Private Money Blueprint Coaching Program

Module 5 – Staying SEC Compliant w/ Jillian Sidoti

About this presentation

• You are not going to learn this in 90 minutes, so relax.

• Securities Laws are very complicated laws that involve various state laws and federal laws.

• This presentation just gives you ideas of things you might be able to do.

• You need professional assistance to carry this out the first time, so don’t hesitate to ask for help.

• Experience in Real Estate development• Attorney specializing in private placements for

the real estate industry• Public offerings for companies in multiple

industries and countries• Professor of finance, accounting, and

management

Introduction

• No attorney – client relationship is created

• Mere overview

• No reliability

Disclaimer

First things first

Looking for “Private Lenders” = Selling Securities

Trying to call it something else…won’t work

“How many legs does a dog have if you call the tail a leg? Four. Calling a tail a leg doesn't make it a leg. “ - Abraham Lincoln

•This is not a security. The information provided herein is not intended to be for the purposes of

soliciting a security under state or federal regulations. This information is intended to give the private investor alternatives to stock market

investments, but is not intended to be a solicitation of a security under SEC rules and definitions. This is intended to be a private

borrowing transaction.

Securities Laws You Should Know

• Making it Easier to Understand:– SEC v WJ Howey Co established

what is now known as the “Howey Test”

• Is your offering a security? The answer is “yes” if the following factors are met:

• There is an investment of money;• In a common enterprise;• With the expectation of profits;• Solely through the efforts of a

promoter

Securities Laws You Should Know

• It is EXTREMELY important to carefully follow securities laws and to be sure follow the THREE D’S– DISCLOSE

• all material facts

– DISCLAIM• all potential liabilities the best you can

– DETAILS• be sure to include all relevant details and

be sure nothing is ambiguous

• WHAT COULD HAPPEN IF YOU FAIL TO FOLLOW THE THREE D’S?????

•HEREBY ORDERED TO CEASE AND

DESIST.•HEREBY ORDERED TO CEASE AND

DESIST.

There is hope….

• Real estate specific exemption in many states…

Sample Self-Executing Exemption

• FLORIDA:• The exemption for each transaction listed below is self-

executing and does not require any filing with the office prior to claiming such exemption. Any person who claims entitlement to any of the exemptions bears the burden of proving such entitlement in any proceeding brought under this chapter. The registration provisions of s. 517.07 do not apply to any of the following transactions; however, such transactions are subject to the provisions of ss. 517.301,517.311, and 517.312:

Florida, cont.

• (10)The issuance of notes or bonds in connection with the acquisition of real property or renewals thereof, if such notes or bonds are issued to the sellers of, and are secured by all or part of, the real property so acquired.

If I am looking for Private Lenders

• BEFORE you even make an offer:– Qualify the investor– Use an investor qualification form– Establish a “pre-existing” relationship

• You intimately understand the financial status of the individual or entity.

• You are aware of their ability to invest• You can accomplish this with an investor

qualification form

If I am looking for Private Lenders

• In order to invest:– Promissory Note– Deed of Trust or Mortgage (depending on the state)– Required: disclosure document– Subscription Agreement

Disclosure Document

• What it says:– All the risks– History– Exemptions used– Terms and Conditions of investing

Record Keeping

• Every investor file should have the following:– Executed Investor Questionnaire– Executed Subscription Agreement– Executed Promissory Note– Copy of check or wire

• Every company should have the following:– Copies of FORM D’s– Copies of U-2’s– Master Investor list/spreadsheet

Why do I need an attorney

• If you needed an appendectomy you would not give it to yourself. That would be silly. Same goes for the law.

• You can’t possibly know all the rules for every state.

• Securities laws are complicated and hard to read. They don’t make much sense unless you know what you are looking for.

• Why concentrate on this when you should be concentrating on your core business?

Pooling vs. Specific Property

How do I do this without a property?

• HOW?– You don’t need to

identify any properties– You don’t need a bank– You don’t need hard

money lenders– You just need a PLAN

FOR INVESTORS!

POOL THE MONEY!

What to do?

POOLING WORKS!INVESTORS FEEL POWERFUL!

• MAKE YOUR PLAN• FIND INVESTORS• POOL THE MONEY• BUY AS MANY

PROPERTIES AS YOU CAN!!!

Moving to bigger deals

• Sample property:• 65 units• Louisville, KY• $2,050,000• $550 per unit rents• 70% LTV with 8%

• Assumptions:– 5% vacancy rate– Management 4% of

gross– Other expenses =

$200,000– = NOI of $375,598*

*Not including debt service

Compare to SFR

Apartment financing• Mortgage: $10,925.00

• Income: $31,299.00

• Profit: $20,374.00

SFR financing

• Purchase price of $155,000

• Rent of $800• Expenses of 10%

(probably more) - $80 per month

• Mortgage: $796.00

What do I need to do this?

• Either a specific property or a business plan to purchase properties

• A “PRIVATE PLACEMENT MEMORANDUM” (this is your OFFER)

• Subscription Agreement• Investor Questionnaire• Supporting Documents• Need to file FORM D with states and possibly SEC• Need to file U-2 with certain states

Private Placement Memorandum

Private Placement Memorandum

Private Placement Memorandum

Private Placement Memorandum

How much money can I raise?

• As much as you want!– (but there are rules)

• Thresholds:– Up to $1,000,000– Up to $5,000,000– Beyond $5,000,000

What Kind of Investor?

ACCREDITED UNACCREDITED SOPHISTICATEDSMART, RICH NOT SO SMART,

NO SO RICHSMART, BUT NOT

SO RICH

What is Sophisticated?

• For those investors that want to be considered “sophisticated”, not only must they be sufficiently sophisticated to fully understand the risks involved with the investment, the investor also must be able to bear those risks. Of course, the ability to bear risks, standing alone, does not satisfy the suitability rule. In Re. Dambro, 51 S.E.C. 513, 517 (1993)

What is Accredited?

• Single person makes $200,000 per year

• Married couple makes $300,000 per year

• Net worth of $1,000,000 (exclusive of primary residence)

Thresholds

Questions section maybe? How can I find Private Lenders or

Investors?

•This is not a security. The information provided herein is not intended to be for the purposes of

soliciting a security under state or federal regulations. This information is intended to give he private investor alternatives to stock market

investments, but is not intended to be a solicitation of a security under SEC rules and definitions. This is intended to be a private

borrowing transaction.

So what should be on my website?• Information on the properties you actually own

– Be clear, don’t “color” the truth

• Information on the principals• Mission Statement• Contact information• Investor Qualification • Education

What shouldn’t be on my site?

• Guarantees or words like “safe” and “secure”• Overt requests for money• Details on your offering – too many details can

be construed as a general solicitation• Promises of certain returns

Things to remember

• Seek professional advice…don’t go it alone!• Start small, build confidence• Set the terms of the investment opportunity,

don’t let your investors dictate YOUR business.• You can do this! You just have to find what’s

right for you.

Questions?