|Posted on March 21, 2018 at 1:10 AM||comments (0)|
Many companies rely on a business plan or executive summary to serve as the basis for their investment. This does not provide the basis for compliance with state and Federal rules and any capital raised may be in violation of state or Federal rules.
Regulation D is an exemption that allows companies to raise capital though the sale of equity or debt securities without registering with the SEC. Start-ups typically choose the Rule 506(c program because it allows general advertising and solicitation. Companies can now execute a “public offering” of their private placements with straightforward compliance benefits of a traditional Regulation D offering.
The 506(c program allows a client to execute a public offering of securities while retaining the benefits of a Regulation D exempt private placement.
The 506(c exemption allows an issuer to engage in general advertising and solicitation of accredited investors for the securities offering. It is important to note that the current 506(b program is still available for issuers that do not need the capability to engage in general solicitation. The 506(c program allows a client to execute a public offering of securities while retaining the benefits of a Regulation D exempt private placement.
|Posted on May 13, 2017 at 12:50 AM||comments (0)|
Unregistered Real Estate Exempt Offerings
Using our template for a general partnership with a specific purpose you do not need to pay and wait for Regulation D exemptions. Private Placement Advisors LLC employs a general partnership vehicle to avoid almost all review by regulators. With no limited partnership or other passive interest created, no security is formed. This particular template is designed for real estate lenders and borrowers. To learn more about the advantages of unregistered, non-exempt private placements, contact [email protected]
|Posted on March 22, 2017 at 1:55 AM||comments (0)|
A crowdfunding intermediary must register with the Securities and Exchange Commission (SEC) as a broker or as a funding portal and become a member of a national securities association (FINRA). The following crowdfunding intermediaries are registered with the SEC as funding portals and are funding portal members of FINRA.
SEC File No.: 7-11
Website URL(s): https://crowdboarders.com
11625 Custer Road, Suite 110
Frisco, TX 75035
SEC File No.: 7-27
3753 North Pine Grove Ave., # 2
Chicago, IL 60613
DreamFunded Marketplace, LLC
SEC File No.: 7-37
Website URL(s): https://www.dreamfunded.com
425 Market Street, 22nd Floor, Suite 30
San Francisco, CA 94108
SEC File No.: 7-92
Other Name(s): www.equitybender.com
12 Skysail Drive
Corona Del Mar, CA 92625
First Democracy VC
SEC File No.: 7-76
Website URL(s): https://microventures.com
2905 San Gabriel Street, Suite 212
Austin, TX 78705
FlashFunders Funding Portal, LLC
SEC File No.: 7-9
Website URL(s): https://www.flashfunders.com
15260 Ventura Boulevard, 20TH FLOOR
Sherman Oaks, CA 91403
Funding Wonder Crowd, LLC
SEC File No.: 7-70
Website URL(s): https://fundingwonder.com/
175 SW 7th Street, Suite 1800
Miami, FL 33127
SEC File No.: 7-65
Other Name(s): FundpaaS, Inc. d/b/a Custvestor
Website URL(s): http://www.custvestor.com/
101 California Street, Ste 2710
San Francisco, CA 94111
SEC File No.: 7-18
Website URL(s): http://gridshare.com/
2607 NE 13TH Avenue
Portland, OR 97212
GrowthFountain Capital, LLC
SEC File No.: 7-28
Website URL(s): www.growthfountain.com
75 Chambers Street, 6th Floor
New York, NY 10007
Indie Crowd Funder, LLC.
SEC File No.: 7-10
Other Name(s): IndieCrowdFunder.Com
Website URL(s): http://www.indiecrowdfunder.com
1901 Avenue Of The Stars, 2nd Floor
Los Angeles, CA 90067
Jumpstart Micro, Inc
SEC File No.: 7-8
Website URL(s): http://www.jumpstartmicro.com
101 Great Road
Bedford, MA 01730
SEC File No.: 7-42
Other Name(s): Mr. Crowd
Website URL(s): https://www.MrCrowd.com
1046 West Kinzie Street, Suite 300 - #372
Chicago, IL 60642
SEC File No.: 7-20
Website URL(s): http://minnowcfunding.com
3550 Wilshire Blvd., #1926
Los Angeles, CA 90010
SEC File No.: 7-36
Website URL(s): http://neighborcapital.org/
4622 3rd St.
San Francisco, CA 94124
NetCapital Funding Portal Inc.
SEC File No.: 7-35
Website URL(s): https://netcapital.com/
430 North Street
White Plains, NY 10605
NextSeed US LLC
SEC File No.: 7-23
Website URL(s): https://www.nextseed.com/
4101 Greenbriar DR, Suite #122K
Houston, TX 77098
NSSC Funding Portal, LLC
SEC File No.: 7-12
Other Name(s): Small Change
Website URL(s): https://smallchange.com/
945 Liberty Avenue, Unit 605
Pittsburgh, PA 15222
SEC File No.: 7-46
Other Name(s): Republic
Website URL(s): www.republic.co
New York, NY 10012
SEC File No.: 7-26
Website URL(s): https://www.razitall.com/
411 King George Rd, SUITE 101, #325
Basking Ridge, NJ 07920
SI Portal, LLC
SEC File No.: 7-29
Website URL(s): https://www.seedinvest.com
222 Broadway, 19th Floor
New York, NY 10038
Sprowtt CrowdFunding, Inc.
SEC File No.: 7-44
Website URL(s): https://www.sprowttcf.com/
500 E. Kennedy Blvd., Suite 3003
Tampa, FL 33602
StartEngine Capital LLC
SEC File No.: 7-7
Other Name(s): StartEngine
Website URL(s): https://www.startengine.com/
925 North La Brea Ave
Los Angeles, CA 90038
SEC File No.: 7-15
Other Name(s): TRUCROWD; FUNDANNA
Website URL(s): http://www.us.trucrowd.com/https://fundanna.com/
318 W Adams St, STE 1121
Chicago, IL 60606
Wefunder Portal LLC
SEC File No.: 7-33
Other Name(s): Wefunder
Website URL(s): https://www.Wefunder.com
1 Broadway, 14th Floor
Cambridge, MA 02142
|Posted on February 25, 2017 at 7:05 PM||comments (0)|
Will Regulation A+ be a more popular choice for smaller companies than Regulation D?
Rule 506 of Regulation D is the most widely used capital raising exemptions under the US securities laws, largely due to its flexibility. Regulation A+ provides a new way for smaller companies to raise capital and get some liquidity in their securities. However, if a company is confident that it can raise money through the traditional Rule 506 private placement, it may still want to avoid the SEC review process, the hassle of Blue Sky compliance under Tier 1, and the ongoing reporting obligations of Tier 2. The new Regulation A, commonly referred to as Regulation A+, is a significant improvement over the old Regulation A, which was rarely used in any event.
The old Regulation A permitted exempt offerings up to $5 million in any 12-month period, including up to $1.5 million of securities offered by security holders of the company, while the thresholds of Regulation A+ are much higher. There are two tiers for Regulation A+: Tier 1, for offerings up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, for offerings up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer.
Although Rule 506 does not provide an opportunity for selling security holders to participate in the offering, it does not have any caps on the amounts that can be raised, and, while any company, public or private, US or foreign, can raise capital under Rule 506, under Regulation A+ only a US or Canadian issuer that is: a) not a reporting company under the Securities Exchange Act of 1934, b) not an investment company, and c) not a blank check company is considered an “eligible issuer.” Still, in some instances, Regulation A+ appears to be more accommodating than Rule 506.
For example, while Rule 506(b allows an unlimited number of accredited investors, it allows only 35 non-accredited investors. However, Tier 1 of Regulation A+ does not have any limitation on the number or type of investors, but Tier 2 imposes a per-investor cap for non-accredited investors of the aggregate purchase price to be paid by the purchaser for the securities to be no more than 10% of the greater of annual income or net worth for individual investors or revenue or net assets most recently completed fiscal year for entities.
In addition, Regulation A+ allows issuers to “test-the-waters” by trying to determine whether there is any interest in a contemplated securities offering (assuming such practice is allowed under applicable Blue Sky laws for Tier 1 offerings), Rule 506(b does not allow for general solicitation and advertising, though of course Rule 506(c does.
The biggest downside of Regulation A+ is that Blue Sky registration requirements are not preempted for Tier 1 offerings, which significantly limits offerings in multiple states, while such preemption does exist for Rule 506 offerings (as well as Tier 2 of Regulation A+ offerings.) But note that the welcomed flexibility of doing nationwide offerings under Tier 2 comes with a heavy price tag of ongoing reporting. After a Tier 2 offering, an issuer must file with the SEC annual reports on Form 1-K, semi-annual reports on Form 1-SA and current reports on Form 1-U (within 4 business days of the event). Interestingly, the SEC has observed that companies may “voluntarily” file quarterly financial statements on Form 1-U, but the practical effect of desired compliance with Rules 15c2-11 and Rule 144 to maintain placement of quotes by market makers and re-sales of securities, will lead to “voluntary” quarterly reporting becoming essentially mandatory.
Rule 506 offerings are accompanied by private placement memoranda or PPMs, (even when offerings are solely to accredited investors) to protect issuers from Rule 10b-5 liability under the Exchange Act.. Still, there is no prescribed format for such PPMs and they are not reviewed by the SEC. With Regulation A+ offerings, an issuer must file Form 1-A (a “mini” registration statement) through EDGAR with the SEC. First-time issuers are eligible to initially do a non-public submission of a draft of Form 1-A. Such Forms 1-A are subject to the SEC review and comment process, which increases the cost of the transaction and extends the time from the beginning of the transaction and the closing.
Private Placement Advisors LLC
|Posted on February 23, 2017 at 7:55 PM||comments (0)|
We are giving away any 3 of our 15 audio handbooks in exchange for reviews. All we ask is that you give the narration a 1 thru 5 star rating that is fair at Audible.com.
Choose any 3 of the audio handbooks below. Send an email to [email protected] and tell us your selections. We will email you the promotion codes and instructions on how to use them.
1) Crowdfunding on Steroids
2) Regulation Crowdfunding
3) How to Finance a Marijuana Business
4) Medical Marijuana Delivery Handbook
5) Hedge Funds for the Rest of Us
6) Crowdfunding Law
7) Business Brokers and Securities Laws
California Real Estate Exempt Offerings
9) California Real Estate Blind Pools
11) Exempt Offerings
12) Securitized Real Estate and 1031 Exchanges
13) Guide to the JOBS Act
14) Marijuana Money
15) Health, Wellness & Cannabis: A Cookbook
Choose any 3 of the above audio handbooks. Just tell us what you want at [email protected] We will email you the promotion codes to listen to the 3 titles. This offer is limited to the first 25 requests for each handbook.
To purchase audio handbooks on the JOBS Act and exempt offerings go to
About the author:
Douglas Slain specializes in crowd financing under the JOBS Act. He helps small businesses identify and solicit sources of private equity. He also manages a LinkedIn discussion group, State Securities Regulation, with almost 1600 members. After getting a JD from Stanford Law School, Doug practiced law in San Francisco and founded four national appellate law-reporting services now owned and operated by Thomson-Reuters.
Connect with Douglas Slain:
Web site: http://privateplacementadvisors.com
|Posted on December 9, 2016 at 5:20 PM||comments (0)|
Secondary Market in Exempt Offerings
The exempt offering secondary market, largely governed by Rule 144A, is growing rapidly.
What is Rule 144A?
The following transactions are conducted under Rule 144A: a) offerings of debt or preferred securities by public companies; b) offerings by foreign issuers that do not want to become subject to U.S. reporting requirements; and c) offerings of common securities by non-reporting issuers (i.e., “backdoor IPOs”). An issuer who intends to engage in multiple offerings often has a “Rule 144A program.” Rule 144A programs are established to offer debt securities on an ongoing basis. They are similar to “medium-term note programs,” but they are unregistered and can be designed for sales to QIBs.
Among the advantages of using Rule 144A programs are (1) no public disclosure of innovative structures or otherwise sensitive information; (2) fewer FINRA filing requirements; and (3) reduced liability exposure under the Securities Act. Rule 144A is a non-exclusive safe harbor. A reseller may rely upon any applicable exemption from the registration requirements of the Securities Act in connection with the re-sale of restricted securities. In addition, Rule 144A offerings often are made side-by-side with a Regulation S offering (targeted at foreign investors). This permits an issuer to do a multinational offering with a QIB tranche and a Regulation S tranche, and to sell to an initial purchaser outside the United States in reliance on Regulation S, even though the purchaser anticipates and intends immediate resale to QIBs, in reliance on Rule 144A. Rule 144A provides that re-offers and re-sales of exempt offerings or private placements in compliance with the rule are not “distributions” and that the re-seller is therefore not an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act.
A re-seller who is not the issuer, an underwriter, or a dealer can rely on the exemption provided by Section 4(1) of the Securities Act. Re-sellers that are dealers can rely on the exemption provided by Section 4(3) of the Securities Act of 1933. Issuers must find another exemption for the offer and sale of unregistered securities. Typically they rely on Section 4(2), in reliance on Regulation, or on Regulation S. Affiliates of the issuer may rely on Rule 144A. Re-sellers not eligible for the safe harbor under Rule 144A need to rely on the Section 4(1½) exemption. What is a Section 4(1/2) exemption? If an accredited investor cannot qualify as a “QIB” under Rule 144A, it will seek to use the Section 4(1½) exemption for secondary sales. A Section 4(1½) exemption is a case law-derived exemption that allows private placement re-sales of private placement offerings. Re-sellers rely on Section 4(1), which provides an exemption for non-issuers, underwriters, and dealers, to avoid underwriter status by implementing restrictions that would be required in the case of a Section 4(2) offering by the issuer itself. The Section 4(1½) exemption typically applies to the resale of restricted securities to accredited investors who make appropriate representations. Section 4(1½) also is sometimes used to extend a Rule 144A offering to institutional accredited investors.
The Second Circuit has opined that a person purchasing restricted securities from an issuer is not an underwriter for purposes of Section 4(1) if the purchaser resells the restricted securities to persons who qualify as purchasers under Section 4(2) as described by the U.S. Supreme Court in SEC v. Ralston Purina Co., 346 U.S. 119 (1953), and who acquire the restricted securities in a private offering of the type contemplated by Section 4(2). Securities acquired in a Rule 144A transaction are deemed to be “restricted securities” within the meaning of Rule 144(a)(3) and remain restricted until the applicable holding period expires, and may only be publicly resold under Rule 144 pursuant to an effective registration statement or in reliance on another exemption. After a one- year holding period, re-sales of these securities by non- affiliates are not subject to any other conditions under Rule 144. For a reporting issuer, compliance with the adequate current public information condition requires the issuer to have filed all required reports under Section 13 or Section 15(d) of the Exchange Act.
For a non-reporting issuer, compliance with the adequate current public information condition requires the public availability of basic information about the issuer, including certain disclosure documents and financial statements. For affiliate holders of restricted securities, Rule 144 provides a safe harbor permitting re-sales of restricted securities, subject to the same six-month and one-year holding periods for non-affiliates and to other resale conditions of amended Rule 144. Other resale conditions include: (a) adequate current public information about the issuer, (b) volume limitations, (c) manner of sale requirements for equity securities, and (d) notice filings on Form 144.
What is a “QIB”?
A QIB is any entity included within one of the categories of “accredited investor” defined in Rule 501 of Regulation D, acting for its own account or the accounts of other QIBs, that in the aggregate owns and invests on a discretionary basis at least $100 million in securities of issuers not affiliated with the entity ($10 million for a broker-dealer). In addition to the qualifications above, banks and savings and loan associations must have a net worth of at least $25 million to be deemed QIBs. QIBs can be foreign or domestic entities, but must be institutions. Individuals cannot be QIBs, no matter how wealthy or sophisticated.
A broker-dealer acting as a risk-less principal for an identified QIB will itself be deemed a QIB. Eligible purchasers under Rule 144A can be entities formed solely for the purpose of acquiring restricted securities if they satisfy the qualifying QIB tests. A reseller of restricted securities can rely on information other than that enumerated in Rule 144A for its belief that the prospective purchaser is a QIB. The bases for reliance enumerated in Rule 144A are non-exclusive; resellers may have reasonable belief of eligibility based on any number of factors.
A reseller cannot rely on certifications that it knows, or is reckless in not knowing, are false. However, a seller has no duty of verification. In other words, unless the circumstances give a re-seller reason to question the veracity of the information relied on, the reseller does not have a duty to verify the information. The seller must make the purchaser aware that it is acquiring restricted securities and that he securities may only be re-sold pursuant to an exemption from or registration under the Securities Act.
The investor is entitled to know that the securities may be subject to reduced liquidity. Usually the warning is given by placing a legend on the security itself. For example, the note or stock certificate representing securities re-sold under Rule 144A must include a legend (or a notation if using electronic record keeping) stating that the securities have not been registered and, therefore, they may not be re-sold or otherwise disposed of in the absence of such registration or unless such transaction is exempt from, or not subject to, registration.
In addition, the PPM or other offering memorandum used in connection with the Rule 144A offering must include an appropriate notice to investors, such as the following: “Each purchaser of the securities will be deemed to have represented and agreed that it is acquiring the securities for its own account or for an account with respect to which it exercises sole investment discretion, and that it or such account is a QIB and is aware that the sale is being made to it in reliance on Rule 144A.” The offering documents must inform the purchaser that the securities to be acquired can only be re-offered and re-sold pursuant to an exemption from, or registration under, the Securities Act, and that the resold securities have a restricted CUSIP number.
Securities offered under Rule 144A must not be “fungible” with, or substantially identical to, a class of securities listed on a national securities exchange or quoted in an automated inter-dealer quotation system (“listed securities”). Common stock is deemed to be of the “same class” if it is of substantially similar character and the holders enjoy substantially similar rights and privileges. American Depository Receipts (“ADRs”) are considered to be of the same class as the underlying equity security. Preferred stock is deemed to be of the same class if its terms relating to dividend rate, liquidation preference, voting rights, convertibility, call, redemption, and other similar material matters are substantially identical. Debt securities are deemed to be of the same class if the terms relating to interest rate, maturity, subordination, convertibility, call, redemption, and other material terms are substantially the same. Information must be “reasonably current” in relation to the date of re-sale under Rule 144A. This delivery obligation can continue for some time.
To be reasonably current the information must be as of a date within 12 months prior to the re-sale; the most recent balance sheet must be as of a date within 16 months prior to the re-sale; and the most recent profit and loss and retained earnings statements must be for the 12 months preceding the date of the balance sheet. The issuer will prepare an offering memorandum with disclosures normally exceeding the disclosures required to be made available under Rule 144A -- because the offering memorandum often is used as a marketing document. Also, in general, robust disclosure of the issuer’s business and finances reduces liabilities of the issuer and the initial purchasers. Broker-dealers re-offer and re-sell the securities using the exemption provided by Rule 144A. Rule 144A permits the broker-dealer to immediately re-offer and re-sell the restricted securities, even though it has purchased the securities with a view to their distribution.
The availability of Rule 144A does not depend on how much time has expired since the securities were issued or on whether the reseller had investment intent when it purchased the securities. Re-sales under Rule 144A are completely separated from the issuer’s original offering—no matter how quickly thereafter they occur. The documentation used in a Rule 144A transaction is similar to that used in registered offerings, including an offering memorandum and a purchase agreement between the issuer and the initial purchasers (i.e., broker-dealers).
The offering memorandum will contain a detailed description of the issuer, including its financial statements, and the securities to be offered. The form, organization, and content of a purchase agreement for a Rule 144A offering often resembles an underwriting agreement for a public offering but is modified to reflect the manner of offering. In the case of a Rule 144A offering that is combined with a Regulation S offering, the Regulation S offering may be conducted using documents that are based on the country-specific practices of the relevant non-U.S. jurisdiction or jurisdictions. However, the disclosure documents in such a case generally will contain the same substantive information so that investors have the same “disclosure package.”
In connection with offers of debt securities, it is very common to have a Rule 144A tranche offered to QIBs, and a Regulation S tranche offered to non-U.S. persons. However, while Rule 144A securities generally have a restricted period of six months to one year, Regulation S debt securities have a restricted period of only 40 days. Therefore, these tranches are represented by separate certificates to ensure their lawful transfer in the secondary market. The Rule 144A global certificate with a Rule 144A restrictive legend is deposited with DTC, while the Regulation S global certificate with a Regulation S restrictive legend is deposited with a European clearing system. These two securities have different CUSIP numbers and other security identification numbers.
The Rule 144A securities can be re-sold to non-U.S. persons if the buyer certifies that it is not a U.S. person, and the sale otherwise complies with Regulation S. The Regulation S securities can be re-sold in the United States to QIBs if the re-sale complies with Rule 144A. A registration rights agreement would only be applicable to Rule 144A transactions in which the issuer has agreed to register under the Securities Act the securities re-sold in the Rule 144A transaction. The Rule 144A offering process is often similar to the public offering process. The features of this process typically include: solicitation of orders using a “red herring” or preliminary offering memorandum; preparation and delivery of a working term sheet; confirmation of terms with a final offering memorandum; execution of the purchase agreement at pricing; delivery of a comfort letter (if any) from the issuer’s auditing firm at pricing; and closing three to five days after pricing.
Rule 144A offerings do not subject the issuer and the initial purchasers to liability under Section 11 of the Securities Act. Accordingly, the initial purchasers are not entitled to the “due diligence” defense that may be established under Section 11. Liquidity is the primary benefit that comes from holding freely tradable securities rather than restricted securities. Plus some states prohibit some mutual funds and insurance companies from investing more than a certain percentage of their assets in restricted securities. Some investment partnerships and similar entities are subject to comparable restrictions under their organizational documents. Absent an issuer’s agreement to register Rule 144A securities, these entities are limited in their ability to purchase securities in Rule 144A transactions.
Exxon Capital versus Shelf Registrations
The two principal methods to register Rule 144A securities under the Securities Act are “Exxon Capital” exchange offers and Shelf registrations under Rule 415 of the Securities Act. An Exxon Capital exchange offering is a procedure under which securities are privately placed pursuant to Rule 144A and then promptly exchanged for similar securities that have been registered under the Securities Act. This is the preferred means for providing holders of Rule 144A securities with freely tradable securities. It eliminates the need to continuously update a shelf registration statement over its lifetime if any of the investors in the Rule 144A offering are affiliates of the issuer. However, affiliates of the issuer may not participate in an Exxon Capital exchange offer, and broker-dealers also may not participate in these exchange offers.
In addition, all exchanging holders will be required to represent that they acquired the securities in the ordinary course of their business and have no arrangements or understandings with respect to the distribution of the security that is the subject of the exchange offer. Under Rule 415(a)(1)(i), issuers of Rule 144A securities may register the resale of the restricted securities that were sold in the Rule 144A transaction. Registered offerings under Rule 415 are known as shelf registrations. Rule 415(a)(1)(i) permits either a delayed or continuous offering of securities “which are to be offered or sold solely by or on behalf of a person or persons other than the registrant . . . .” The persons covered by this rule include re-sellers holding Rule 144A securities.
Although shelf registrations offer potential liquidity to buyers of Rule 144A securities, the securities remain restricted until they are re-sold under the shelf registration statement. In shelf registrations, the issuer must covenant to keep the shelf registration statement continuously effective for no less than one year in order to ensure the holder liquidity until the resale exemption under Rule 144 becomes available without any limitations on non-affiliates. “Exxon Capital” exchange offers are the preferred means for providing holders of Rule 144A securities with freely tradable securities.
Questions? Contact [email protected]
|Posted on July 27, 2016 at 2:15 AM||comments (0)|
Want to use SEC Rule 506(c), Rule 506(b, Rule 504, or Regulation A to raise start up money?
Our turnkey documentation includes:
· Private Placement Memorandum with topic-specific “Risk Factors” and “Forward-Looking Statements”
· Professional subscription agreement
· Accredited Investor Verification Letter
· Non-Disclosure Agreement
Private Placement Advisors LLC provides JOBS Act solutions for both start ups and investors
|Posted on September 28, 2015 at 3:25 PM||comments (0)|
Crowdfunding platforms: http://www.sanfranciscofunding
Connect with Douglas Slain
Email: [email protected]
|Posted on September 12, 2015 at 10:05 PM||comments (0)|
1) Overpaying Buying a property that has solid value is the most important thing, but finding that property usually takes time and patience. The most common mistake is overpaying. You may want to start with a low-ball offer and work up to a price point before settling your deals.
2) Lack of in-depth knowledge of after-repair market values Most people find distressed properties either via foreclosures or short sales; that does not mean you are buying for less than the fair market value. Before bidding you need to understand the after-repair market value of the property or you may overpay Being patient while you search is key. The profitability of your rehab depends directly on the initial price at which you buy your property.
3) Property is not a “rehab” Some properties lack sufficient upside to make them viable fix-and-flippers. A house, for instance, that just needs some yard work, new paint and other cosmetic work leaves little opportunity to add value. Unless that house was obtained at a foreclosure sale or under unusual circumstances, it is unlikely to be discounted much and the brokerage commissions will eat into limited profits. At the other end of the continuum are properties that are close to being “teardowns.” Flawed foundations, systemic drainage issues, major roof problems, or environmental problems including mold – these are some problems that can be “beyond repair” economically.
Sweet spot? Ideal fixers often have poor curb appeal, bad landscaping, minor structural problems, and perhaps extensive interior problems. An ugly property often offers the most profit potential. Do not get overoptimistic about the economics of the renovations. Do not overestimate the increase in market value of the proposed improvements and do not underestimate the out-of pocket cost of those repairs. Cutting down view-obstructing trees or landscaping a backyard—these are kind of improvements that may make economic sense. You need to analyze how much value is added by each renovation (or other added value feature), and compare that value to the costs, while keeping in mind the value of comparable houses in the neighborhood.
4) Failure to have a well thought-out budget before bidding Estimating the acquisition costs and the interest payments on any borrowed money is straightforward, but rehab costs must be guessed at (and then tightly controlled). Property flippers are project managers as well as investors. Timeframes for the project must be estimated and understood. A realistic budget not only helps you get organized but can serve to make sure that each contractor is bidding on work you want. Try to get line-item bids with each sub-project broken out separately.
5) Not using the best sources of financing Try banks and savings and loans, crowdfunding portals, angel investors, friends and family—in that order.
6) Failure to keep the project on time and on budget No matter whom you hire, you must be in control of all the details, including scheduling, budgeting, and monitoring workmanship. You are the one with the “vision” of the renovation so you will often have to be on-site to answer last-minute questions. Tasks performed out of order throw a wrench into the schedule that you have developed. You may want to set up incentives for the contractors in exchange for meeting project completion dates. You need to have a schedule.
7) Not having alternative exit strategies. Exit strategies are crucial when the market turns against you. Exit strategies include: lease with a purchase option; wholesale to another investor; rent out the property.
|Posted on July 30, 2015 at 12:45 AM||comments (0)|
Because registering securities with state and/or federal agencies is expensive and time intensive, issuers attempt to comply with one or more exemptions from registration. These types of offerings are commonly called private placements or exempt offerings.
When doing a real-estate deal with other people’s money, the issuer must comply with state and Federal securities law. Securities must be registered or qualify for an exemption. Otherwise the investors can ask for their money back without further reason and sue the sponsor, and the State and/or SEC can impose fines.
When assessing exemptions, a real estate sponsor must assess whether financial requirements of the offering will eliminate too many investors and whether investors will come from more than one state.
The definition of “securities” is broad; among other things it means any ” note, stock, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement.”
This definition includes promissory notes secured by real estate, although there are exemptions, discussed below.
General partnership interests are not considered securities, on the theory that general partners each have the authority to exercise meaningful control over the partnership. Limited partnership interests are presumed to be securities.
If the investors are tenants in common, they are listed on the deed without other ownership entity. If they are all involved in the management of the property the owners have the same liability as general partners. Tenants-in-common interests when there is centralized management are considered securities. TIC interests offered by a sponsor as investments are considered securities.
Limited liability company interests are securities. There is an exception under some states’ laws for LLCs where all of the members are actively engaged in management of the LLC.
An exemption exits with certain secured promissory notes. A promissory note secured by a lien on real property, which is neither one of a series of notes of equal priority secured by interests in the same property nor a note in which beneficial interests are sold to more than one person or entity.
This exemption obtains optimally when there is just one investor per property. You cannot use it if there are different investors secured by the same property, unless each investor will have a lien with different priority.
Note that if the promissory note has an equity “kicker,” the note will be deemed a security.
The location of the investors determines what securities laws apply, not the state of the sponsor. If you sell securities just in Washington State, for instance, then you only need to deal with Washington securities laws. If you sell in other states, you must comply with Federal securities laws and the laws of Washington and of each state where you sell.
Most securities exemptions require the filing of completed exemption forms with the relevant state and Federal securities agencies, which is still far less
expensive and vastly simpler than registering an offering.
The federal Rule 504 exemption may be attractive if the offering is for $1 million or less, since it allows public advertising and there are no investor qualifications.
If the offering is limited to accredited investors, there are approximately 40 states that have adopted the Model Accredited Investor Exemption (MAIE) – and no registration is required. The MAIE allows public advertising of a tombstone ad for the investment.
The Rule 504 exemption may also be used in conjunction with a SCOR offering.
The federal Rule 505 exemption covers offerings up to $5 million. Although no general solicitation/advertising is allowed, there are no investor qualifications. Some other states allow a Form D/Rule 505 filing rather than requiring their own exemption forms, although there are fewer of these states than those that have adopted the MAIE.
The Rule 506 exemption is generally more attractive.
The federal Rule 506 exemption allows offerings in unlimited amounts to sophisticated or accredited investors. The big advantage is that exemption means the real estate sponsor is exempt from all state regulation, although notices have to be filed in most states.
No state is allowed to make any kind of review of the terms of the offering. Sales can only be made to individual accredited investors, although sophisticated investors may invest if there is a substantive pre-existing relationship.
The general rule is that anyone who attempts to sell securities must be licensed as a broker. This does not include an officer or director of the company making the offering or an individual occupying a similar status or performing similar function, such as the manager of an LLC.
Also there must not be compensation specifically related to purchases or sales of securities. The compensation must be part of a salary and not paid on a commission basis.