Private Money solicitation

[Roger Poulin]

I went to a real estate auction that was not far from were I live. A guy that had a huge estate died, someone bought it and split it into 5 ac lots.   I went mostly to network, but I was ready to buy. The sale requires payment in 5 days, so the people buying had to have access to cash quickly. I registered at the check-in tent to get a bidder number, and saw they had a list of all the bidders on a yellow pads. I asked if I could take a photo of the pages. The nice lady at the table grabbed the pads and made photo copies of all the pages.  So now I have names and addresses of 89 people that potentially could get their hands on money quickly.  

Would it be out of line to send each a letter asking them if they ever considered private lending?

Would it violate SEC syndication rules?

How would I word such a letter?

Thanks in advance

[Jillian Sidoti]

Here is an article I wrote. I hope this helps: 

Using Private Money Lenders: is it exempt from securities law?

There is a plethora of education and “how to’s” in the world of real estate education that claim that if a real estate entrepreneur uses a private lenders and secures such a transaction with a piece of real estate with the use of a mortgage or deed of trust, such a transaction is exempt from any kind of securities registration.

This is somewhat true but is not always true. In this article, we are going to explore when you can rely on the deed of trust and mortgage and when you should consult a securities attorney for your real estate transaction.

How do I know it is a security in the first place?

The Securities Act of 1933 was established as part of FDR’s new deal, post-Great Depression to require either a registration of securities or exemption therefrom. However, in 1946, the WJ Howey case gave guidance on what a security actually is by establishing an easy to use test:

• 1.There is an investment of money.
• 2.In a common enterprise (more than one investor).
• 3.With the expectations of profits.
• 4.Through the efforts of a promoter. (In other words, the investor is passive.)

If you fit all of these points, then you are a selling a security and go to the next step.

Are you crossing state lines?

The Securities Act of 1933 is the big federal law that rules the land when it comes to securities and securities transactions. Particularly, it matters when your property is in one state and the investor is another state. For transactions or notes that are secured by a deed of trust or mortgage, there is no federal exemption. Thus, you must make proper disclosure to the investor and perhaps file a FORM D with the Securities Exchange Commission (SEC.)

What are the rules in your state?

Most states do have what is called a “self-executing exemption” when it comes to notes secured by mortgages or deeds of trust. However, there are rules.

NO GENERAL SOLICITATION – meaning there cannot be any advertising for the private money lender. You must establish a substantive, pre-existing relationship with an investor prior to making an offer to them.

MUST BE SECURED BY A DEED OF TRUST OR MORTGAGE – therefore an unsecured promissory note will NOT work.

NO COMMISSION PAID FOR FINDING THE INVESTOR – this is good advice.

ONLY ONE INVESTOR ALLOWED – In other words, you can NOT have more than one person on the note, you cannot fractionalize it, and it cannot be a 1st, 2nd, 3rd, etc. One note, that’s it.

Do not try to skirt these rules. Several years ago, a client of mine had recorded multiple investors on a mortgage. The securities commission in that state had a habit of perusing recorded documents like these notes and found multiple, unfamiliar lenders on my client’s note. The securities commission swiftly sent out a subpoena followed by a cease and desist attached to a hefty fine of $5,000. These types of simple violations are a great way for states to generate revenue.

Which states do not have an exemption?

Alaska, Arizona, Arkansas, Florida, Kentucky, Montana do not have an exemption like this meaning you have to find another exemption or register the security. Furthermore, those in Illinois should be aware that Illinois has some stricter rules.

So what should I do?

Regardless of whether or not you are afforded an exemption for your private lender transaction you should practice the following steps:

• 1.Provide full disclosure to your investors. Make sure they are apprised of all the risks associated with investor and understand the terms and conditions of the transaction.
• 2.Provide your investors with a written note. The note should discuss the terms, the rate, the maturity state, and the security interest.
• 3.Actually record the deed of trust or mortgage. Failure to do this with ruin any exemption that you have.