Loop holes in SEC Regulations?

Question

Any advice on how to advertise RE deals without raising red flags with SEC regulators?

Don Konipol · Answer

Yeah, don't.  Are you talking about advertising for investors to participate in a limited partnership for the purchase or operation of real estate?  If so all investment offerings that are publically advertised must be registered - with the SEC if it is interstate - with the state regulatory agency if it is intrastate.  An exemption to registration exists under certain conditions, one of the conditions is that no general advertising or solicitation is allowed and that the offering be a private offering with 35 or less limited partners.  There are obviously nuances and legalities and interpertations within these parameters.  My suggestion is to either buy a good book on securities laws or buy 3 hours of a securities attorneys time and find out the various options.
By the way, I have been syndicating offerings for 28 years and still have questions about new issues that arise as the technology of media and communications change!

Don Konipol · Answer

To do what you propose on a small scale will not result in any action by the Federal regulators initially as there are not enough regulators to monitor or control even a small percentage of securities offerings.

The problem will only come about if you have disgruntled investors.  Once these investors contact a securities attorney your compliance with SEC regs will be carefully scrutinized.  Any non compliance issue will be used as a basis for a lawsuit.  If investors lose money and there are enough of them a class action suit may occur.

It is at this point that the plaintiff's attorney will ask for a securities registration investigation.  The very thin line between general solicitation and private placement will be the basis for much of the court arguments.

For anyone doing syndications, the council of an experienced, knowledgeable securities attorney is a neccessity.  Such an attorney can answer specific questions as to how best qualify your offering to be in compliance at the least expense.  For example, on my last two offerings I had intended to go nationwide, which would have required about $100k in expense for SEC and various state registrations.  On the advise of my attorney we did a Texas only instrastate offering, and still raised a combined total of $18 million.

Jon Holdman · Answer

The simplest answer to avoiding encounters with the SEC (or some state agency), other than the really obvious ones of not putting a blatant ad in the paper, is to be sure your investors make money.  If they don't, they get unhappy and come after you.  Hopefully its clear from these posts there is no hard and fast line.  So, its entirely possible that if you do everything your lawyer says, you can STILL end in an unpleasant discussion in a court room.  If you're trying to play as close to the edge as you can, which this very pubic "Loop holes in SEC Regulations?" post sure makes it sound like, and your investors end up losing their money, that discussion may go badly.

Jon Tarr · Answer

I think Jon and Don are right on in their posts, however as someone who was investigated by the Arizona Corporation Commission and the Attorney General.  :)

Yes, that's correct, investigated, but not sued.  Here is the best piece of advice that I can give.

Relationships don't matter!  When things go bad (and they will in some instances) you want to protect yourself with disclosure, disclosure, disclosure.  The only way to do that is to contact an attorney in your area who SPECIALIZES in SEC regulations.  Peroid!!

When the SEC or any governmanet agency comes after you, they do not care about anything other than disclosures, and in order to get the right disclosure you have to speak with an attorney who KNOWS these organizations.

It's not cheap, but if you are putting a worthwhile project together it is worth the money.

"An ounce of prevention is worth a pound of cure"

Don Konipol · Answer

There is no one answer to the question of what constitutes compliance and what doesn't.  A supreme court justice once said that he can not define pornography but he knows it when he sees it.

We can begin with the absolutes.  You approach only potential investors you have had a prior relationship with.  This is absolutely compliant and not general solicitation or advertising.  On the other extreme you place an ad on your website offering investors a 12% return if they invest with you.  This is absolutely general solicitation and advertising.

In between it gets fuzzy.  You hold a seminar on investing in your syndication and speak with attendees about investing in your syndicate. This is general solicitation. On the other hand you hold a seminar about real estate investing in general, mentioning that you syndicate real estate deals but offering no hard info nor do you ask attendees to invest.  At the end of the seminar some attendees come up to you and ask for more information on your syndication programs.  You schedule appointments with them to discuss such.  This is probably not general solicitation.

As nit picking as this seems, intent is a very important part of the compliance determination.

SEC regs have created a safe harbor for private placements (no solicitation or advertising).  The syndicate can have a maximum number of 35 non accredited investors and theoretically an unlimited number of accredited investors (the actual number of total investors is 99 because if this is exceeded compliance reaches a whole new much more expensive level).  Different states have different versions of the private placement exemption.

My advise is to find the best securities lawyer you can. Buy 2 hours of his time and find out in general what you can do and what you should stay away from.  Then draw up a specific marketing plan based on this discussion.  Present the plan to the attorney for approval and/or changes. Only an experienced securities attorney will be able to keep you safe.  I have 35 years experience syndicating deals and find out something I didn't know each time I visit with legal council!

Jon Holdman · Answer

Bryan, I do not believe you can legally do what you want to do.  I advise you seek legal guidance. You will need that to do the reg D paperwork in any case.

It's my understanding that you MUST have an existing relationship with your investors before you can offer to sell them a security.  So all your web site could do is to make contact with someone. You would then have to develop the relationship before you could broach the topic of them investing with you.  Not a lawyer, but I suspect you'll run afoul of securities law if you send them material from your web site, then do the questionaire, then make the offer.

Again, seek out an attorney who does private placements and follow their advice.

Vikram C. · Answer

As others have stated, having your final plan vetted by a good securities lawyer is a must.  I have a good securities lawyer here in AZ and his rate is $400 per hour, which is not much considering the stakes.  I am sure the rates are similar in TX.

Having the attorney vet your plan and give you a memo stating why he thinks it is legal can actually help you avoid criminal prosecution for violation of securities laws.  As you know, our federal prosecutors can sometimes be over-zealous, especially if they have politcial ambitions.  RE investors, syndicators, etc. are great targets for them to "set an example" and get some public popularity.

Bryan Hancock · Answer

Actually this wasn't my post...I did unwittingly hijack it though.

I'm not trying to skirt the law or live on the edge or anything.  I am trying to figure out what the heck the "rules" are with respect to what is considered soliciting.  Don's answer with the pornography analogy is genius and is the best explanation I have seen to date.

Everything will get checked and vetted prior to turning on the viral marketing so I think I'll be okay.

Bryan Hancock · Answer

Thanks everyone.  Our new site is planned for launch next week...for phase 1.  I am going to solicit feedback on it to see what the general consensus is about whether or not it tends toward the educational or solicitation end of the spectrum.  Your advice will be greatly appreciated.

My goal is to minimize the amount of security lawyer hours we consume so hopefully we can get it crisp and 95% of the way done prior to engaging an attorney.  V1 won't have anything that can be considered solicitation on it anyway...V2 will be where we introduce a "2nd gate" for potential investors.

The responses to this post are most informative and I appreciate you sharing your thoughts.  Hopefully this is something we can continue to do in the RE Syndication group posts.

Bryan Hancock · Answer

@Don

Are there major general solicitation rulings that you rely on for the Texas exemption that are different than what other states' laws say?  We have a big pool of investors in the State of Washington that would potentially want to participate.

Surely a process can be set up to make all of this compliant.  The internet is just a lead gathering tool.  We are happy to forge a relationship over time using a process that is documented, but you never get a straight answer about what this means from attorneys.  Is 6 months sufficient?  Do you have to talk to them 10 times?  Do you have to attend their child's functions?  The whole definition is nebulous from the get-go.

Limiting projects to accredited investors absolves us of some of the legal risk from what I have heard.  It doesn't absolve us of any of the general solicitation or anti-fraud stuff in the laws though.  We want to be fully compliant, but it is challenging when there aren't well-written requirements on this.

Does anyone know of court rulings or guidance on what is considered general solicitation?  Surely this stuff has been tried several times.

Loop holes in SEC Regulations?

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