Why Is It When You Ask 3 Lawyers The Same Question You Get 4 Different Answers?
I asked my attorney a seemingly simple question: “Is A Private Mortgage Note Considered a Security and Is It subject To the Same Scrutiny by the SEC and the State?”
Seems like a pretty straight forward question and should be a straight forward answer right? Not even close. My regular attorney said that he would research it and get back to me. He said that yes according to the SEC and the “Howey” Test (SEC v. W.J. Howey Co. 1946) it met the definition of a security and that because of this it was regulated by the SEC and the State Department of Securities.
He also passed me on to another attorney who was better informed about the SEC and she proceeded to tell me the same thing and that we needed to be registered in the states that required such registration. She taught me everything I needed to know about putting together Private Placement Memorandums and how to find private lenders legally. Considering that you cannot make general solicitations to find investors. She emphasized using proper disclosures and risk assessments correctly. Basic “Cover Your Assets” disclosures for everything.
The end of last year my attorney decided to go “in-house” with a new startup company where she could take that company public. Great for her, not so good for me. Or was it?…
I spent the next couple of months looking for a new SEC attorney that could help us all out. So after finding and interviewing several I finally found one of the best in the Pacific Northwest. I made an appointment with him. Sent him a copy of my course Cracking the Private Lending Vault and proceeded to spend an afternoon and $5000 with him for consultation.
Here is where it gets tricky and it turns out that it was a very good thing for my other SEC attorney to have gone “in-house.”
My new SEC Attorney John said that even though the using the “Howey” test classified notes and debt as a security another test “Reves v Ernst & Young” (1990) further defined that a promissory note secured by real estate was not classified as a security and so therefore it was not subject to the SEC regulations as a security.
Great News right? Well maybe…
While that is the case without a couple of specific clauses written in specific ways the note could still be considered a security. Drat…
The two things are simple but not to be messed with. If you don’t have them in your promissory note then you could be in trouble when the state and federal regulators come knocking at your door.
I reveal both of them in the Cracking the Private Lending Vault course as well my complete promissory note that includes the proper clauses and disclaimers.
The one thing that John the SEC attorney said before we left was how impressed he was with the multistep marketing campaigns that I use to raise funds. Because they are designed with the SEC rules in mind he was blown away at how effective they were despite the regulations. It is a fine line but he was comfortable that it would withstand the scrutiny well.
Have a great weekend, go out and enjoy the fresh start of the new month!
Categories: Private Lending Questions |
