Private Lending and the SEC by Alan Cowgill

Alan Cowgill is certainly the best-known name in our business in the field of raising private money. A 25+ year landlord/rehabber, he’s raised millions in private money for his own business, and helped others raise millions more. If you happen to be in Ohio, he’ll be visiting Columbus ( and Cincinnati ( in February; it’s worth seeing his approach to getting private lenders.

While speaking all over the nation, meeting thousands of real estate investors the past few years and getting asked questions on the SEC, I realized that there is a lot of confusion concerning SEC regulations as it applies to private lending.

The confusion seems to arise because of the following:

  • Each state establishes their own regulations and exemptions.  Therefore, there are different guidelines depending on where you live.
  • If you cross state lines with your private lending, i.e. houses in one state and lenders in another, the Federal SEC regulations come into play.
  • There are a lot of half-truths floating around and when people hear these, they get confused and possibly fearful.

To be better equipped to answer everyone’s questions, I decided to hire an attorney to do some research.  First, let’s cover the question of “a security” and whether real estate even falls under the auspices of the SEC:

What is a security?

The term “security” is broadly defined to mean “any certificate or instrument, or any oral, written, or electronic agreement, understanding, or opportunity, that represents title to or interest in, or is secured by any lien or charge upon the capital, assets, profits, property or credit of any person or of any public or governmental body, subdivision, or agency.”

That’s the language used on the website of the Ohio Division of Securities.  This definition includes such common items as shares of stock, warrants and options, promissory notes, membership interests in limited liability companies, bonds and debentures.  Limited partnership interests are considered to be securities, while general partnership interests are generally not considered to be securities.  The statutory definition additionally includes the term “investment contract,” which has been construed by court decisions to include numerous investment opportunities and business opportunities, which at first glance may not appear to fit within the definition of “security.”

Does that mean private lending may be considered securities?

When you are borrowing money from private lenders, you are offering them a security.  You’re making an IOU to them, by borrowing their money and promising to pay them a fixed interest rate over a certain time period or when the sale of a property is concluded.

When a company sells shares or stock, it’s giving the purchaser of the securities an ownership interest.  Shareholders make their money when they get dividends on their investment or when they sell their stock.  Private lenders are lending you funds and they make their money by receiving the interest rate you’ve promised them.

All states allow securities to be offered to lenders when they are either registered or offered under a proper exemption from registration.  Securities laws do define debt as a type of security.  It means that securities laws and regulations apply to the real estate business.

What Securities Laws Require:

What I found was that each state is able to establish their own regulations, but they all have the same pattern.  So, I’ll use my state of Ohio as a model to explain what is typical for nearly all states.

  1. In Ohio I can acquire up to 10 private lenders without having to file any paperwork with the state division of the SEC. ONce I file the proper paperwork my number of lenders is unlimited. Different States have different numbers and most are higher than Ohio.
  2. As long as my properties and lenders are in Ohio, JUST the state regulations apply. If I have lenders and or houses in different states, then the Federal SEC regulations apply.
  3. If I go over 10 lenders, the paperwork I need to file with the state can be fairly simple.  But I’ll want to hire an SEC attorney skilled in filing.
  4. I need to give a disclosure statement to potential lenders.
  5. I can’t “pool” lender money unless I file different paperwork
  6. I canNOT use the word ‘guarantee’ in my advertising. That would be misleading private lenders and considered FRAUD.

As a side note, some of you are under the impression that the SEC is out to cause you problems.  The SEC is not the bad guy; they are looking for the bad guys.  They want legitimate business owners to prosper.  In many states, they are very willing to help you if you just ask.  They just want you to comply with their regulations.

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