At some point most note buyers end up investing with other people. At Paperstac, our team has heard the good, the bad, and the ugly. All of the stories that we have heard come down to one common denominator: Business Structure.
Most note investors form a very simple “partnership-type” of relationship. This arrangement is usually some form of a joint venture or a general partnership. The most common problem with these arrangements is that the 2 or more partners share responsibility and liability. More specifically, the partners each have 100% liability but only 50% of the decision making power. That is a recipe for disaster as when the partners disagree on a decision such as to sell as-is or renovate and sell, they can’t resolve the issue until they do agree. If one partner cuts and runs, the other still has 100% liability.
LLC (perhaps with a Private Placement)
Other investors form an LLC together. This is a better structure but be sure that the operating agreement in the LLC spells out specifically, who has decision making power and under what circumstances. You have some flexibility here, where this entity can be managed by 1 person, a committee, or all members vote (don’t do all members vote or again, nothing happens until all agree). Adding a Private Placement Agreement, such as a REG D504 can allow more investors however most of those investors will need to be accredited.
Transparency and Disclosure
The other big issue with these structures is transparency and disclosure. Partnerships and joint ventures are usually pretty loose on this. LLC’s can vote to have meetings or not and when and if reports need to be filed. It’s important to read the disclosures of these structures because they can also be very good. Just understand what can be written into these arrangements so everyone is clear.
Larger and Newer Entities
On a larger scale, one of the best business structure’s to come around is the REG A+ fund. This arrangement takes the best of many types of structure and wraps it all in one. For example, Here are the top 5 reasons to invest in a REG A+ Fund:
- Open to both accredited and non-accredited investors with a minimum investment
- Public filing with the SEC
- Annual reports with audited financials
- Semi-annual reports
- Event reports if something significant changes such as the nature of the business itself
- Qualified investment for self-directed IRA
- If you use a registered investment advisor, their job will be much easier with this public entity versus a private entity
- Easy to invest and no broker required. Technology enables investors to interface and directly invest.
In addition to those 5 reasons, there is security in knowing that it is a lengthy and expensive process to create the REG A+ fund and the fund creator must pass qualifications.
For all of these reasons and more, we chose this business structure for our Money With Meaning Fund. We enveloped that structure with a socially responsible goals which will help people stay in their home by doing everything we can to modify their loans or some other work out. You can learn more about the fund and invest into it (minimum investment $200.00- not a typo) by clicking the logo.
By TJ Osterman and Kevin Shortle