Using private money from multiple sources as debt

[Joshua Nackenson]

What is the legal/logistical structure to fund a deal using private money from multiple sources? It would seem that if getting debt together from say 5 private individuals the security of being in 5th position on a property is basically nonexistent. I was speaking with an investor recently who mentioned he managed to pool together the funds from investors as debt. Sort of like a syndication but not providing any equity. Since this wouldn't be equity I don't believe it would fall under standard SEC rules for syndication. I'm wondering if someone can point me in the right direction on how to set up something like this and logistically what it would look like for the investors/lenders -- would I need to form a separate LLC which essentially acts as a debt fund but only for this 1 specific project?

[Chris Seveney]

@Joshua Nackenson

Debt vs equity is not considered regarding sec regulations. There are debt funds and equity funds and all must follow the same rules. Look up the howey test:

The Howey test consists of four elements often referred to as prongs. According to the test, a transaction is a security if it is (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profit, or (4) to be derived from the efforts of others

If you have multiple investors who are passive and they are not loans in positions 1-5 and are getting a return, this would require you to file with the sec. The most common is a 569b or 506c which gives you the exemption. To do this will cost $15-25k to setup.

I believe in California you may be able to pool up to 10 people without registering but don’t hold me to that.