Rental Property Investor · Washington Township, NJ · Member since 2015 · 1k+ posts · 976 votes
Not sure if I should be posting this under the Private Lending forum or the legal forum, but figured this would be a start and we'll see what sort of answers it turns up.
I'm working on writing my investment proposal to take to some additional private money lenders. These are folks I have previous personal or professional relationships with and some of whom are accredited investors, but some are also not accredited.
Curious to get the thoughts of others who have traveled down this path but what is that line where I need to be looking at a securities attorney and dealing with Reg D?
Also - What exactly is considered advertising and solicitation also? I'm guessing from the bit I've read so far that emailing and calling people I know about the opportunity to be a private lender is not a problem. However is putting a status up on LinkedIn or Facebook or BiggerPockets for that matter, explaining my business and then having a general statement like "Interested to find out how you can invest with me, contact me for more details" Is that considered advertising? These are status updates or posts or whatever you want to call it depending on the forum which are going to people that I have pre-existing connections with and doesn't in itself offer any sort of promises on return or anything. I mean after all people are on BP pretty regularly asking for private funding and it doesn't seem like it's triggering Reg D for most of those people.
I know this is a lot and probably a dense topic, but appreciate the insights from anyone who is willing to share.
When I met with a Securities attorney a few years ago, I found that selling a mortgage note would be considered a real estate transaction and not a security as long as I did not make a public offering for the note, did not fractionalize it (assigned the mortgage in it's entirety), and did not pay a commission to someone brokering the note that was not an owner and officer of my company. This has worked out for the last 4000+ transactions I have created/sold.
Thanks @Darren Eady. I guess the part I'm specifically trying to figure out is what is it that constitutes a public offering. I'll do some more research on how the SEC defines this as well...but as always it's up to case law interpretation as well, which is where the attorney's come in.
@James Masotti, I believe the three-touch rule would apply. Meet someone on BP, connect with them and email directly and they are a client that you can market to. Just don't advertise "Notes for Sale" on a specific note before building a list of people that are your clients first.
Thanks again @Darren Eady - This is definitely the part I need to explore more directly. Obviously folks on BP have an interest in real estate and many more invest through SDIRA and Solo 401(k) avenues even if they don't lend capital directly out of their bank account. Where it becomes a bit more gray for me is with regards to LinkedIn and Facebook. Sounds like I can't put out a blanket statement like "Hey everyone talk to me about real estate investing!" which makes sense...but if I target specific individuals and send them a message letting them know what I'm doing and if they'd be interested or if they know anyone who would be then this potentially meets the criteria.
This is an extremely dense topic but I'll try to give it a shot. In investment banking we typically work with companies who want to do a private placement via Reg D. This helps them work with a small amount of investors to structure a deal and also gain a competitive advantage from pricing non-disclosure. Also Reg D requires less legal work vs 144a. I'm not sure if you should look into a Reg D offering since you'll probably need to consider underwriting fees (maybe a small I-bank can do it), security counsel fees, and even potentially clearing house fees if you do it as a security. If you go the route of a loan or note, perhaps that makes more sense. Also, you can't just source money for a Reg D just anywhere - i.e. Facebook. You can only do a Reg D with accredited investors.
@Franco Li - Thanks for your input. I think you're looking at a much larger scale than I am. And from what I've gathered on the SEC site that rule 504 would permit me to target unaccredited investors as long as I'm seeking debt financing under $1MM in capital, which I would be initially. Of course part of the criteria there is to adhere to state security laws...which I need to research more as well since I'd be potentially seeking debt financing from people in several states.