Legal: Selling Securities to Non-Accredited New Mexicans!

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Legal: Selling Securities to Non-Accredited New Mexicans!

Marc C.
Buy-and-Hold Rental Investor · Santa Fe, NM · Member since 2015 · 438 posts · 352 votes

Did you know that New Mexico has one of the most accommodating securities laws in the country? Under the 202X exemption, investors can raise up to $2.5M from non-accredited New Mexican investors if the funds will be invested mostly in New Mexico. So, once the offering is approved by the state securities division, one could sell, say, $10,000 interests in a project to the general public, and ADVERTISE IT. This would allow the general public, instead of just rich people, to participate as passive investors in earning above-bank returns and all of the other benefits of RE ownership. That's very exciting. Legal costs for preparing the offering have been estimated to run about $10,000. 

What's interesting is I found only one example of someone in the state doing this recently for real estate (a debt offering, where the sponsor was selling debt securities which he was going to use to pay down his commercial mortgages). 

I'd really like to explore this as a way to democratize ownership of larger investment properties. 

From: http://www.rld.state.nm.us/uploads/files/Small%20O...

The 202X is a state exemption (Statute 58-13C- 202X) that permits general solicitation. The total offering, including interest on installment payments does not exceed $2.5 million. There is no limit on the number of purchasers; however the following conditions apply: The issuer’s principal office, or principal place of business or a majority of its employees or assets must be located in New Mexico. More than one-half of the offering proceeds must be used in New Mexico. An offering document must be delivered to each prospective purchaser prior to sale, disclosing such information as the Director requires; and Notice and the payment of $350 fee must be filed with the Director ten (10) days prior to the first offer. Because there is no corresponding provision in federal securities law, 202X offerings are usually limited to New Mexico residents. 202X offerings do not have to meet the substantive standards that are applied to registered offerings; however, resale of such securities is restricted.

Keywords: Albuquerque, Santa Fe, Roswell, Clovis, Las Cruces

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Jeff Greenberg
Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
10y

@Marc C. I understand that California has a similar law, but watch out for the gotcha.  Don't cross the state line with the asset or the investors.  Even if New Mexico is OK with it, IMHO the feds will not see it that way.  Keep everything in the state.

Good investing.

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  • Jeff Greenberg
    Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
    10y

    @Marc C. I understand that California has a similar law, but watch out for the gotcha.  Don't cross the state line with the asset or the investors.  Even if New Mexico is OK with it, IMHO the feds will not see it that way.  Keep everything in the state.

    Good investing.

    3Reply
  • Don Enrique
    Virtual Assistant · Alhambra, CA · Member since 2015 · 92 posts · 16 votes
    10y

    Any one have any experience with the Job Act for raising $$.

    Don Enrique

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  • Marc C.
    OP
    Buy-and-Hold Rental Investor · Santa Fe, NM · Member since 2015 · 438 posts · 352 votes
    10y
    Originally posted by @Don Enrique:

    Any one have any experience with the Job Act for raising $$.

    Don Enrique

    Hi, Don. The Jobs Act has several parts. Regulation A+, which is like a mini-IPO for mid-size companies, Regulation D Rule 506b and 506c, which are for accredited investors, and Title III, which is the new (as of May 2016) part that lets sponsors raise up to $1M a year from non-accredited investors. Rule 506b and 506c are the foundation of the real estate crowdfunding sites that have become so popular over the last 3 years. RealtyMogul.com, RealtyShares.com, and Fundrise.com are examples. 

    So far, I haven't seen any real estate companies use Title III. I imagine because of the restrictions on investors' maximum contributions: If either the investor's annual income or net worth is less than $100,000, then they can only invest the greater of $2,000 or 5% of their annual income or net worth (whichever is less) on an annual basis in crowdfunding investments. If their income and net worth is $100,000 or more, then they can invest 10% of their income or net worth. In addition, Title III sponsors have to use a registered crowdfunding platform.

    The "problem" with using other people's money to provide equity for real estate deals is that your #1 job can become investor management instead of company or property management. With hundreds of investors who've invested $2000 each, you'd almost need a full time investor manager...all that for $1M or less. 

    Meanwhile, it's never been easier to raise money from accredited investors. EVERYONE with $1M in assets is looking for returns better than "safe" investments like CD's can provide. And it's never been easier for those folks to find decent real estate investments, even if there is a $50,000 minimum, via the RE crowdfunding sites. 

    So, I just don't see how Title III is "worth it" for RE syndication sponsors. However, using your state's inTRAstate exemption from SEC registration, as I am suggesting above for New Mexicans, you might be able to raise funds from your state's public at a much lower cost than Title III, with less regulation and no required intermediary. Just depends on your state's laws and whether it has adopted a method of complying with the Rule 147 exemption from SEC registration for small local companies. Visit your state securities regulation division's web site for details. 

    1Reply
  • Matt Gee
    Real Estate Investor · Albuquerque, NM · Member since 2015 · 68 posts · 12 votes
    10y

    Mark, fascinating stuff, and you clearly have a good idea of what you're talking about.  Let me know when you're in Abq, I'd like to grab coffee and chat.

    0Reply
  • David Thompson
    Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes
    10y

    Marc,

    Have you raised $1M before ?  Looking at your statement re: never been easier to raise money from accredited investors may give newbies the wrong idea...was wondering if you have because in my experience, especially if you don't have a lot of it, a reality check is in order...see my link below.   I ended up raising $1.75M over 5 weeks and $1.05M stuck.  That's right, for a variety of lifes up and downs, folks will back out for good reasons (loss of job, death in family, divorce, etc that completely refocuses them and puts investing on the back burner). 

    I worked w/very experienced syndication team so had credibility w/the team, great deal, market.  I just don't want anyone to come at this w/a great deal, then go out thinking raising capital is easy and lose the deal because of this thinking.  Raising capital takes a plan and is a job that takes complete focus, and developing that network of investors for future deals is never ending.

    https://www.biggerpockets.com/forums/432/topics/30...

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  • Marc C.
    OP
    Buy-and-Hold Rental Investor · Santa Fe, NM · Member since 2015 · 438 posts · 352 votes
    10y

    I was referring to the fact that there are so many crowdfunding sites now for accredited investors (and so much money looking for yield). THAT is what is making it easier than ever before. Yes, I have raised funds for businesses, and you're right...it's a pain. Hence my comment that one becomes an Investor Manager rather than a Business Manager, which may not be a good thing. But, by using one of the crowdfunding sites like RealtyMogul, they put all the investors in one LLC which THEY manage, so the sponsor doesn't have to. Makes a lot of sense, although I have yet to use it.

    The important thing is: Find the deals and the money is out there. Finding the deal is harder than the money, in my experience. 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @Marc C.  I am with you on title III   non starter for real estate enless your just have some burning desire to manage a bunch of small investors .. can't see at all how that would be profitable or fun.

    @David Thompson  I can see commitment to actual funding to be along the lines you talk about that's the same reason the airlines over book the seats.. LOL.

    The toughest investor on the planet is the 50k or 100k investor..

    Syndication is all about the sponsor really plain and simple.. hard to get started but once you have a track record it certainly gets better or easier whichever you prefer.. and in my mind you need to be doing deals that are going to be quite profitable for the sponsor to make it worth the RISK and time and energy.  When these deals unwind.. ( and they do) the sponsor can find themselves in one heck of a mess)  and then wonder to them selves why they did that.

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  • Jeff Greenberg
    Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
    10y
    Originally posted by @Marc C.:
    Originally posted by @Don Enrique:

    Any one have any experience with the Job Act for raising $$.

    Don Enrique

    Hi, Don. The Jobs Act has several parts. Regulation A+, which is like a mini-IPO for mid-size companies, Regulation D Rule 506b and 506c, which are for accredited investors, and Title III, which is the new (as of May 2016) part that lets sponsors raise up to $1M a year from non-accredited investors. Rule 506b and 506c are the foundation of the real estate crowdfunding sites that have become so popular over the last 3 years. RealtyMogul.com, RealtyShares.com, and Fundrise.com are examples. 

    Just clarify 506b has been around longer than the Jobs Act, but ran under the name of rue 506.  It added on the "b" to differentiate it from 506c.  With 506b offerings you can have non accredited investors.  It is true that it is usually the smaller investor that require the most hand holding.  Even though I have never had any issues with my smaller investors, it is best to work your way up to higher net worth individuals.

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