Have you ever heard of the Howie test?
If you want to raise money from private investors to finance a real estate investment, you need to know what the Howie test is and what it means to you.
J. Howie was a Florida businessman who sold real estate contracts to finance the development of citrus groves he owned (a type of sale-leaseback transaction). Howie would offer people to buy his groves and then rent them out – that way the buyer would earn a profit from the rent received for Howie tending the land.
And what? Who cares? How does it affect you? Read more…
The issue the SEC took up with J. Howie and his real estate deal, was how he marketed his investment opportunities. You see, Howie advertised the land sale through promotional materials at tourist resorts in his area. He promised big profits to those who received the trade presentation by showing interest. Most of Howie’s buyers were not Florida residents and had no experience in farming or agriculture.
The SEC (which regulates securities laws for real estate investors) filed suit against Howie, seeking an injunction to stop Howie from using the mail and other means of “interstate commerce” to offer what it called the sale of non-exempt, unregistered securities.
The Supreme Court ruled that Howie was offering an “investment contract” as defined in the Securities Act of 1933. As part of this decision, the Supreme Court developed a test to determine whether an opportunity is an “investment contract.” This test was called the Howie Test.
An investment contract according to the Howie test was defined as follows:
1. investing money due to
2. expectation of profit from
3. joint venture
4. which depends solely on the efforts of the promoter or a third party
What it meant to J. Howie and for all real estate investors in the future, was that whenever you are looking for investors, whether the investor closes the deal or has a mortgage, if the investor relies on you, to make their profit you consider that you are selling a security. The Howey test set the standard for securities laws in raising money for real estate investment.
Because you are selling securities when you raise private money, you must comply with securities laws.
In raising private money, as well as teaching real estate investors how to raise private money, I found it helpful to learn the basics of securities laws and how they affected us. Honestly, if you’re focused on your financial goals (and real estate investing as the means to achieve them), nothing should hold you back – especially rules. Once you know the rules of the game, you will be able to play it much better.
You should always have a qualified securities attorney assist you with private cash offerings. I have a trusted team of professional advisors and my securities lawyer is at the top of the list and I often turn to them for advice. When it comes to your powerful team of advisors, never be smart and be stupid.
***This information is for educational purposes only. The content of this article does not constitute legal or tax advice. The author does not provide legal, tax or professional advice. Before entering into any business transaction, please consult with your appropriate legal and tax advisor.***