Usha Investment Group LLC

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How to Legally Raise Private Money; Legal Advice for Investors

Are you a real estate investor in the US looking for ideas on how you can raise private money to fund your investment projects? We have prepared this article to give you tips on how you can legally raise funds from private investors.

How can you market your offer legally to private investors? The rule of thumb is to establish relationships before you can offer the interest to investors. Alternatively, you can advertise the offerings, but then you’re restricted to only investors with certain financial qualifications who can invest with you.

For passive investors, it’s also important to understand how syndications work so that they can be in a position to identify any illegal private funding deals. As a passive investor, you need to know who the principles of the company are so that you can conduct a thorough background check. Make sure you understand how the company is structured, your role in the company, voting rights, and how often are they planning to look at distribution.

Understand waterfall clearly (when they distribute cash). How is it distributed? Who gets paid first? Who gets paid second, or who gets paid third? Read the fee structure carefully and make sure that you understand it. If you have objections to their fee structure or the waterfall structure, then maybe it’s not the right investment for you.

Also, review the risks and make sure that you understand them as they affect your ability to see a return on your investment, or get your money back at all.

Investors are grouped into two types namely, accredited investors and non-accredited investors. There were amendments to accredited investor status last year although it largely remains for individuals. For instance, to determine if an individual is an accredited investor, they must have a million dollars net worth excluding equity in their primary residents.

Alternatively, they need to have $200,000 a year income if they’re single or 300,000, if they’re a couple and the couple could be a married couple, it could be a cohabitating couple, but they’re still allowed, to combine their assets or their income. Those income requirements are for the last two years.

Also, if you’re a member of a management team of a syndicate, then by definition, you’re accredited and you can invest in your own deals.

For funding investors, certain restrictions apply for investors who are either US citizens or foreigners. Regulation D rule 506 applies to investors who are US persons. It applies to US citizens who either have their money already in the United States and they plan to use that bank account to carry out investments or they have a company that they’ve already established in the US.

Other persons are considered non-US persons and regulation D rule 506 would not apply to them. There’s a separate exemption called regulation S that applies to these non-US persons. To be on the safe side, you must perform due diligence on foreign investors before you accept to partner with them to raise private money for your real estate deals.

You can do your due diligence by visiting the office of foreign assets control O FAC to find out if they appear in the lists of prohibited persons and prohibited countries. If you are dealing with foreign investors, you will need to hire a professional to conduct due diligence for you before you accept their private money.

You will also need to bear in mind that there are specific tax implications that apply if you are working with foreign investors when investing in the US. You need to understand that each country has its own securities laws and the SC only applies to the investment carried out within the US jurisdictions.

Consider speaking to a securities attorney or equivalent in that country if you are planning to work with foreign investors to find out if there are any restrictions on who can invest with you or how you can solicit those investors.

Application of 1031 exchange in real estate syndications is very difficult as it will require you to create a limited liability company that would sell off interest to investors. In addition, the management or the syndicator would keep some of those interests to themselves for their equity contributions.

SEC laws for Fund of Fund deals are different in the sense that there are additional regulatory requirements. 

When buying direct real estate, you only need to worry about regulation D and rule 506 and the SEC rules with the fund of funds. However, some additional rules apply relating to whether you have to register as an investment company or as an investment advisor. The reason for that is when you’re buying direct real estate, there are some exceptions that to the effect that owning and controlling real estate, those aren’t securities.

Listen to the Legal Advice for investors with Kim Lisa Taylor below link