SEC Registration for Note Fund?

[Jonathan Dicent]

Hello All,

I'm curious to know if you wanted to start a Limited Partnership to invest in notes and/or tax liens, is that something where you would need to register with the SEC or some other regulatory body? Whether that be off the bat or if you begin managing pass a certain amount of funds? Thanks in advance!

[Don Konipol]

@Jonathan Dicent

Registration with the SEC is an option, but the legal costs are prohibitive for all but the largest funds that want to be public ally owned. The minimum for a full registration of a startup is $250,000 in costs, but $500,000 is more likely.

Most funds operate under an EXEMPTION from registration. The two most popular exemptions are for intrastate only operation and for private offerings.

If your offering is made available only to people you have a previous financial relationship with, use no advertising or solicitation, and all of your investors are either accredited or sophisticated, you have met the requirements for a private offering and no need to register the offering with the SEC.

Of course, the above is a basic simplified explanation of the general private offering. The problem with reliance on the general private offering is that you have no idea as to whether the SEC will agree that you have met the requirements for an exempt general private offering because no guidelines have ever been published. Further, you will be subject to the numerous and various fraud, securities and trade laws should you be sued by a disgruntled investor.

Forty some years ago the SEC decided to rectify this situation by creating a well defined private offering exemption from registration offering option known by to rule numbers Regulation D 504, 505 and 506. 506(b) became most popular, 506(c) was added to accommodate internet offerings about 6 years ago.

The gist of compliance with Reg D is the issuance of a private placement memorandum, the acceptance of only accredited investors as investors, disclosure requirements, and the filing of a Reg D form with the SEC, as well as notification filings with the individual states where the investors reside.

The cost of the Reg D all in, mostly legal and filing fees, ranges from $10,000 to $25,000. The advantages are that your offering will be considered by the more sophisticated investors that won’t consider offerings relying on the general exemption for private offerings; the Reg D offerings are exempt from state securities laws and regulations; that if compliance is met you have a statutory and definitive defense if sued; and that by definition you are in compliance with SEC regulations and don’t have to worry about SEC taking action against you because of noncompliance issues down the road.