Raising money from friends and family

[Jeff Wilson]

Hello,

I have a small real estate business where I own a few rentals and do some fix and flips. I want to start borrowing money from friends and family in order to grow my business. My question to you is if I need some sort of real estate or investment company licence to do this? Also are there any rules regarding raising investment money like this and do I need to make sure the investors can "afford" the investment or are somehow "accredited"?

[Ned Carey]

The concern is the investment a "Security" Under federal law, if the investors are passive you have to jump through all kinds of hoops to comply with securities laws. There is no exemption for family, friends or the fact that you are only borrowing $1.00. The gurus saying 1 investor 1 property is not a security is Bull poop.

If the investors are active in the business it is not a security. But how active, how much authority? That is a gray area.

So the question becomes when does it become an issue that will be enforced.

With family and friends it will likely never be an issue unless and until someone loses substantial money.

Now state security laws vary, but many follow the federal regulations. Maryland for example is close to the federal regulations but has a $150,000 exemption. If you are only raising $150K in a year no problem. That is as long as everyone is investing in and from Maryland. As soon as you cross state lines it becomes a Federal issue. Good luck - Ned

Search the site for securities laws and you will find lots more info.