subject: How to use private lenders on non-traditional investments [print this page] How to use private lenders on non-traditional investments
A number of my students have asked me how they can borrow money from private lenders to get into some non-traditional types of investing. These types of investments include buying consumer credit card debt, car loans, distressed loans made by FDIC-insured banks that have gone out of business or gotten into financial difficulties, and various kinds of notes.
Of course, the first question that seems to come up is: how can they do this without securing their private lenders money on a piece of property? The answer to that is the topic of this note. Traditionally, my students borrow money from private lenders and, in exchange, offer each private lender a promissory note, a mortgage, and follow my system in terms of putting hazard insurance on the properties they are buying with the money. They also have their private lenders send funds directly to a title company or closing agent.
But this new approach to investing is a different kind of investing and requires you to think differently and structure your deals differently. First of all, youre not borrowing money to invest in real estate, something you can secure their money on. When youre buying credit card debt, or car loans, or distressed FDIC loans or other notes, there isnt a street address you can go to or a register of deeds where you can record a mortgage. Often, these investments are pools of grouped-together debt, packaged by their sellers, and many times these pools include forms of debt from issuers that are based in different states. Sometimes, youre buying debt not from the original issuer but from an intermediary company that has repackaged the debt.
Ive learned from my SEC attorney that these types of investments are structured as blind pools. According to a definition by Landmark Partners, a large private equity and real estate investment firm based in Connecticut and Massachusetts, a blind pool is:
When a limited partnership has been formed by several investors pooling their capital and then subsequently looks for investments; virtually all private equity funds, and the majority of private real estate funds, are blind pools.
Now, not all blind pools are limited partnerships; some are housed in LLCs or similar entities. And you can include all kinds of distressed debt into what they invest in. Essentially, a blind pool is simply a company that starts out targeting types of investments, but not necessarily knowing what particular investments theyll make. For example, you may not know what pools of debt will be available, at what price, who issued the debt, its potential risks and benefits, and yet you know you can analyze all this and come up with a business model that makes this a worthwhile investment business.
As far as the SEC and the state securities divisions are concerned, blind pools are nothing new. They originated in England about 280 years ago. The first known blind pool included a statement in the prospectus offering shares "of a company for caring on an undertaking of great advantages, but nobody to know what it is." They surfaced in America during the stock market boom of the 1920s (from the website of the North American Securities Administrators Association). Blind pools are regulated like other securities, but are different from real estate investing, as they dont benefit from all of the state and federal exemptions that real estate investing benefits from. Youre more likely to need to use a private placement memorandum under Regulation D, Rule 506 of the Securities Act of 1933, as amended, if youre raising money across state lines. On an in-state basis, youll want to look at using an offering filing that allows you to focus on accredited investors. And given that so many pools of debt come from issuers based in different states, the Regulation D offering is most likely.
Like any other opportunity to raise money from private lenders, youll want to plan, plan and plan some more, study your investment options and, of course, get good advice from an experienced SEC attorney.
