As of late, commercial developers are facing major financial loss and penalties if the SEC or state regulators find them in violation of certain securities rules and regulations when bringing on equity partners. In the Inside Counsel article “Hidden Dangers for Developers: Risks Involved in Recruiting Passive Investors,” Partner Suzanne Mulvihill comments on the legal risks involved in recruiting passive investors and how to avoid them.
As commercial development increases, Mulvihill warns that developers who cut corners to take advantage of the current real estate climate may be in violation of their perceived exemption status. If the SEC or state agency discovers this, fines and sanctions can be levied and the securities exemption status can be removed, which would mean every project would have to be registered with the SEC and developers could face fraud lawsuits.
“Developers need to heed this warning because these agencies are being more vigilant than ever in protecting investors,” said Mulvihill. “Developers who do not engage a licensed broker-dealer are often not operating within the confines of the law.”
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