How do you legally structure angel funds from friends and family?

[Jeff Rice]

Trying to fund my first investment property via friends and family.

I don't currently have an LLC as it is harder to get a biz loan than a personal loan considering I have no biz history of successful investments. I'm wondering if I should structure my incoming angel investments as loans, partners/cosigners, or something I'm not considering.

My plan is to pay back different %'s on their initial investment depending on how much coverage I provide them. Aka. I will guarantee some or all of their investment for lesser payout of the earnings on the flip. I'm not liquid, so my guarantee on their investment would have to be liquidated and paid out if my flip flops. That is why I would prefer to fund this project via friends and family than out of pocket.

I know I don't have to guarantee any of their initial investment but I figured it would lower the barriers to entry for my friends/family.

How should I go about legally/financially structuring my relationships with these investors/loans?

Any help would be appreciated!

[Sean Morrison]

Disclaimer: I am an attorney, but I am not your attorney. This is not legal advice, just friendly information.

Sounds like you're describing a "friends and family" round of investing. Most people forget this, but any time a person invests money into a project that (a) they are not managing or (b) is not fully secured, then it's a sale of securities and regulated by the SEC. That goes for stock, partnership ownership, and even debt. Typically, a friends and family round can use the Rule 504 SEC exemption if it follows those strict rules, but it will also need a state-level exemption for any states where an investor resides.

As you can see, it's more complicated than simply taking people's money.