Raising capital without being subject to SEC syndication

[Scott Jenkins]

During studying for the CPA exam over a decade ago, I first encountered SEC rules for raising capital and syndication. But I'm not interested in syndication. I am reasonably proficient at finding local friends to invest in deals. But no where have I been able to find guidance on raising capital while "avoiding" SEC solicitation rules. Has anyone run across a great book, video, or resource on this topic? Am I able to solicit "friends" on Facebook or LinkedIn or biggerpockets for that matter without risking SEC conflict. Most on Facebook are at least acquaintances, but what level of familiarity must I have with someone? I never seek more than a few investors from friend pools. Is there a limit on the number of people I can seek as investors? I set up separate entities with GP/LP structure on deals.

[Brian Burke]

Scott I’ll ask your question a different way.  “Back when I got my driver’s license, I learned about the rules of the road.  Now I have a new car I’d like to test out—is there a way I can drive it without following those pesky rules?”

As a former police officer I can answer that with a fairly confident “no.”  As a fellow real estate investor who funds all deals with investor money, I can also answer “no.”

The regulations surrounding the raising of money simply state that if you sell securities, the securities must be registered unless they qualify for an exemption.  And, securities are inconveniently defined as raising money from others.

Registering your securities is prohibitively expensive, so your only option is to qualify for an exemption, which is how nearly all operators raise funds.

Qualifying for an exemption means that you have to follow a specific set of rules, and there are things you can do and things you cannot do, and there are investors you can accept, and investors that you cannot.  Research 506(b) and 506(c) here on BP and you’ll find plenty of guidance.

The bottom line is, you can raise money, just have a lawyer that specializes in this field help you and it won’t be all that hard.  Follow their advice and you’ll be fine.  Their advice might also tell you that if you and a few good friends (who do not have to be accredited) want to collaborate on a real estate deal you can do it with a simple partnership agreement and that’s it.  If they are just Facebook friends, Instagram followers, etc., that wouldn’t qualify for the type of friends I’m thinking of.  You’d have to follow the securities framework.  But every situation is different and some lawyers might have a different tolerance for practical risks, so your mileage may vary.