OP
    Hatfield, PA · Member since 2012 · 1k+ posts · 629 votes
    14y

    Let me give the juicy part of one of their emails to their email list. The email is one of a series this person sends out to EVERYONE, even though he never had any contact with them. The post was on a social media for training, and it quickly moves on to opportunities to invest in the apartment buildings he gets:

    " Like the bank were about to move forward with
    on another “repo” property they want to get rid of.
    It should be ready for investors in 10 days.
    And you get to benefit without the long-term suffering
    and murderous learning curve.
    Like the investor from Thailand who just called me and
    is ready to move forward.
    And the guy from Florida who now investing after reading my
    e-mails for 2 YEARS (you guys drive me crazy).
    It’s been an excellent first quarter…distribution checks are
    on their way…like the 4% return on the XXX
    property (16% annual).
    And we’re falling behind market value on many rents,
    so we’re bringing them up on most properties…to be fair
    to the renters and to ourselves.
    No need to gouge anyone…there’s plenty of money
    with the (boring) straight-shooting approach.
    But it means higher cash flow returns.
    AND YOU DON’T HAVE TO WAIT TO READ 2
    YEAR’S WORTH OF E-MAILS BEFORE YOU CALL ME!
    Contrary to popular belief, that’s NOT a requirement
    for becoming a partner investor.
    You can call NOW, and still get in on a great 2nd quarter:
    Or…you can forgo the satisfaction of ripping open
    8 more fat distribution checks over the next 2 years…
    And call me then, anyway.
    But why wait? "

    1Reply
  • Ann Bellamy
    Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes
    14y

    They could make a case for looking for lenders instead of "investors" right up until they said "partner investor".

    There is an additional problem. Solicitations like this are so ubiquitous that new investors think they can do it too, because how could it be illegal if everyone is doing it? And Ned Carey is right, that so many people do it and get away with it.

    As my attorney says every time I ask him why I can't do a particular structure: "Nothing's a problem until it's a problem."

    1Reply
  • David Wedemire
    Real Estate Investor · Bellingham, WA · Member since 2008 · 407 posts · 90 votes
    14y

    So true that it is not a problem til it's a problem meaning a private lender deal goes sour and they complain to the SEC. That how it all starts with any SEC investigation and fine.

    0Reply
  • Mike Jakobczak
    Real Estate Investor · Toronto, Ontario · Member since 2010 · 413 posts · 114 votes
    14y

    Yea some Gurus make me laugh. They are so cheesy and I don't know how people take them serious. And like Ned Carey said they are not even in the grey area with a lot of their postings. Always love running into them and pretending I'm new in real estate and begin to overwhelm them with questions which I never really get a clear answer. Always have to talk to the expert on their team. lol Which surprisingly is free when I sign up for their $10,000+ course...haha

    0Reply
  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    14y

    Ann Bellamy He he he, I almost ended my post with that exact quote. :-)

    1Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    Reminds me (or I'll mention) I met a wannabe guru trying something similar at the library, he and his wife were passing out flyers and I took one.

    I started a conversation playing as dumb as a rock and gave him my first name and number. They called and we left it that I'd be interested. I also called the Missouri State Patrol fraud division and the Finance Dept. (who covers RE) LOL

    I hate scams. I have done this before, applying for programs and turning it over, they either get caught or leave town and I had to go to court to testify on a mortgage broker and one "investor partnership" both got nailed!

    So, caution wrong doers and those who think of trying, there are others like myself out there (Realtors are really scam chasers in this area) so your chances of getting caught are getting better.....

    I can just be ornery sometimes, LOL

    1Reply
  • Jimmy C.
    Flipper/Rehabber · Seminole, FL · Member since 2010 · 859 posts · 316 votes
    14y

    So wait a second here folks. How do I raise private money for rehab projects, and/or cash flow properties?

    I am in an area where 700+ private mortgages were written in the past 4 months. And I am in possession of a list of all of those transactions. It includes their names and addresses.

    What can I do with it that wont get me in trouble? Can I do direct mail? Or do I literally have to track these folks down and try to introduce myself?

    0Reply
  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    14y

    The education angle is pretty prevalent for those looking to find investors. I know of several legit operations that offer symposiums or mentorships to train people how to raise money though. So the "guru" term is somewhat painting with a broad brush. There are many legit operations out there.

    The bottom line to me is that relationships should be developed over the course of time. Once that step is done asking someone to partner with you is pretty legitimate given their opportunity to kick your tires.

    0Reply
  • Jimmy C.
    Flipper/Rehabber · Seminole, FL · Member since 2010 · 859 posts · 316 votes
    14y

    So I shouldn't send a letter to these folks to fish for a private mortgage?

    Gotta take them to dinner first? Meet their family? :-)

    0Reply
  • Ann Bellamy
    Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes
    14y

    Jimmy C., that's fairly close. You have to have a pre existing relationship with someone before you can ask them to invest. And you can't solicit strangers, ala letters or advertising.

    However, althought I'm not a securities attorney, or any other kind of attorney, my understanding is that seeking a loan is different. If you are looking for a loan, not an investor or investment, you can approach people. The challenge comes in when you have to get funding for the major portion of the deal, and also for the downpayment. Then you have a situation of a first and second position mortgage, and few are willing to lend in second position.

    I'd like it if others jumped in and confirmed or disputed my contention that looking for loans is looked at differently than looking for investors.

    0Reply
  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    14y

    This topic is covered in many other threads on BP. It would be hard for someone to claim that these private loans are securities because the relationship of the parties would be adversarial in the event they are secured and the investor attempts to seize the collateral for non-payment. It really depends on how they are structured though.

    Having said that I don't think the state securities commission would like you blanket advertising to lists for money. I am sure many gurus have found aggressive attorneys to draft agreements for this presumably so they would have built-in business defending claims.

    Things may change with the new Jobs Act. We should know in the coming months.

    BTW....I am not a securities attorney either so please check with one to get advice for your particular situation.

    0Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    14y

    One key issue on searching for individuals to make private mortgage loans is whether or not these individuals are in the business of providing loans. If you are just soliciting, or advertising to "investors" say, in general, then these people clearly are not in the loan business. If you solicit a list of people who have made say 5 or more private mortgage loans, then these people are probably in the business.

    Now back to the question of a list of people generated in such a way as to how many loans they have made is unknown (i.e. whether they are in the loan business or just happened to do owner financing on a property they sold). I don't think any Federal or state agency will prosecute you for sending a letter (although it technically may be a securities violation). If you want to be ultra safe you would have to turn down any loan offers from people with no loan making experience who responded to your solicitation and accept offers from people with experience and who already hold a number of such private loans.

    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    1Reply
  • Mike Morrison
    Contractor · Woodlands, TX · Member since 2010 · 95 posts · 18 votes
    14y

    Paging John Corzine...

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    Just food for thought....

    There are tens of thousands of investigators, regulators and complaince folks all over the country. They may well have brothers, sisters and whatever family members that speak to them about financial matters and seek their opinions. Compared to the general population it's a small number, but still significant. When you add Realtors to that mix (as most know something about such activities) it's hard to keep your solicitations really secret or private.

    You never know who you may be contacting, just as the guy I described above. Most, IMO, will ignore a solicitation that isn't an obvious serious violation or seems to be really scammy, as I have. The question is is this solicitation really a public threat so to speak and is it worth shutting them down?

    So, I kinda agree with Don that chances are that a letter to 20 people won't land you in jail. OTH, one brokerage here in town was doing just that, offering investment oppotunities which caught the eye of the State Finance Dept. which led to an investigation where they found some unhappy investors and one thing led to another. That broker went to prison and was fined more than they can probably ever pay. So sending written materials out can and does get you nailed.

    My rule to getting investors was never put any solicitation in writing or anything that could be viewed or read as a solicitation or prospectus of financial performance. Nothing was ever guaranteed until we signed notes or entity agreements or contracts to partner. You also need to take care that your investor is not purchasing an unregulated security, like a bond. Also, I never used the word "investor" or allowed them to think that I viewed them in that light....it's what we can do is, or what I could do for you is. It's a small thing but we were in each deal together as partners.

    Keeping the "investor" responsible for what they do is key in my mind. If you do enough deals someday something will blow up and you will need to keep folks calm and focused without them saying "you told me I'd get". In the end I can say that none of my "investors" ever lost a dime as they came first.

    I almost always approached people from a personal situation or point of view and not as an initial business offer. That does not mean that the conversation would not get to investing in a few minutes, simply talking about what I do, making money for others.

    2Reply
  • Jimmy C.
    Flipper/Rehabber · Seminole, FL · Member since 2010 · 859 posts · 316 votes
    14y

    Thank you gentlemen. I think it makes sense that I drill down in the list and find those that made multiple loans per month. Once I have the players separated from the common folk, I will probably be dealing with seasoned people and companies anyway.

    Glad I read this thread before attempting the shotgun blast approach. Now I will make my letters much more tactfully, and should be okay.

    1Reply
  • Keith Lutz
    Real Estate Agent · Hackettstown, NJ · Member since 2011 · 206 posts · 62 votes
    14y

    Jimmy C., let a lawyer review it, that is familiar with SEC law, or at the very least post it here and get some un-professional opinions!

    0Reply
  • Ken Latchers
    OP
    Hatfield, PA · Member since 2012 · 1k+ posts · 629 votes
    14y

    @Jimmy

    Based on what I have seen, you are not OK. You should not be relying on forum advice in place of legal advice. You need to become very knowledgeable about the requirements of the SEC, the state "SECs" where you might solicit, etc.

    Everybody wants private money. The path you are outlining does not sound like There are many regulations about advertising, crossing state lines, amoutns, accredited investors, etc. I think at this point you have no idea what you are getting yourself into and you are actually placing yourself into great danger. I do not agree with "those who have multiple loans" at all. You are soliciting clear and simple, and you are about to head into a minefeld wearing a blindfold.

    0Reply
  • Jimmy C.
    Flipper/Rehabber · Seminole, FL · Member since 2010 · 859 posts · 316 votes
    14y

    Awesome Ken! Do you think I can get minimum security time? Lord knows I need to work on my back swing.

    Nah, I haven't even drafted a letter yet. And when I do it will be sent to folks that obviously write private mortgages. For the first point of contact, it will just be an introduction and asking them to call me to chat or schedule a meeting. Then I can meet the people in person, and build relationships.

    The alternative to this would be to literally stalk people in person, which probably wouldn't be good. Imagine a 270 pound dude (that looks nervous) approaching you out of the blue (that already knows your name!)

    Or I could always do nothing. But I don't think I would like the results.

    0Reply
  • James Hiddle
    Altus, OK · Member since 2008 · 2k+ posts · 690 votes
    14y

    Jimmy hire a good SEC lawyer. He/She will keep your head above water and make sure your compliant with SEC regs.

    The last thing you want to do is stir the hornets(SEC)nest.

    0Reply
  • Jimmy C.
    Flipper/Rehabber · Seminole, FL · Member since 2010 · 859 posts · 316 votes
    14y

    Right on. Thanks for the suggestions. I'll have an attorney review my letter. But I'm not guaranteeing any rate of return, or putting many details. Just something to pique their interests and make them call.

    0Reply
  • Ann Bellamy
    Lender · Tyngsboro, MA · Member since 2009 · 3k+ posts · 2k+ votes
    14y

    Jimmy C., anyone who lends money where the mortgage is recorded gets flooded with solicitation letters. Yours could be one of many. I get the same set of letters for every new loan. Note buyers, real estate investors looking for "private money", etc.

    So if you are going to be one of many, a plain vanilla letter is unlikely to pique their interest.

    So if you are going to be plain vanilla, you should at least be legal plain vanilla. It would be a shame to be dinged by the SEC for something that didn't even produce great results.

    A good SEC attorney can teach you about the "test the waters" feature.

    But I can tell you that people are very leary of putting money with people they don't know. I get connections weekly from people wanting me to lend out their money. Where do these connections come from? Almost exclusively by recommendation from someone they know and trust. Or people who have been watching me operate my business for years and finally feel comfortable enough to discuss it. Rarely do they find my website and ask my about investing in my business.

    Build your business and your brand by operating a quality business and they will come. Of course, it's not as simple as that, but violating SEC rules is not a good way to start.

    3Reply
  • Jimmy C.
    Flipper/Rehabber · Seminole, FL · Member since 2010 · 859 posts · 316 votes
    14y

    Thanks Ann, you made some very valid points. I hadn't considered the fact these people are probably overwhelmed with direct mail already. I live in the REI capital of the world, so I am sure that is probably the case. So I guess I am going to go with a more indirect approach (you guys talked me into it)

    Darn it! I cant play Devils Advocate anymore now

    0Reply
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