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SEC Questions Answered- Part 2
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What is a security?
The term "security" is broadly defined to mean "any certificate or instrument, or any oral, written, or electronic agreement, understanding, or opportunity, that represents title to or interest in, or is secured by any lien or charge upon the capital, assets, profits, property or credit of any person or of any public or governmental body, subdivision, or agency."
That's the language used on the website of the Ohio Division of Securities. This definition includes such common items as shares of stock, warrants and options, promissory notes, membership interests in limited liability companies, bonds and debentures. Limited partnership interests are considered to be securities, while general partnership interests are generally not considered to be securities. The statutory definition additionally includes the term "investment contract," which has been construed by court decisions to include numerous investment opportunities and business opportunities, which at first glance may not appear to fit within the definition of "security."
Does that mean private lending may be considered securities?
When you are borrowing money from private lenders, you are offering them a security. You're making an IOU to them, by borrowing their money and promising to pay them a fixed interest rate over a certain time period or when the sale of a property is concluded.
When a company sells shares or stock, it's giving the purchaser of the securities an ownership interest. Shareholders make their money when they get dividends on their investment or when they sell their stock. Private lenders are lending you funds and they make their money by receiving the interest rate you've promised them.
All states allow securities to be offered to lenders when they are either registered or offered under a proper exemption from registration. Securities laws do define debt as a type of security. It means that securities laws and regulations apply to the real estate business.
Alan Cowgill is a speaker, author, and real estate entrepreneur. His step-by-step system “Private Lending Made Easy” teaches others to find private lenders.