Article by Alan Cowgill
When you pool money from private lenders, you’re putting funds together from two or more different private lenders.
You obviously need to look at doing something different where your state’s paperwork is concerned. This means you will need to file paperwork with your state and provide a disclosure document to your potential private lenders.
In Ohio, for example, we have what is known as 6(A)1 filing. This filing allows for pooling private lenders’ money in running your real-estate investment business. This filing also allows advertising and unlimited private lenders.
Remember, securities laws and regulations vary from state to state and the Federal SEC has its own set of laws and regulations.
Pooling money occurs when you combine funds from two or more different private lenders.
You should use or form a new business entity. You should choose a corporation (which could be an S-corporation) or an LLC. Some states have different filings available depending upon whether you have a corporation or an LLC, and LLC’s are sometimes treated as partnerships. Most states won’t allow you to pool money when you’re operating as a sole proprietorship or DBA.
You cannot use your state’s exemption for real-estate transactions, similar to Ohio’s 3(H) exemption, when you pool lenders together. You cannot use this particular exemption because there is no paperwork involved. In Ohio, you must “upgrade” to the 6(A)1 form, which allows pooling. All states have similar paperwork levels. You should use one of your state’s filings that allow for pooling money.
These filings require you to fill out paperwork, informing the state regulator about your business and what you’re doing. It usually requires you to disclose information to your potential private lenders, which is for your benefit as well as your private lenders’ benefit.
You’ll pay a fee to your state regulator when you file your paperwork.
One of the things I’ve taught my students and continue to stress is that you shouldn’t be pooling money from private lenders unless you make sure you’re in compliance. In order to be in compliance with your home state’s securities laws, you’ll need to find the proper exemption, filing or registration option and comply with its requirements.
The following is some general information on staying in compliance with your state’s requirements.
When you use an exemption to bring in private lenders, you are making an offer and sale of a security. It’s important to understand that an offer to sell is usually treated the same as a sale when it comes to securities compliance.
Two key concepts to understand when you sell securities are that there are exempt securities and there are exempt transactions. Whether you’re selling stock, equities, borrowing money, or debt, these are treated as securities. An exempt security usually means a security issued by a governmental agency or authority.
An exempt transaction refers to the sale of a security not issued by a government agency that has been given an exemption under state law (or federal law) because of the nature of the security and how it’s sold.
Many of my students are basing their compliance on the exemptions in their states that are similar to the one in Ohio found under 3(H):
Ohio Revised Code, Chapter XVII, Title 1707.03(H) The sale of notes, bonds, or other evidences of indebtedness that are secured by a mortgage lien upon real estate, leasehold estate other than oil, gas, or mining leasehold, or tangible personal property, or which evidence of indebtedness is due under or based upon a conditional-sale contract, if all such notes, bonds, or other evidences of indebtedness are sold to a single purchaser at a single sale, is exempt.
Remember, these are still securities, and the sale of these securities can be exempt under securities laws in Ohio. Compliance with the offer and sale of these securities is still required.
Some states may offer you more than one choice, so you’ll want to evaluate those choices.
Alan has done hundreds of real estate deals using private money and will show you how you can do it too at our conference next month. You can catch Alan’s presentation on Friday, February 22nd at 10:10am at Devos Place (River Overlook E-F) in Grand Rapids.