The Howey Test (otherwise known as Why Private Investing Involves the SEC)


Have you ever heard of the “Howey” test?

If you want to raise money from private investors to finance real estate investments, you need to know what the Howey test is and what it means for you.

J. Howey was a Florida entrepreneur who sold real estate contracts to finance the development of the citrus groves he owned (a type of sale-leaseback contract). Howey would offer people to buy his groves and then he would re-let them – so that the buyer would derive his income from the rents received for Howey looking after the land.

So what? We do not care? How does this affect you? Continue reading…

The issue the SEC took on with J. Howey and his real estate deal was how he marketed his investment opportunity. You see, Howey marketed his land sales via promotional material at tourist resorts in his area. He promised big profits to those who received the sales presentation expressing interest. Most Howey buyers were neither Florida residents nor experienced in farming or farming.

The SEC (which regulates securities laws for real estate investors) has filed a lawsuit against Howey, in which it seeks an injunction to restrain Howey from using the mail and other means of “interstate commerce” to offer what she called the sale of non-exempt and non-registered goods. Security.

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

An investment contract according to the Howey test has been defined as follows:

1. an investment of money due to

2. an expectation of benefits from

3. a joint venture

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

What this meant for J. Howey, and for all real estate investors in the future, is that whenever you look for investors, it doesn’t matter if the investor takes the deed or has a mortgage, if the investor is counting on you to make their profits, you are considered to be selling a security. The Howey test set the standard for securities laws when it comes to raising funds for real estate investments.

Because you are selling a security when raising private funds, you must comply with securities laws.

I have found it helpful when raising private funds, as well as teaching real estate investors how to raise private funds, to review the basics of securities laws and how they affect us. Honestly, when you focus on your financial goals (and real estate investing as a vehicle to achieve them), nothing should put you off, especially regulation. Once you know the rules of the game, you can play it much better.

You should always have a qualified securities attorney to help you with your private money deals. I have a trusted team of professional advisers and my securities attorney is at the top of the list – and I often seek their advice. Never be wise and foolish when it comes to your team of advisors.

***This information is intended for educational purposes only. The content of this article does not constitute legal or tax advice. The author does not give any legal, tax or professional advice. Before engaging in any business transaction, please consult a competent legal and tax advisor.***

Source by Adam J Davis

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