Raising Money – Caution!! Solicitation and SEC rules

Be Careful!!  Sometimes it can be confusing and hard to know exactly what can and cannot do when it comes to letting investors know about certain real estate investment opportunities.  Although I am certainly not an attorney and can give no legal advice I do think it is important to share discussions I have had with attorneys and other real estate / private lending professionals and mentors I have worked with. 

The message: Be careful what you write or post online, in emails, videos, Craigslist, Facebook, Linkedin or any other public online and offline medium.  Also, be careful when meeting new perspective investors.  Soliciting for investors in most cases is strictly prohibited by the SEC (Securities and Exchange Commission).  As harmless as it may seem, to post online or place an ad such as “looking for an investor to invest in my real estate deal” or “I can pay you 9% (or whatever the rate) interest on your money” can land you in big trouble.  The SEC has been known to have no mercy for violators of these rules and in many cases imposes very stiff fines and penalties.

Why is the SEC so strict and why is this such a serious violation?  Unfortunately, in the past there have been many unscrupulous people that have taken advantage of unsophisticated investors.  The technique or example of this I’ve heard used in the past is where  the person or people with the investment opportunity have invited unsophisticated investors to a presentation at a fine dining restaurant and then used high pressure and/or intimidation techniques to get them to invest including saying things like “after all you did get this expensive lobster dinner”….    Unfortunately, in case after case, investors such as these who have been pressured or have made uninformed spur of the moment decisions have lost massive amounts of money and in many cases left them completely broke. 

For this reason, among others, the SEC guidelines now restrict solicitation to investors with previous relationships such as family, friends and business associates.  Any new relationships need to be developed before any investment opportunity of any sort is offered to new prospective investors.  Although the SEC rules do not specifically state it the generally accepted guideline used is the 30 day, 3 touch rule.    This means the investor would have been communicated with at least 3 times (email, phone calls, in person, etc.) for a minimum period of 30 days before investing in the deal presented.  One obvious reason for this is to cut down on impulsive or pressured decision making by the investor.   

So how can we get potential investors to know what we have to offer?  How can we build relationships without soliciting?  I would suggest approaching any new potential investor initially with the sole intent of teaching  Why not teach the exact strategy?  This is a good way for the investor to get to know what you do and why the strategy is a good one.  It gives the investor time to get to know and trust you, and learn from you. 

Suggestion:  On the initial contact using examples of mock deals can be effective.  On the second touch actual completed deals could potentially be used.  Not until the third touch would I present any actual offer.

Again, be very careful about how you raise money.  With new contacts teach methods and strategies.  The 30 day 3 touch rule seems to be the most accepted rule of thumb.  It’s not worth the risk of getting the attention and the wrath of the SEC. 

Until next time…Happy Lending!

Tom

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