From a securities legal standpoint, you could do a joint venture (JV) or member-managed LLC, where the investors are actively involved and stay in control of their own money, if you don’t want to have to comply with securities laws. The mistake most people make is that they call something a JV but then treat it like a passive investment. It’s not what you say, it’s what you do that will determine whether you have sold securities.

To ensure that everyone stays active, they need more than just a voting right. You can either give them a title and a job, or simply don’t take control of their money (i.e., you could ask them to contribute money when you need it and they write a check).

The downside is that if you want to do bigger deals that you will syndicate down the road, the JV structure will hold you back and it won’t necessarily count toward your syndication track record, which will become important for subsequent deals. If you plan to stay with small deals with just a few high-net-worth investors in each deal, it can work for you.

A loan from a private lender is fine unless you have an institutional loan in first position that won’t allow subordinate debt. But notes are securities, too. If you do an isolated transaction with an accredited investor, you may not need to do anything else, but if you are pooling funds from non-accredited investors, or your business starts to depend on repeated borrowing from private investors, you are in the business of selling notes as securities and you still need to comply with securities laws.

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If your concern is regarding the costs of syndication, you can keep them low by only using a small number of accredited investors, as a PPM won’t be required (although it is still advised) if everyone is accredited.

Using private money for real estate is a business where it is easier to go big than it is to stay small, as the securities compliance requirements may be the same for a small or big deal. But in a bigger deal, the costs are not as disproportionate.

As always, it is best to talk to a securities attorney when dealing with private money so you understand all of the options available to you, and some may vary on a state-by-state basis.

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