Be sure you consider the securities implications of obtaining money from family and friends for your syndication deals. Promissory notes are “securities” and so are selling interests in a company to passive investors. Those are called “investment contracts,” which are also securities.
If you are selling securities, you must either “register” the securities with a regulatory agency (SEC or state securities regulators) or qualify for an exemption from registration. Each exemption has a specific set of rules. Unfortunately, there isn’t any such thing as a “less than five-person” rule or a “do-nothing” rule. Further, you can’t typically just use a Limited Partnership Agreement or LLC Agreement with passive investors, without further providing disclosures, securities notice filings, and making sure your investors have the appropriate financial qualifications before accepting their funds.
For each exemption, the burden is on you to establish a record-keeping system to prove how you complied with the rules (just like claiming a tax deduction). To do that, you have to understand the rules of the exemption you are following.
Depending on what state you live in, there may well be a state securities exemption that will allow you to issue promissory notes to investors in limited circumstances, but it behooves you to figure out the rules before you do it. Because if you do it wrong, there can be dire consequences if the deal fails or someone wants his or her money back early.
Should You Really Start a Fund?
We get potential clients who reach out to us every week who want to start a fund. While we could simply take their money and set them up with fund offering documents, we actually talk a lot of people out of doing a fund. Why? Because they don’t have the necessary...