b'Trust Deed v. Fund InvestmentsSecurities Exemption in Private LendingbyTae KimGeraci LLPn the private lending industry, there aretransaction is considered a securitythe registration process is extremely two common categories of investmentsif: (1) it is an investment of money; (2)burdensome and cost prohibitive.Think an investor can make: Direct Investmentswith expectation of profits from thatof the stock marketS&P 500 companies which are made by investing in a Trustinvestment; (3) to a common enterprise;must register with the SEC before going Deed or Indirect Investments which areand (4) profits are derived from a promoterto the public to raise money.In order to made by investing in a Fund. This articleor a third party. The Howey test is reiteratedavoid this registration process, agencies discusses the securities exemptionsin the multi-beneficiary loan settings inhave provided several exemptions from related to both types of investments,People v. Schock, which clearly indicatesregistration: and potential trade-offs, limitations, andthat fractional interest in a promissory legal implications among the securitiesnote constitutes a security because theCalifornia Corporations Code exemptions that managers and servicersinvestor is committing relatively modestSection 25102(f): should be aware of when facilitating thesesums with the expectation of a profit types of investments.based on the reliance of skill, services,In California, a manager or a company and solvency of a promoter or a company.may rely on a 25102(f) exemption.DIRECT INVESTMENTS: The promoter goes out to the market toCalifornia Corporations Code section seek investors to arrange the loans funded25102(f) exempts an Issuer for up to Investors can make direct investmentsto borrowers.In these instances, Direct35 investors who have pre-existing or through what is sometimes called trustInvestments are generally constituted asbusiness relationship with the Issuer; deed investments. It generally occurspurchase of securities.On the other hand,provided, that, the investor is making in the form of investing in fractionalizedif the lender also actively controls the Directan investment for its own account interests of a loan (i.e., multi-beneficiaryInvestment, it is arguable whether theand that the Issuer has not made any loans), or whole notes. The investorinterests are considered securities.The keyadvertisement to offer the security.generally becomes the lender of recordelement of determining if an investment isCalifornia requires the Issuer to file a under the promissory note and relateda security is whether the investor controls25102(f) notice with the DBO and pay loan documents. As a lender of record,such investment. a filing fee. the investor has enforceable remedies and rights from the loan documents, including,Are there any exemptionsManyotherstatesprovidesimilar among others, the right of payment ofDirect Investments from theexemptions.For example, in Delaware, the principal and interest and the right ofsecurities laws? Issuer may be exempted from registration foreclosure on the loan. The lender (i.e.,if the Issuer complies with, among other investor) can control the outcome of theThe first question is what are you seekingthings, and ensures that the Issuer has sold loan and has the ability to enforce thean exemption from?The securities lawsits securities to no more than 25 persons in terms.generally require that an issuer of securitiesthe state during any 12 consecutive month (the Issuer) register with the governmentperiod.The Issuer must also reasonably Are Direct Investments stillbody regulating the securities laws believe all investors are purchasing for securities? either with the Securities and Exchangeinvestment using its own account.Commission (SEC) or a state counterpart, Generally, yes, Direct Investments arefor example, in California, Department securities.Under the Howey Test, aof Business Oversight (DBO).However,continued on page 32Points of InterestFall 2019Page 31'