(2) Who Are Your Investors and What Type of Offering Will You Issue?
Whether you plan to target sophisticated investors through traditional private placements or appeal to those primarily using social media and crowdfunding vehicles, below are some of the various offerings to consider when raising capital for your real estate fund:
– Regulation D Rule 506(b):
Issuers cannot use general solicitation.
You can offer to an unlimited amount of Accredited Investors and up to 35 Non-Accredited investors meeting certain sophistication requirements.
There is no limit on the offering size.
– Regulation D Rule 506(c) – Title II:
A private placement that allows for an opportunity to reach a much broader audience of investors. Issuers can use general solicitation, however, securities must only be sold to Accredited Investors. There is no limit on the offering size.
– Regulation D Rule 504:
You can offer and sell up to $1 million of securities in any 12-month period.
These securities may be sold to any number and type of investor, and the issuer is not subject to specific disclosure requirements.
– Whether private or public offering under Rule 504, the Issuer must follow all State securities laws and/or exemptions in each state the securities are offered in.
– Title IV – Regulation A+:
You can raise up to $50MM per year from both Accredited and Non-Accredited Investors, however, the offering must be submitted and approved by the SEC. This will include additional time and costs.
– Title III:
You can raise up to $1MM per year from both Accredited and Non-Accredited Investors, however, all offerings must be filed with the SEC and offered though a “Funding Portal” which is licensed by FINRA and the SEC. Any advertising and/or solicitation is subject to specific limitations.
“Accredited Investor” is defined as a person
(1) that has made $200K ($300K if married) each of the prior 2 years, or
(2) have a net worth of at least $1MM. This can be validated by a third-party vendor or the investor’s CPA/Attorney.
(3) Consider Operating Costs and the Flow of Funds:
The Fund’s Manager (many times the same party as the Issuer) charges a management fee directly to the Fund, usually anywhere between 1%-3%. This is payment for the oversight and management of the Fund’s day-to-day operations and portfolio management. All other operating expenses and fees (legal, accounting and taxes, account administration, auditor, etc.) are normally charged directly to the Fund.