Fees For Raising Money.

I am transferring most of a thread here to the Legal forum from the Deals in Progress forum. The original post (by Concrete) concerned a project he is working on in Alabama. As part of that post Concrete outlined an investment structure that he is considering for raising money for that project.

I responded to Concrete that I thought some of the things he had said in his post were violations of certain security regulations and I edited the post to bring it closer to compliance.

Myfrogger responded to my comments as follows (quoted in full):

The only thing I can comment on is local private companies have given me referal fees plus an interest in the company if I find them money.

The agreement we have currently is that I get a 7% cash refferal fee plus 7% stock referal fee. With $50,000 investment, I would receive $3,500 cash plus 2800 shares of stock currently selling at $1.25/share.

This is a small company but growing with the idea of going public. I'm not sure the accounting of the 7/7 fee but they do it and i'm confident they are not in violation of any law because I know the founders personally.

To which NancyChadwick responded:

myfrogger,

I suggest you see these links concerning provisions in RESPA (Real Estate Settlement Procedures Act) on paying or accepting referral fees:

http://www.hud.gov/offices/hsg/sfh/res/respa_hm.cfm

http://www.hud.gov/offices/hsg/sfh/res/sc2secti.cfm

In addition, state banking laws would require mortgage brokers to be licensed.

Nancy

And bnorton responded in turn:

Nancy,

RESPA only applies to OO residential mortgages. It does not apply to NOO residential or commercial.

The state banking does vary state to state. I don't know much about PA's, but I do know it has some quirks. But here in MD, if it is NOO or commercial, and is not sold to Fanny, Freddie, or Ginny, it does not fall under the residential mortgage laws. Who knows what other states require.


This made it NancyChadwick's turn:

bnorton,

Thank you for the clarification concerning transactions exempted from RESPA (myfrogger didn't indicate the type of transactions involved).

But even assuming the transactions are exempt from RESPA, I think that the payment of fees to someone who is not licensed is stil troubling in those states requiring mortgage brokers to be licensed.


And, finally, bnorton again:

It is certainly a question for concern, however it may not be against the law. It depends on the state. Actually I was really shocked to learn that there are states where a license is not required to be a mortgage broker. Even for residential OO mortgages. Scary

Now, I have moved these posts here for two reasons.

1) I thought they were distracting attention from Concrete's original post and I didn't want to see his stuff get lost in a thread about the legality of paying a fee to someone who raises money for you.

2) The question of a refferral fee to a money-raiser is also a good and valid question and one that may be of interest to a wider section of the TCI community than Concrete's original post in the Deals in Progress forum.

The issue, for me then, is that these are two excellent questions and, I believe, each deserve their own thread. I have, therefore, used my god-like power as moderator to make that happen.

That said we now return you to your regularly scheduled programing. Please, myfrogger, Nancy, bnorton and any others who may have an opinion in the matter, continue with your conversation.