Legal Question in Investment Law in California

Re: when must a borrower of funds register as a financial advisor

I think there is a danger that the IOUs you are issuing to these "lenders" may be considered securities for the purpose of the Securities Act of 1933, as amended. There is a fuzzy line between an individual's borrowing money for personal purposes and giving an IOU to the lender, and a business borrowing money and issuing a bond. Where is the line? I think when the likelihood of repayment and/or payment of interest or profits depends upon the business success of the borrower, then the obligation (IOU, bond, note or whatever) becomes a security. The definition of a security nowadays has been greatly broadened by court decisions in favor of cheated (or unlucky) lenders (or, to take the courts' view, investors) and finding that the transaction was the issuance of a security and required either registration or issuance under a recognized exemption from the registration requirements.

Further, your borrowing-and-investing could be considered operating a mutual fund, which requires a different kind of compliance program.

It would be impossible in the scope of a couple of e-mail exchanges to evaluate your particular activity and advise you competently. I can't say with any certainty one way or another whather you are risking SEC or any other kind of enforcement, or private suits from a "lender." I do believe, however, that you should get competent advice from a securities lawyer that you can sit down with and go over your entire activity. I'm guessing it's a regulated activity and you need to find an exemption that fits and stay within its rules, including making necessary disclosures to your "lenders."