April 24, 2021

What is a Security? | Fast Funding Info

In this episode of Fast Funding Info, Nate Dodson talks about what legally defines a security and, more importantly, why you should care about whether you are or not selling them.


What does it really mean that you are working with securities?  Generally, there's a test: you're raising money from multiple people, these funds are getting pooled together, you or some other third party is managing the project, and the investors are expecting to get a return on their money. So, if you're doing that— if you're acquiring real estate with other people's equity contributions, if you're starting up a business with raising seed capital, as long as you're not paying for everything out of your pocket you're most likely working with investments— with securities.

If you're raising money from third parties, from other people, and you're trying to get them a return on their investment there's a huge amount of regulations that have to be dealt with. If you're raising money from investors the investment has to be either registered or exempt from registration. Usually, with the securities exemptions, you're relying on what type of investor are you bringing in, who you're finding you're the investors through or from, and your relationship, and the suitability of the investors— whether they're accredited, unaccredited but sophisticated.

If you're raising money from multiple people these are just areas of concern because the consequences of not disclosing the right information, the consequences of not abiding by federal and or state laws on how to raise capital, how to treat your investors, can be catastrophic. If it is to the extent that is against criminal law, you may go to jail. If it is a failure that is a civil action, civil issue, either with a regulator or if an investor complains or files a lawsuit, not necessarily a criminal goes to jail, but certain securities infractions regulations can follow you for life. What I mean by that is some of these securities issues can't bankrupt out of, can't walk away [from], they're not dischargeable. So, it is a pretty serious concern and issue to make sure that at all times you're working with your investors and you're raising your capital properly and by all the rules and laws to ensure that you're protected, your business is protected, and your family's protected.

For more information on what a Security is, click here.

You may also like How to Structure a Real Estate Syndication.

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