Anti Fraud Provisions For Hybrid Investors/Partners - Securities Law

[Bryan Hancock]

Several threads I have read on BP of late and some personal business dealings have caused me to research anti fraud provisions quite carefully of late. I wanted to share this article:

Consider Compliance With Securities Laws In Your Next Business Law Transaction

that I found on the subject. The following quotation:

//Begin Quote
On the other hand, interests in a general partnership or joint venture normally are not securities because of the legal power of the general partners or venturers to participate in the management and/or business operations of the entity. However, this is not absolute and, accordingly, general partnership or joint venture interests can be determined to be securities, if the partner or joint venture investor can show that the agreement leaves so little power in the hands of the partner or venturer that the arrangement is actually analogous to a limited partnership. In addition, if the partner or venturer lacks sufficient business experience and expertise needed to exercise partnership powers, or the partner or venturer is so dependent on the managerial expertise of other partners or third parties that he cannot exercise substantial partnership or venture power, the investment contract analysis may be used to determine that
such interests are securities.
//End Quote

In other words, if your investor is either naive or generally an unskilled investor then they tend rather close to the passive investor end of the spectrum regardless of what you label them in your agreements. This opens the promoter up to a whole host of issues and thus one's JV agreements should be crafted carefully by someone with legal training in securities law. Scribbling something on a napkin or twisting existing agreements you had with full-blown investors into new JVs is fraught with risk.

Intentionally hiding information from JV PARTNERS is bad news. If there is a lender involved that you intend to conceal information from that is likely bank fraud as well. So if one of your partners wants to hide the information from either the bank or "investors" (partners) you are inviting to join your investment be VERY CAREFUL. Selling an investment is not like selling a product and one needs to disclose the profits sharing arrangement in full.

[Don Konipol]

Another good informative post Bryan! The investor offering partnership participations needs to forget the "buyer beware" law of the free market. I now vett any partners I am considering to make sure that they are financially sophisticated and knowledgeable in real estate. This was harder to do when I was building an estate; now that I am more in the mode of protecting an estate I can afford to pass on partners and deals that present those kind of risks.

Not the ideal environment to support business startups that create jobs, but just a realistic assessment of where we stand today. Ah, how I long for the Reagan years.