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Pooling Money
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When you pool money from private lenders, you're putting funds together from two or more different private lenders on the same promissory note.
Securities Laws and regulations vary from state to state and the Federal SEC has its own set of laws and regulations. All states have a filing that allows for pooling private lenders' money in running your real-estate investment business. This filing also allows advertising. You will need to file paperwork with your state and provide a disclosure document to your potential private lenders.
You should use or form a new business entity that could be an S-corporation, C-corporation or an LLC. Some states have different filings available depending upon whether you have a corporation or an LLC, and LLC's are sometimes treated as partnerships. Most states won't allow you to pool money when you're operating as a sole proprietorship or DBA.
You should use one of your state's filings that allow for pooling money.
These filings require you to fill out paperwork, informing the state regulator about your business and what you're doing. It usually requires you to disclose information to your potential private lenders, which is for your benefit as well as your private lenders' benefit.
You'll pay a fee to your state regulator when you file your paperwork.
One of the things I've taught my students and continue to stress is that you shouldn't be pooling money from private lenders unless you make sure you're in compliance with SEC Regulations.
In order to be in compliance with your home state's securities laws, you'll need to find the proper exemption, filing or registration option and comply with its requirements.
The following is some general information on staying in compliance with your state's requirements.
When you use an exemption to bring in private lenders, you are making an offer and sale of a security. It's important to understand that an offer to sell is usually treated the same as a sale when it comes to securities compliance.
Two key concepts to understand when you sell securities are that there are exempt securities and there are exempt transactions. Whether you're selling stock, equities, borrowing money, or debt, these are treated as securities. An exempt security usually means a security issued by a governmental agency or authority.
An exempt transaction refers to the sale of a security not issued by a government agency that has been given an exemption under state law (or federal law) because of the nature of the security and how it's sold.
Some states may offer you more than one choice, so you'll want to evaluate those choices.
As a final important note, don’t go this alone. At this level you need the guidance of a competent SEC attorney.
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Alan Cowgill is a speaker, author, and real estate entrepreneur. His step-by-step system “Private Lending Made Easy” teaches others to find private lenders.