Who regulates securities?
Each state regulates investments
offered to its citizens. The federal government, through the Securities & Exchange Commission (SEC), regulates offerings across state lines. This means that you'll have to look at the laws and regulations in your state when you're only working with private lenders in your state. If you're working with folks across state lines, you'll need to comply with the laws in each state you're working in and comply with the SEC's rules too.
What about advertising?
It's important to understand that each state sets its rules for advertising investment opportunities, which includes private lending. Every state has opportunities for you to advertise to bring in private lenders. There are strict regulations on this and you need to comply with the states rules.
What about advertising across state lines?
You would use a state exemption that allows you to advertise and only advertise to accredited investors. Accredited investors are defined elsewhere in this package of information. As a reminder, the Securities Act of 1933 has several definitions of accredited investors. The most important for your business are likely to be these two:
1. A natural person who has individual net worth, or joint net worth with the person's spouse, that exceeds $1 million at the time of the purchase;
2. A natural person with income
exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.
So what sort of disclosure should I give my private lenders?
When you are reaching out to private lenders, whether it's just one or a large group, it's very important that you disclose the risks and benefits of the private lending opportunity you're offering them. There are several reasons you should do this. Some are for the benefit of your private lenders, who will want to know what your business is and how they can make money lending to you.
Securities laws work to protect private lenders, so you must disclose to them what the potential downsides are. These might include how long it will take to sell a property; mortgage rate changes, housing market pricing fluctuations, or the cost of rehabbing a property. There are others you'll want to mention.
Disclosure documents will also help you protect yourself and business against possible claims that you didn't describe the business properly. A strong disclosure document will help you protect your reputation and protect you against frivolous litigation. It will also help you comply with securities laws and regulations and, should you get a question from a regulator, help you demonstrate to them you are working to be in compliance.
Commissions- Can I pay them?
The bottom line on paying commissions is: don't. Unless you are using a proper registration or exemption and using a licensed or registered broker/dealer, almost every state prohibits paying commissions for the sale of securities.
Now, in Ohio, it is possible to pay someone to help you get potential private lenders to a luncheon, but only if you pay him or her whether or not these folks end up lending you money. That means that you can't pay them based on their success rate or anything that connects their compensation to getting private lenders. Other states won't even let you do that unless the people you're compensating are registered or licensed broker/dealers.
Public Offerings- What does that mean?
It's easiest to explain what it means by explaining what a public offering isn't.
Generally, any offering that is not exempt under the private offering exemption of the securities act of 1933 (Regulation D) is a public offering. This means that if you aren't using an exempt offering, as we talk about in the course materials, then you are getting involved in a public offering. Each and every state has its own definition of exempt offerings and these aren't considered to be public offerings.
Exempt offerings are what open the door for you to run your real estate investing business successfully and in compliance.
In Summary, remember securities laws and regulations offer you many opportunities to do your real estate investing business and stay in compliance. Yes, there's going to be some paperwork that goes with these laws and regulations. It's just part of doing business, and that's what Alan's course is all about, helping you get into business and do it the right way and successfully.
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