Securities Misconceptions Explained

Are you operating under misconceptions?

As a securities attorney, I hear lots of misconceptions from people who think they are NOT selling securities because:

  • “I only have one investor.”
  • Or, “I’m  raising less than a million dollars.”
  • Or, “I have less than 35 investors.”

All are fallacies.

The truth about selling securities

The truth is, when it comes to real estate:

  • Both promissory notes and investment contracts are within the definition of securities (among other things).
  • Investment contracts are correctly defined as: 1) An investment of money, 2) in a common enterprise, 3) with an expectation of profits, 4) based solely on the efforts of the promoter.
  • If you are selling securities, you must qualify for an exemption or register the offering (i.e., go public by getting it pre-approved by a regulator first). Failure to do so violates securities laws and puts the syndicator at risk of regulatory action. Further, their investors risk losing their money (because the syndicator will likely quickly deplete it on their legal defense fees).
  • To qualify for an exemption, you must figure out which exemption applies to your business—this is best done with the help of securities counsel. Exemptions exist at the state and federal levels and each has its own set of rules, such as describing minimum investor financial qualifications, advertising prohibitions, dollar limits for the offering, limits on the number of investors or the amount they can invest, etc.
  • Most exemptions are self-executing, meaning syndicators have to keep records showing how they followed the rules in case of an investigation by a regulator or legal action by a disgruntled investor. If they can’t produce the records, they don’t get the exemption—which means the syndicator could face potential prosecution by securities agencies (state or federal), a rescission order forcing them to pay everyone backwithin 30 days, fines, jail, civil judgments, or a possible prohibition against ever doing another offering again.

Syndicators who can’t cite the exact exemption they are following—such as Rule 506(b) or 506(c) or another state exemption—probably aren’t following one. And that puts the entire investment at risk.

It’s best to get your own securities legal advice to make sure you are doing it right. And if you like the person who gave you contrary advice, you might want to educate them, too!

NOTE: This information is of a general, educational nature and may not be construed as legal advice pertaining to your specific offering, exemption or situation. Any such advice must be sought from your own attorney pursuant to an attorney-client relationship, after consideration of your specific facts or questions. At Syndication Attorneys, PLLC, we will be happy to discuss your investing goals with you. You can schedule a free, 30-minute consultation by clicking this link.

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At Syndication Attorneys LLC, we are committed to your success – book a consultation with one of our team members today!

Are you ready to raise private capital?

At Syndication Attorneys LLC, we are committed to your success – book a consultation with one of our team members today!

About Syndication Attorneys

We are NOT your stereotypical law firm. We don’t believe in simply taking your money, handing you a stack of technical, often-incomprehensible legal documents and then bidding you good luck and good-bye. At Syndication Attorneys PLLC, we are committed to your success – not just with the project at hand, but your continuing success in business and investing. We are your long-term legal team.

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