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!

#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…

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.