I’m in the business of real estate investing, that is, I use Other People’s Money (OPM) to fund my deals. Am I violating the securities laws?
You have astutely identified the legal issue which perhaps poses the most significant liability issue to real estate entrepreneurs, that is, persons who are in the business of using other people’s money (OPM) to invest in real estate.
Unlike you, many real estate entrepreneurs simply don’t recognize the potential for non-compliance. This lack of recognition is often facilitated by real estate “gurus” and other knowledgeable investors who seem to casually dismiss the topic as a “non-issue.” When the subject is discussed at all, which is seldom, one is likely to be told that there is no securities law issue as long as investors’ money is not “pooled.” Life is seldom that simple; securities law is definitely not that simple.
I would caution you against relying on the advice of non-attorneys when it comes to legal issues in general, and securities laws in particular. The fact that someone may have operated their real estate business for many years and handled numerous deals is not, in and of itself, conclusive on the issue of whether they are, or have been, complying with the securities and other laws. All that can properly be gleaned from such “evidence” is that no one — either an investor or government regulator — has bothered to challenge their business practices. As long as deals are profitable, investors are unlikely to care if the securities laws are being violated; and as long as deals are profitable, real estate entrepreneurs are less likely to come to the attention of securities regulators.
The apparent lack of securities law compliance among real estate entrepreneurs is unfortunate. In most cases, compliance is not all that difficult. Furthermore, it would be reasonable to expect that, in most “simple” or “basic” cases involving routine facts and business plans, the actual legal work to keep a “small” real estate entrepreneur compliant with the securities laws should not be cost prohibitive, even though legal fees often can be quite high for more complicated or sophisticated offerings.
In the end, compliance with securities laws is a business expense, much like any other. The real estate entrepreneur who neglects this aspect of their business plan runs the risk of civil and, yes, even criminal, penalties. This is not a risk that a real estate entrepreneur should be willing to bear.