Are Tax-lien Certificates Considered Security Instruments?
Such as stocks & bonds? Question being that if one wanted to start a tax-lien investment company, would one have to register with the SEC even though the tax liens in themselves might not necessarily be security instruments being that they are issued by the county or govt?
You would not have to register if you bought tax-leins with your own money. If you wished to raise money from investors you would need to follow the provisions of the SEC act.
As a general rule investments offered to the general public in the US have to have a SEC registration (reg D). Last I checked the cost to file a reg D memorandum was around $50K and that was 15 or 20 years ago so I am sure it is much more now.
There are ways out of this rule
1) Do not solicit the general public (i.e. make a private placement) and,
2) Do not accept more than 35 unqualified investors.
3) You may take as many qualified investors as you wish-- but qualified investors must show that they have a history of investment in similar transactions and have the sophistication to understand the risks they were taking and had sufficient financial resources to stand the loss of their investment.
As to the form of the entity the traditional answer to that question was a Limited Partnership and I still think that is a superior product. However the LP is somewhat out of fashion these days and the more popular entity is a LLC.
In addition you need to be aware of the blue sky law of each state in which you offer this security or accept investors.
Remember that even if you stay inside the private placement exemption the fraud provisions of the SEC act remain in place. Therefore full disclosure is necessary.
In addition there are very strict licensing requirements to any person whom you may wish to pay a commission for the sale of these securities. Ignore them at considerable risk to yourself but even more risk to the salesperson.
[ Edited by commercialking on Date 06/03/2004 ]
Commercialking to the last part of your response, you referred to them as securities. But how are the certificates in themselves considered securities? I believe there is a company who was shut down by the attorney general in myrtle beach because they are being considered a securities firm. However a judge there overuled the attorney general and allowed the firm to continue operating because the Judge says that tax liens do not qualify as security instruments. Common sense would suggest to err on the side of caution and register as a securities firm with the SEC, but the costs to do so can be enormous, one needs to have anywhere from $50K - $1 million in reserves depending on how much capital one wants to raise.
You need legal advice to get a real answer.
The common man's view says the following...
It has little to do with the tax liens themselves. It has a lot to do with how you accept and manage other people's money related to investing in tax liens. Essentially if you manage their money you are in the securities business at some level.
If you are buying on their behalf and you are making the on the spot decision as to which lien should be purchased you are likely also in the securities business.
Offering people help with their investments is a CYA activity.
Ask a lawyer before doing anything like this.
John
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[ Edited by JohnMerchant on Date 06/05/2004 ]