Real-Estate Deals And securities laws


When the composition of a real-estate deal that includes other investors sometimes referred to as “syndication”, must be in compliance with state and possibly the federal securities laws. When securities are issued, they must be registered or fit within the exemption. Otherwise, investors may subsequently be able to sue the principal and the state B and – or seconds can impose fines and prison sentences. Often offering is structured to fit within the exceptions in the law that would otherwise require registration of securities. One must weigh the advertising needs, whether the requirement will eliminate too many investors, whether investors come from more than one state, etc. to determine the best exemption.

definition ASecurities @

definition Asecurities @ is quite broad. Under federal law concept Asecurity @ means the A note, Stock … evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement … @ etc. California law definition basically a federal one. Note that this definition includes promissory notes secured by real estate, but there are exceptions securities laws applicable in that case.

There are some exceptions to the definition Asecurities @. Public interest groups are not considered securities, on the theory that the general partners who have the right to exercise meaningful control over the operation. Limited partnership interests, however, be considered as securities

If investors are all tenants in common (which means they are registered to work but there is no formal unit), there are no securities -. But owners who all have the same personal responsibility as if they were members. Good insurance coverage is key in this case.

interests Limited liability companies generally form securities. This is certainly true that the manager managed LLC = S. Still, there is exception under California law for the member managed LLC = S where all members participate actively in the management LLC. The California law says that Asecurity @ does not

a membership interest in a limited liability company in which the person requesting this waiver can prove that all parties participate actively in control of a corporation; provided evidence that the parties, or have the right to vote or the right to information about the business and affairs of the corporation, or the right to participate in management, shall not, without more, that all members are active on the board of a corporation. …

the definition shows, however, that members must be truly involved in the management, and not only have the right to do it.

It is not yet clear whether it is similar to the federal exemption (the cases appear to conflict), so the safer course at this time is expected to auction LLC interests to residents of different states are securities under federal law.

There is also an exemption under California law for certain secured debentures. Specifically, there is an exemption for

A promissory note secured by a mortgage on the property, which is not one of a series of notes of equal priority secured interests in the same real estate or comment as beneficial interests are sold to more than one person or entity.

This works there is just one investor at the hotel. It does not work if there are different investors secured by the same property (unless each investor will lie with priority). This is an unusual exemption in that it does not require any form to be filed with the state.

Also, if the promissory note has equity (profit) “kicker” (versus just interested), then the note is security.

Unfortunately, there is nothing comparable on the federal level.

General Rules

General position of investors (and not the state in which the entity was formed) decide what securities laws apply. For example, if you sell securities only in California, then you just need to deal with California securities laws. If you sell in other countries as well, generally you will also be in compliance with federal securities laws and the rules of the country where you sell.

Because registering offer of securities with state and / or federal agencies can be expensive and time consuming, a public offering is built specifically to comply with one or more exemptions from registration. These types of deals are often called APrivate locations @

One of the consequences of using securities exemptions, however, is B with a few exceptions -. Public advertising is not allowed. Since it is allowed, restrictions on advertising apply generally.

Another consequence of using securities exemptions is that many of them make financial demands of investors.

Finally need most securities Exemptions complete exemption application forms with relevant state / federal securities agencies. Still, this is vastly simpler than the formal registration of the offering.

California Exemptions

If public advertising is required, then either 25,102 (n) offering or California SCOR offer the offering shall be used. See How Securities may be sold discussion here about what works and does not include general advertising.

The California 25102 (n) exemption allows up to $ 5 million to raise, but only Atombstone @ (bare bones) ad, you can use B though it can be put on the website also B and only Aqualified @ buyers can invest. Complete information about the offer can only be given to those who respond to Tombstone ad and then sign a document confirming that they are qualified buyer.

If the entity making the offer is a company (receive and LLC), the qualified buyers for 25 102 (n) purposes are companies with more than $ 5 million dollars in assets, and individuals with either a) a minimum net worth (in associated with a spouse) $ 250,000 and revenues in excess of $ 100,000 or b) a minimum net worth $ 500,000. Kicker is the value of the residence will be excluded in both cases. In addition, the amount of investment each person can not exceed 10 percent of net worth individual.

The 25 102 (n) exemption can also be used with the LLC, but the investors have to meet federal A recognized invest @ standards discussed below.

Alternatively SCOR (Small Corporate Offer Registration) offer exemption. This is limited to auction up to $ 1 million. Unfortunately, California makes it much more difficult to do SCOR offering than other countries. Financial need Aopen @ gifts (as opposed to those limited to, for example, accredited investors) or gifts in excess of $ 500,000. The money raised can only be used for business, not to pay debts, and California requires a minimum price of $ 2 per share. In addition, the exemption is limited to the company (not LLC = S) with one class of stock. Finally, California requires SCOR offering qualify for a license. This means that, unlike with most securities exemptions, the state has to accept the offering before it can be done. Therefore, a SCOR offering includes California is usually not particularly attractive.

If public advertising is not required, California 25102 (f) and (h) exemptions are much easier to use.

These two exceptions have a number of similarities. Both have no limit on the amount of the tender. Both are limited to 35 investors, however, generally insiders and accredited investors are excluded from the count and spouse are considered one investor.

One major difference is that 25,102 (H) exemption is limited to companies with a single class of stock; to 25,102 (F) exemption can be used for all securities. This can be important because LLC = s are often used for investment real estate, provided that the section S corporation can not be used if its income from passive investments (such as rents) is more than 25% of the total of more than three consecutive years. Another problem with using 25 102 (H) exemption is that it is not allowed to sell a product (commissions, discounts to brokers, promotional expenses); the 25 102 (f) exemption does.

On the other hand, 25 102 (f) exemption requires investors to have substantial pre-existing relationship with one or more principals of the company or the ability to protect their own interests (alone or in conjunction with an investment adviser); the 25 102 (H) exemption has no restrictions on the type of investor. Also, while Ageneral solicitation @ is allowed with neither one, 25 102 (H) exemption makes a unique personal contact with anyone. However, 25 102 (f) exemption allows advertising to be only to individuals fairly considered in advance to meet the 25 102 (F) qualifications. What that means is that with 25 102 (h) waiver (but not 25 102 (f) exemption), letter or e-mail for the award can be sent to a list of potential investors without knowing anything about them.

Federal Exemptions

If the Offering is a population of more than one state, the federal securities laws apply as well. It means that, with the exception of federal Rule 506 offering (discussed below), for an exemption for both state securities laws and the federal securities laws must be met.

The Federal Rule 504 exemption may be attractive if the offer for $ 1 million or less, as it makes public advertising and there are no investor qualification.

If the offer is limited to accredited investors (defined below), there are approximately 40 countries that have adopted the Model Accredited Investor Exemption (Maier) B and no registration is required of them. The Maier makes public advertising Tombstone ad for investment, as the tombstone ad for California 25102 (n) exemption discussed above (though some states have variants).

The Rule 504 exemption can also be used in connection with SCOR offering or (at least in California) California 25102 (n) exemption.

The Federal Rule 505 exemption covers gifts up to $ 5 million. Although no general solicitation / advertising is permitted, there are no suitable investors. It could possibly be combined with California 25102 (h) the tender if you wanted to send a unique offering to the list of persons without knowing what their education could be. Some other states also allow the Form D / Rule 505 filing rather than having their own exemption forms, but there are fewer of these countries, but those who have adopted Maier. Therefore, Rule 506 exemption is usually much more attractive.

The Federal Rule 506 exemption does offer an unlimited amount of B but only to sophisticated or accredited investors. The big advantage of this type of auction has is that it is exempt from all state regulation (although notice must be placed in some states). In other words, no state is authorized to make any revision of the specification and may prohibit the offering. For this reason, this exemption is often used.

The offer can only be made to individual accredited investors (other sophisticated investors can invest as well as long as there is material available connections).

Basically, accredited investors

Any organization not formed for the specific purpose of acquiring the securities offered, and total assets in excess of $ 5,000,000,

Any director, executive officer, or general partner of the issuer of the securities offered or sold, or a director, executive officer, or general partner of the general partner of the issuer

every person as an individual net worth, or joint net worth with spouse concerned, at the time purchases in excess of $ 1 million,

Any person who had an individual income in excess of $ 200,000 in each of the last two years or joint income with a spouse as a person in excess of $ 300,000 in each of those years and has a reasonable expectation of achieving the same revenue year.

Although federal Regulation A exemption looks initially attractive because test the water @ provisions, the problem in California’s request for qualification B is relatively complex B must be filed with the state first. Moreover, other States = securities laws of kt. A gifts. (Reg. A offerings are also limited to a maximum of $ 5 million.) In addition, Reg. A Atest water @ auction can only be done by a licensed broker-dealer. If all offering made exclusively in California, broker-dealer only has to be registered with California; if the securities are offered to those in other states, the broker-dealer must also be registered with the SEC. Because of these limitations, Reg. A waiver is not very attractive.

who may sell securities

The general rule is that anyone who tries to sell securities must be licensed as a broker.

Fortunately, California law states that this does not apply to the officer or director of the company making the offer or the person sitting in a similar status or performing similar functions (as administrator LLC), provided that he / she does not benefits specifically related to the purchase or sale of securities. In other words, they can do it as part of the salary, but not, for example, on a commission basis.

Federal law is much the same.

All others must keep server = S license. If the auction sold only in one country, you need brokers to obtain a license in the state. If the auction is sold in more than one state, the server must have permission from the SEC as well.

How Securities may be sold

As previously proportionality with many private placements, public advertising is not allowed.

What you can do in these auctions is one contact with potential investors you consider reasonable to meet the requirements of the securities exemption. (This often involves potential investors who have a significant underlying business or social relationship with one or more of the principals). You can contact them by letter, phone, email, etc. as long as the communication is targeted to them individually. What you can not do is to run a newspaper ad, set up a Web site, go out flyers, etc. offer to sell securities. You also can not send offers to sell them on the list if you have no idea whether they qualify to be an investor. On the other hand, if for example, you are making Rule 506 deals, you can buy a list of investors from a reputable company if the company guarantees that he is pre-screened investors and had a licensed broker determine that they are accredited investors; in that case, you can contact with potential investors listed separately.

In addition, the company can provide information about themselves to the public as long as the information does not constitute an offer. In other words, as long as it is not trying to sell B or attempting to solicit an offer to buy securities B, you can provide information about what the unit is doing or intends to do.

For example, a company can have a web site that generally describes what the company is doing and say something like plans more information, click here. @ (The web site itself, of course, can not offer to sell any securities or to receive an offer to buy securities.) The link will then lead to investor questionnaires / certification and statement that it should be completed and submitted to the company. As questionnaire / certification will then review the decision made on whether a person is qualified. If and only if there is reason appears to be qualified, you can send invites and / or passwords given a special section of the website containing the offer materials.

Another option is to keep Aeducational @ courses where you indicate what the company is doing. The course, of course, can not call or request for bids to invest. You can, however, go buy a questionnaire and tell people that if they want more information about the company they need to complete the questionnaire and return it. You can also mail or email questionnaires to attendees. Forms that are returned can then be reviewed to determine which investors qualify for the offer. You can then make an offer targeting only the normal seems to be qualified.

Although the SEC is to re-evaluate the case, if the federal securities exemption is used (because not all investors from state to state), the only licensed brokers can make a decision to potential investors is qualified (unless the investor has substantive existing business or social relationship with one or more of the principal so that the principal fairly considers the potential investor is qualified). This is not the case if the offering is made only to potential investors in California.

Note that you can not just ask potential investors if they are qualified to invest. Instead, you must use the investor questionnaire and responses reviewed to determine whether an investor is qualified or not.

above article constitutes general information only and should not rely on it as legal advice.


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