SEC Regulations When Working With Partners

[Brad Cornell]

Hey All!

My wife and I became RE investors last June when we bought a 4-unit that we are house hacking. Since then I’ve been hunting for more deals like a mad man and educating myself through books, BP, and meetups.  We’re now walking down the path of working with investors to do more and bigger deals. We’ve built a decent size network of investors and have about 500K available to work with at the moment with more available once we prove the concept. We’ve learned a ton moving this direction but I seem to be hitting a few roadblocks that I was hoping you all could help me with. 

Here's the scenario- I have four investors that I have previous relationships with, some friends and some family.  They see that I'm doing well with small multi-family investing and have said "if you find a good deal let me know and I'd love to invest."  They are looking for 3-7 year commitments and want ownership stake in the properties.  I would be the deal provider and manage the day to day operations and any rehab as well as tenant management while they would basically just inject cash.  We're looking to mostly do small to medium sized multi's for now.

The question is this, do I need to file with the SEC or is there a way to legitimately do it without the deal being a security?  I've heard several different thoughts and ideas about this entire thing, I've ready "Raising Private Capital by Matt Faircloth," scoured the forms and watched a lot of YouTube videos, but haven't gotten very far.  I'm hoping you amazing people can shed some light with your experience.

[Mauricio Rauld]

Hey Brad-  I am a syndication attorney.  Anytime you take money from investors where the returns are generated by your efforts (in other words, investors are passive and you do the work) then you are dealing with a security and must comply with both federal and state securities laws. This basically means you need to register the security/syndication with the SEC, or find an exception to registration.  Most people find an exemption and you will likely qualify (based on your email) for a Reg D, 506B b exemption.  

The only way to keep out of being considered a security is if all of you are actively involved in the deal and ideally, all co-managers of the LLC. Although with 5 of you, that might be a hard sell. Usually this works if you have 1 or 2 other investors and all of you put money in the deal and actively participate.

It will be your burden to prove to the SEC that your other partners are actively involved.

Hope this helps.

Mauricio