General Solicitation (Advertising) For Private Lenders Under Many Normal Conditions Are Prohibited.
I am amazed by the fact that more often than not I will attend a networking meeting or a REIA club meeting and always hear people stand up and say “I am a real estate investor and I am looking for private lenders on this property I am buying.”
I am amazed because in many states, and in most circumstances, doing just that is against the law. Now, I am not one of those hard nosed guys who think that everything is black and white. If you jay walk or speed you are a dirty rotten law breaker.
I was a cop while I was in the military, but I have been known to speed occasionally, to tip back a few too many beers at parties, and to walk across the street in the middle of the block. But overall I am a law abiding guy, especially when it comes to business and borrowing other peoples’ funds to do my business.
According to the SEC, if you raise money for your business by selling securities you need either to register your security or file an exemption. Typically, exemptions fall under Regulation D – rule 504, 505 or 506. Which one you file depends on how much money you raise.
Most small business people raise money using the 504 exemption, with which you can raise up to $1,000,000 in any 12 month period. Also, in some states you can advertise for investors provided that you only advertise for accredited investors.
An accredited investor is someone that meets the criteria defined in Regulation D Rule 501. They have a net worth greater than $1,000,000 or an income of $200,000 per year for the last two years as well as the expectation of the same income for the current year. If the investor is married then they and their partner need a combined income of $300,000 per year for the last two years, with the same expectation for the current year.
Many states do not allow advertising at all for a rule 504 exempt investment. When you ask for money in a meeting you violate that guideline.
Often I get asked if there are people around that are enforcing that law or if it is just some technicality that no one cares about? The answer depends upon your state. We have a section of Washington State where there are state employees that are actively looking for companies that violate this rule. Other states, no one really cares until it is brought to their attention.
Most often it is just used by the prosecution if something goes wrong. Let’s say that you borrow money from a lender and cannot pay it back on time. You get your property foreclosed on and the lender then sues you for fraud. The prosecutor will pile on charges to ensure that something sticks. Kind of like being called in front of congress on a political witch hunt. You have nothing to hide so you go there and tell them everything they want to know. But you miss something or you remember something wrong and then you are convicted of lying to congress. The first charge is thrown out but the others remain and you go to jail or get fined.
So I am telling you that before you advertise you need to be aware of what is legal in your state and then stay within the guidelines and rules. If you don’t you may pay for it in the future.
Besides, lenders who know about these rules will not work with someone that does not. If you don’t know this they will wonder what else you don’t know. The good thing is there are ways to advertise and still stay on the right side of the legal line. I will touch base about that next week.
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The SEC restrictions on general solicitations for lenders also appear to apply senior settlements which are investments in insurance policy portfolios. I have been trying to find a good way to solicit qualified investors to invest in these life policy portfolios and these would not be a loan to me but simply a purchase. they are not securities according to various law suits but there are similar restrictions against general solicitation. it’s really difficult to contact people to do deals basically.