Key Takeaways

Transcript

My name is Tilden Moschetti, syndication attorney with the Moschetti Syndication Law Group. We specialize in Reg D Rule 506b and Rule 506c offerings for syndicators and funds. About at least once a week, I have a meeting with somebody who believes that they have found a loophole around the securities rules. We’re going to talk about whether or not that is a real loophole or not.

The Myth of the “Friends and Family Loan” Loophole

All right, so what is this loophole that we’re talking about? Well, the story goes something like this: “I put a friends and family syndication together, but it actually wasn’t a security because what I did was I took a loan from a friend or family.” Okay, so let’s go through whether or not that is a security.

Reves v. Ernst & Young and the Misunderstood Loan Exception

The big idea where that idea comes from, it’s not crazy that they came up with it. In fact, there was a case called Reves v. Ernst and Young. In that case, the U.S. Supreme Court said that some types of loans are not securities—but not all loans.

A lot of people took that to mean that all loans are not securities. That is not what the Court said.

Types of Loans That Are Not Securities

So what did the Court actually say were not securities?

These all occur in the ordinary course of business, typically with banks or institutional lenders.

Why Friends-and-Family “Loans” Are Still Securities

Unless your friends and family are acting as a commercial bank, these exceptions almost never apply.

In a typical scenario—where someone says, “Lend me money to buy real estate or start my business, and I’ll pay you back with interest”—we go right back to the Howey Test:

That is a security, even if it is structured as debt with a fixed rate of return.

Debt Can Still Be a Security

Even if the investment is documented as a promissory note, even if it has a set interest rate, and even if it’s called a “loan,” it is still a security if the investor is passive and relying on the sponsor’s efforts.

Bottom Line for Syndicators

Bottom line: this is not a shortcut. Raising money from friends and family through loans does not avoid securities laws if those investors expect profits from your work.

These transactions must either be registered with the SEC or qualify for an exemption like Regulation D Rule 506(b) or 506(c).

Hope that helps clarify it and keeps you out of hot water. If you’re looking to do a syndication or put together a fund, let’s talk about how to do it compliantly so everyone wins.

My name is Tilden Moschetti. I am a securities attorney specializing in Reg D syndications and funds under Rule 506b and 506c.