Eliminating securities problems – Part 2

I previously discussed what a security is and who are accredited investors. Non-accredited investors are typically excluded from most syndicated private placements. This is part of the cause of the investor isolation in the self directed IRA/401k marketplace.

The stock market’s growth has been because it’s easy to invest in it because of fractional ownership. You can’t afford to buy Microsoft outright, but you can afford to own a millionth of a percent of it. Self directed accounts have failed to go mainstream because securities laws get in the way of making fractional ownership simple for the non-accredited investor.

Assuming you are not accredited, so far your options in pooling money are:

  1. Ignore securities laws – Very bad idea. Investments are supposed to be profitable. When securities laws are ignored, you could face huge fines and even prison.
  2. Regulation D offerings– You can create or find a “Red D” offering. In this arrangement disclosure requirements must be met, and notices must be filed with the SEC and/or state securities agencies for each state in which there is an investor. It’s recommended that an attorney create the disclosure documents, and this can typically cost $10,000 and up. (Again check www.nfhlaw.com for more free info on Red D offerings)
  3. Form an Investment Club – If every investor actively participates in investment decisions, then there probably isn’t an investment contract or security.

Red D offerings are usually the preferred way of raising money from private investors, but this is because usually money is being raised for a business rather than a passive investment. When the pooling of money is happening with the intent of acquiring a passive investment, it becomes feasible for the investors to actively participate in the investment decisions. Unlike Reg D, this can eliminate the security. With no security, there’s no notices to file or legal fees to prepare disclosures.

If the amount of money being pooled is high enough to justify paying $10,000 or more in attorney’s fees, then Red D becomes feasible. If it’s not, you may want to consider forming an investment club. In fact, you may want to consider an investment club regardless of the amount of money raised.

More info soon about Investment Club feasibility.

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