How to Play by the SEC’s Rules in Real Estate

Posted on Dec 14 2015 - 10:13pm by Lance Edwards
Lance Edwards. President, First Cornerstone Group, LLC.

Lance Edwards, President, First Cornerstone Group, LLC.

BY LANCE EDWARDS— You need to realize that when you are out raising money you are creating an investment product. Keeping that in mind, there are some rules that you have to adhere to. As you become more successful at closing deals and raising bigger monies, you come closer to limits set by the Securities and Exchange Commission.

You will need to consult with a securities attorney to get all your questions regarding this area answered but there are some things that are definite and others that are not.

It is always smart to play well within “bounds” to avoid being called to task by the SEC.

Each state has its own regulations when dealing with its investors. Generally speaking, it is easier if all of your investors are located in one state. When you start crossing state boundaries, then you get into a grey area.

There are, however, key words to remember when you are getting into “out of bounds”:

General Soliciting: An example of this would be to run a radio ad in Los Angeles soliciting people to become investors in apartment projects. These would be people you don’t know, on a broad scale.

Where you get into trouble with this is when something goes wrong on a project and an investor files a complaint. If you had 10 disgruntled investors and they file a securities fraud complaint, then you have a problem.

This is where referrals are extremely important. Only work with people that you know or people that know you through a mutual contact. This way, you are staying within a defined group. You are working with people that you have a relationship with.

The biggest concern is when your investors are not active participants. It is more like a security when they are passive participants and don’t have a specific role.

Defined group: This group includes family, friends, colleagues, charity contacts, people from church, real estate club contacts, existing relationships, and referrals. If you really want to raise big money, join a charity and become a part of their fundraising drive and get in contact with the major contributors.

By becoming a part of a charity, you have created relationships. You are giving back and it’s a way to have access to private monies with a defined group of people who are most likely accredited.

The main thing to be aware of is that there are rules. Some of these rules fall under a grey area so it is always smart to stay within the defined areas. When in doubt, consult an attorney.