Private Loans: Do I need an accredited investor for my private lender program?

In Part 1 of this article, I defined what an “accredited investor” is, and in this article I will address the issue of whether a real estate investor needs to deal with “accredited investors” or can use people who are not “accredited investors.” as part of their private lender program.

Under the Securities Act of 1933 (the “Act”), a company or individual that sells securities must register the securities with the SEC or find an exemption from the registration requirements. The Act provides companies or individuals with a number of exemptions. For some of the exemptions, such as Rules 505 and 506 of Regulation D, a company or individual can sell its securities to what is known as an “Accredited Investor.” But this is the only exemption for the typical real estate investor.

Generally, any offering of loans or securities that is not exempt under the private offering exemption of the Securities Act of 1933 (Regulation D) is a public offering. This means that if you are not using an exempt offering, you are making a public offering and must register with the federal SEC or possibly your state SEC.

Each and every state has its own definition of exempt offerings and they are not considered public offerings. Will most states allow a real estate investor to do a certain restricted number of private loan transactions without having to register with that state’s SEC? In some states, you can file some documents that are considerably lighter than a full registration process.

For example, in Pennsylvania, a real estate investor may not make more than 25 loans to other Pennsylvanians as long as they do not advertise publicly or use the Internet to promote the offer. In this case, the 25 natural persons do not necessarily have to be “accredited investors”. The state requires a notice, but not a long and difficult registration process.

Each state has its own rules and it is very important that you seek professional advice on your state’s rules and regulations.