Real Estate Finance Real Estate Investment And Real Estate Development The Howey Test (Otherwise Known As Why Private Money Investing Involves the SEC)

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The Howey Test (Otherwise Known As Why Private Money Investing Involves the SEC)

Have you ever heard of the ‘Howey’ test?

If you want to raise money from private investors for a real estate investment fund, you should know what the Howey test is and what it means to you.

J. Howey was a Florida entrepreneur who was selling real estate contracts (a sale-leaseback type of contract) to finance the development of a citrus grove he owned. Howe was offering people to buy his groves and then he would take them back – so the buyer would earn his return from the rent he received for Howe caring for the land.

Where? Who cares? How does it affect you? Read on…

The SEC said J. The issue with Howe and his real estate deals was how he was marketing his investment opportunities. You see, Howe marketed his land sales through promotional materials at tourist resorts in his area. He promised huge profits to those who received the sales presentation with interest. Most of Howe’s buyers were neither residents of Florida nor experienced in farming or agriculture.

The SEC (which regulates securities laws for real estate investors) filed suit against Howe, where they sought an injunction to prevent Howe from using the mail and other means of “interstate commerce” to make what they called non-exempt, unregistered sales. Security.

The Supreme Court ruled that Howe was offering an “investment agreement” as defined by the Securities Act of 1933. As part of this decision, the Supreme Court developed a test to see whether an opportunity constituted an “investment contract.” This test was called “Howey Test”.

An investment contract under the Howey Test was defined as follows:

1. Investment of due money

2. An expectation of benefit arising from

3. A joint venture

4. Which depends solely on the efforts of the promoter or third party

J. What this means for Howe and all future real estate investors is that any time you are looking for investors, whether the investor has gone through a deed or a mortgage, if the investor is counting on you. Make their profit you are considered to have sold the security. The Howey Test set the standard for securities law to raise money for real estate investment.

Since you are selling securities when you raise private money, you must comply with securities laws.

I’ve found it useful when raising private money, as well as when I teach real estate investors about the basics of securities laws and how they affect us. Honestly, when you’re focused on your financial goals (and real estate investing as your vehicle for achieving them), nothing should stop you — especially regulations. Once you know the rules of the game, you can play it better.

You should always have a qualified mortgage attorney help you with your private money offers. I have a trusted team of professional advisors and my securities attorney is at the top of the list – and I often seek their advice. Don’t be money wise and pound foolish when it comes to your power team of advisors.

*** This information is for educational purposes only. The content of this article does not constitute legal or tax advice. The author does not provide any legal, tax or professional advice. Before conducting any business transaction, please consult appropriate legal and tax advice.

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