Multiple private lenders for one deal, is it legal?

[Andrew Wenman]

Hello BP, I have been thinking about financing some more deals and I have several friends willing to give me money to invest. I was interested if there any law that restrict the amount of money an individual can invest with you and if there is a limit on the number of investors you can bring on? I was thinking of doing a first round investment with 20 individuals contributing $20,000 to $30,000 each. I feel if you bring in to many investors you would have to register as a fund with the SEC, but they may have a threshold. If anyone can help out or provide any links that would be wonderful! Thanks Andrew

[Jon Holdman]

If it was you and two buddies you could probably make it fly as a simple partnership (using an entity such as an LLC). With 20 people, its much dodgier. Further, you say $20-30K each, which is a small amount. That makes me think these are not accredited investors and perhaps not even sophisticated investors. If that's the case you really need to formalize this. If you're unfamiliar with those terms, again, you want to formalize this. Its not a difficult or complex process, though it will take some time and something like $10-20K in legal costs. But this will give you protection WHEN one of these investors gets unhappy.

You may think, "that's won't happen". You CANNOT afford to think like that. At this point you must assume something will go wrong and take the necessary steps to protect yourself. That means a property LLC operating agreement and a proper private placement memorandum.

If any of these investors are not people that you already know socially, then, that's yet another reason to get an attorney and do this correctly.