Making sure I don't run afoul of SEC?

Question

Not sure if this is the proper forum to post this to; move if needed.

I was looking at the various rules, and as you may imagine, it's a little confusing. I was looking over Title II - IV, and some others.

What I'm wondering is, if I have a certain percentage of funds, say through a HML, would I still be subject to any SEC rules, for finding my remaining funds through a 3rd party?

I was told that since I would be doing a "partnership," or maybe a "JV," the SEC wasn't applicable. Others have said that even if I have that sort of situation (forming a partnership, or investing company, with multiple members), since I didn't previously know the people, and have an "established relationship," that I could run afoul. Still others have said if you know them for a set time (ranges from 30 - 90 days, or have "at least 3 contacts, between in person, phone, and/or virtual"), then that covers the "established relationship."

Then, there's the "it depends...it's complicated...there's not hard set rules..."

Can any experienced members, who've had to make sure they don't run afoul of SEC, give their 2 cents and their actual experiences?

Taylor L. · Answer

Would your 3rd party after the HML be issuing a loan or an equity investment? What terms would you be offering them?

A JV or partnership agreement doesn't automatically make you immune to securities laws. From a syndication background, you have to ask yourself if the partners have an active role in the management of the business or property. If one or more partners in your company isn't doing anything to earn a return, then they're a passive investor and must receive the appropriate disclosures.

I'm not a lawyer, just a guy who syndicates real estate :)

John Corey · Answer

Google 'sec howey test'. And speak with a securities attorney. The Howey test is from the 1930s so the information might be new to you and yet it is well established. Many real estate investors who start with SFR never realize that there are regulations for fund raising. Or, they only find out when they are contacted by the SEC.Two lawyers have commented in the thread. Reach out to them. There are a few others who also contribute on BP. There is a reason they put time into BP posts. There are many RE investors who need legal advice on the topic. The lawyers are very generous with sharing so take advantage.

Mauricio Rauld · Answer

Dont think I can post here, but I have a bunch of videos on my YouTube channel that address structure (I think Top 3 Biggest mistakes).  PM me and happy to share directly.

Amy Wan · Answer

There's a lot to unpack in the above question because it touches on several different topics.

You would be subject to SEC rules whenever you have two or more passive investors, regardless of whether you're calling it a JV or whatever. People tend to call things JVs that arent truly JVs.

With regard to the different regulations and pre-existing relationships and whatnot, it all depends on what exemption you're using. 95% of the time, people use Rule 506(b).

People say "it depends" because, as you've rightly pointed out, there are no hard and fast rules. The SEC looks at all this on a case by case basis. But there are best practices :)

Happy to talk if you need.

John Fortes · Answer

Every situation is unique but you need to consult with the likes of @Amy Wan, @Mauricio Rauld and @Kim Lisa Taylor for a good idea of what you are seeking to do. Though you can take all these comments and digest it. You would have to get on a a call with a qualified professional to help walk through your ideal situation and scenario.

Happy investing!

Making sure I don't run afoul of SEC?

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