The proposals to allow “crowd funding” without the current registration regulations are being reviewed as a way to “help fast-growing companies keep their accounts private” and to “solicit investments online,” reports the Financial Times.

The measure, which has passed the House (in hope it will lead to job creation), would give companies the ability to raise money from investors – up to $10,000 per investor per year – without the formal registration and level of disclosure currently required by law.
The House has passed the “crowd funding” legislation in HR 2930, which includes the following provisions:

• Allows companies to raise $5 million from individual investments up to $10,000/investor/year.
• Eliminates the ban on general solicitation under Blue Sky laws for startup, emerging or small firm capital.
• Excludes these “crowd funding” investors from being labeled as shareholders under the Securities Exchange Act.

The legislation does have a few requirements around disclosure and fraud prevention including:

• Notice to potential investors about the nature of their investment as “startup, emerging business and small issuers” and the risks involved.
• “Registration” to include the intermediary or principal’s physical address, website address, and the names of the intermediary and the intermediary’s employees.
• The SEC must have investor-level access to the website of any crowd funder.

Many of the current structures for raising capital require state registration and in some cases – state approval. For instance, the SCOR (Small Corporate Offering Registration) type of security must be approved in many states and has conditions attached. And this is the big sticking point for opponents.

Crowd funding legislation opponents say the states should be the policymakers in this case. The current legislation could take the state review process out of the picture.

Jack Herstein, the president of the North American Securities Administrators Association testified before the Senate on Thursday and pointed out that the House and Senate bills (HR 2930 and S 1791) would “prevent state regulators from reviewing investment opportunities made on these websites before they are offered for sale to the public.”

Herstein continued that the issue of regulation in crowd funding belongs with the states.

John Coffee, a professor at Columbia Law School, says this legislation is dangerous because “people who are not brokers – who are simply unemployed salesmen who used to sell used cars – could start marketing all this stuff, possibly being paid by the issuer or some intermediary based on the sales they accomplish.”

What are your thoughts? Could this lead to crowd funding birddogging like Mr. Coffee suggests? Is this a bad thing? Or does it eliminate some of the barriers and legal costs for investors looking to pool or raise money from private sources? Could crowd funding help real estate investors raise more money?

It’s definitely an interesting story to follow in the coming weeks. Stay tuned.

The Federal Reserve, which received sweeping new authority under the Obama regulatory reauthorization, wants to effectively eliminate seller-held mortgages. It will do this by enacting a rule for the Dodd-Frank Act prohibiting property sellers from taking back a mortgage unless the buyer essentially can qualify for conventional financing!

If this is enacted it also will remove access to housing for millions of Americans, because seller “financing” is the only way people who can’t qualify for conventional loans can buy a house.

Moreover, it would allow a buyer a three year right of rescission (they can cancel the sale) if the seller did not properly qualify them. The right of rescission also applies to anyone who buys the note.

The Fed is Soliciting Comments on the Proposal

The deadline to comment is FRIDAY, July 22.

Click here and scroll to the bottom of the page to submit your comments!

With your help, the Fed may at least decide that this does not apply to private transactions. Urge them to exempt seller installment sales from the rule.

Points to Make In Your Comments

• Seller “financing” provides housing for millions who otherwise could not qualify for conventional loans.
• Homeowners are not bank officers or mortgage lenders. By requiring them (many if not most of whom who take back a mortgage are elderly) to qualify buyers using bank standards means they will simply refuse to sell with owner financing. Thus millions of people will be deprived of home ownership.
• Why should the buyer be required to divulge their income and assets to the very person with whom they are negotiating the terms of a sale? This is not required when there is a 3rd party lender.
• Requiring the buyer to turn over all their financial information to a stranger opens the door for identification theft and fraud.
• This also creates the opportunity for predatory borrowing. This is where an unscrupulous buyer knowledgeable about the Dodd-Frank Act leads an uninformed seller (and this will be the majority of sellers) into negotiations not in compliance with the ability-to-repay requirements. (An example of that could be a balloon, an interest rate greater than 1.49% above a standard mortgage, or the seller did not know how to calculate the income-to-debt ratio correctly, or know what residual income means). That buyer lives in the property trying to resell it for a profit and if they are not successful within three years they rescind the sale and get all their money back.
• By not allowing them to negotiate a balloon payment, there is a good chance that a seller 55 years or older will die before receiving all their equity. A lot of seniors have invested in real property with the intent of selling it using seller financing (an installment sale) in order to supplement their income in retirement, but also with the hope that they would not be stuck with a 30 year investment. The Dodd-Frank Act does the same thing insurance companies do who sell 30 year annuities to seniors. Our government has criticized this deplorable practice because seniors will die before they receive all their investment.
• The restriction of no balloon doesn’t affect just seniors, it has financial consequences for anyone using seller financing. Under the Dodd-Frank Act community banks are allowed to originate fully amortizing loans with a five year balloon. The rationale is that they hold these loans in their own portfolios and the government recognizes their need to hedge against inflation and rising interest rates. Yet, the Act does not recognize that private property owners who have 100% skin in the game need the same protection. A five year balloon is predatory lending. If there has to be a restriction it should at the very least be the same allowance given to community banks of a balloon in 5 years.
• There are a lot of small builders that have a spec house or two that they can’t sell unless they offer great terms using seller financing. Otherwise they have to let these properties go back to the bank, which does not help housing or the economy.
• It has been said that a seller financing the sale of his or her own property would completely avoid the issue of licensing by retaining the services of a licensed loan originator. If a mortgage loan originator (MLO) fails to properly follow the ability-to-repay guidelines the buyer still has three years in which to rescind the sale which leaves the seller at risk and will most likely bankrupt them.

Retirement Account or IRA. You can convert a managed IRA to a self-directed IRA and decide the type of investments you want.

Step One: Fire Your Stock Broker

Instead of having a financial planner, broker or mutual fund company direct your money in stocks, bonds and funds, you can invest in your real estate deals. This is also a great way to purchase tax liens and certificates.

Step Two: Reach Out to Private Investors

Self-directed IRAs are a great sales tool for working with private investors. Regular folks with a little nest egg sacked away for a rainy day can accelerate their returns by investing these funds with you. And, the cool part is that it’s completely legal.

Here’s my recommended resource for self-directed IRA accounts – Guidant Financial.

A Few Rules from the IRS

The IRS does have a few rules on what you can’t invest in with a self-directed IRA – life insurance contracts, S corporations, art, jewelry, and other collectibles. That’s ok because you can use your returns on your real estate investments to buy collectibles, art and real estate.

Step 3: Learn the Ins and Outs of Self-Directed Deal Financing

This blog post just gives you the introduction to how a self-directed IRA can help you get started on your financial future as a real estate investor. Check out my Real Estate IRA Blueprint program here.

That’s just what I did. I began pooling what I call remnant money to close more deals and make more money for my investors and myself.

Here’s how remnant money makes you a more efficient investor using a hypothetical example.

Bob has loaned me $100K to invest in one deal. He has another $50K sitting there doing nothing but gaining a measly percentage in an IRA or money market account. He asks me to do something with that money to get the 8-10% return he’s getting from the other investment.

Georgette has invested $300K with me and has another $50K just sitting there like Bob’s $50K. She wants the same return as her other money. What do I do to make my investors happy?

I pool their money and invest it another deal, and they both have first lien holder status.

How do I do this? A fractionalized trust deed. These are legal and possible as long as you follow the security rules. Watch my free video training series to get all the investor insights on pooling and syndication.

I truly believe that relationship financing is the revolution that will change real estate investing in the future. And, that’s just what syndication is – building relationships to pool capital and make more deals.

As you’ve heard me say, my business didn’t take off until I started raising private money. I went out and started talking about my deals with people who wanted better returns on their money. I then built a network – a syndicate of private investors – to invest in more properties and bigger deals.

Without the relationships I built with my investors, I wouldn’t be where I am today. The syndication team is crucial to getting rich in today’s real estate market.

The way I got to where I am today is by finding money to pool (and, yes, it’s legal as long as you follow the rules) and building a great team of investors.

Keys to Working with an Investment Team

1. Disclosure – Playing by the rules and letting my investors know what they were getting into (a fractionalized trust deed and a joint venture agreement. See my video series to learn more about these.)
2. Building trust – Disclosure is part of it, but trust goes beyond disclosure. Having a genuine interest in making profitable deals for my investors is my number one priority. It should also be yours.
3. Networking always – The more you network; the more potential partners you’ll find for your syndicate. Providing more opportunities for your team shows your passion for “getting rich as a team.” And part of that is extending the team.

Learn more about private money syndicates in my four-part video series – free at www.syndicationsuccess.com.