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Accredited Investor Question

Hey guys, Friend A's brother wants to invest in a hedge f rising1l03/01/18
Are you saying they want to have some undisclosed arrangemen jeffm03/01/18
jeez. why not have brother lend X dollars to Friend A with dingbat03/02/18
rising1l (Mar 1, 2018 - 10:00 pm)

Hey guys,

Friend A's brother wants to invest in a hedge fund. Friend A is an accredited investor his brother is not. Friend A wants to form a LLC where he is the sole owner but his brother would have some sort of side agreement with the LLC so that he has the option to purchase shares in the LLC at a future date.

Does this structure work?

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jeffm (Mar 1, 2018 - 10:58 pm)

Are you saying they want to have some undisclosed arrangement which is contrary to the paper trail which is supposed to legitimize the entire arrangement? "The documents will say I am the owner, but you'll be one-half and they don't need to know - wink, wink." I would not do one of those. They can make for the ugliest litigation.

I had one of those, but it didn't hinge on someone trying to squeeze in despite not being an "accredited investor." In mine, a guy had poor credit but cash to invest. Lender would not approve guy with bad credit, so the 2 decided, "I'll borrow the money in my name; you put up the cash. The lender doesn't need to know." That was the worst mistake those guys ever made. The business stagnated into a situation where they could hardly make the loan payments and payroll on time. I had the pleasure of litigating it all the way through a jury trial against the pro se who lost all his cash and wanted to burn the earth and throw salt on it. He went to the lender. He went to court. He went to the IRS. He went to the DA. Ugh!

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dingbat (Mar 2, 2018 - 7:24 pm)

jeez. why not have brother lend X dollars to Friend A with a promissory note. Friend A invests the funds. Eventually, Friend A cashes out, pays off promissory note, and either Friend A or brother makes a gift to sort out the difference?

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