Private Money Blueprint Coaching Program Module 5 Staying

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.

Introduction • 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

Disclaimer • No attorney – client relationship is created • Mere overview • No reliability

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.

• “Security” includes any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange……

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 • DISCLAIM • DETAILS – 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? ? ?

. T IS E S A E H • Y B RE D R O D E ER TO CE D N A S E D

There is hope…. • Real estate specific exemption in many states…

Sample Self-Executing Exemption • FLORIDA: • The exemption for each transaction listed below is selfexecuting 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.

• Investor Provides Money • You provide expertise • Investor Receives a Promissory Note • Secured by a Mortgage or DOT • Purchas e new property

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?

POOL THE MONEY! • 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!

What to do? POOLING WORKS! • • MAKE YOUR PLAN FIND INVESTORS POOL THE MONEY BUY AS MANY PROPERTIES AS YOU CAN!!! INVESTORS FEEL POWERFUL!

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 • Cover Page • States the offering price, Type of offering, Allowed investors, Minimum purchase, Summary • Securities Legends • Required text by the securities boards and SEC; Only include the legends applicable - the legends that are for the states in which you are offering the security • Suitability Standards • Accredited Investors, Unaccredited, and/or Sophisticated

Private Placement Memorandum • Summary • Risk Factors • Use of Proceeds • What the investors will get, what to expect, what the company is all about • What the risks are related to investing in the securities, related to the company, the mangement, the industry • How the investors' money will be spent, what percentages will be spent where, weather or not commissions/due diligence fees will be paid.

Private Placement Memorandum • Dilution • Company • Managemen t • How the security might be effected by internal and external circumstances. • Description of the company, its business, its plan, and its management. • Who the officers and directors are. What their experience is. What their compensation may be.

Private Placement Memorandum • Tax and Legal • Exit Strategy • Exhibits • What kind of tax treatment investors may expect; any litigation or other controversies effecting the company. • How investors may expect to be paid back and how they may redeem their interests. • Any exhibits pertaining other pertinent information or disclosures.

How much money can I raise? • As much as you want! – (but there are rules) • Thresholds: – Up to $1, 000 – Up to $5, 000 – Beyond $5, 000

What Kind of Investor? ACCREDITED SMART, RICH UNACCREDITED SOPHISTICATED NOT SO SMART, BUT NO 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 (exclusive of primary residence)

Thresholds • Up to $1, 000 • (Rule 504) • Any type of investor • As many investors as you want • Up to $5, 000 • (Rule 505) • Up to 35 Unaccredited or Sophisticated • Unlimited Accredited • Unlimited • No unaccredited • Up to 35 Sophisticated • Unlimited Accredited

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.

• ONLINE • $$ $ • PERSONA L • HIGH NET WORTH

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?