Crowdfunding Lawyers

Creating Your Deal: A Guide to Putting It All Together

March 1, 2023
Creating Your Deal: A Guide to Putting It All Together

Building a successful offering takes time, vision, and patience. It also requires understanding four important elements, each of which affects the ultimate outcome – your success. For new sponsors, that can be tricky. Even those with some experience under their belts may find that they don’t truly understand each element, which can lead to reduced performance, less investor interest, and limited profitability. In this post, we’ll explore what you need to know.

 

Key Considerations

 Before creating a deal, stop and answer these four key questions. Those answers will inform the deal structure, marketing methods and communication tools you use, and even the audience you target.

  1. What are you trying to accomplish?
  2. Why are you asking investors for money?
  3. What is your goal?
  4. Why do many people want to help you accomplish that?

There must be a compelling story behind what you are trying to accomplish. What’s your goal? That should inform the story and help you communicate with investors. Determine why investors might want to help you.

 

An Investor’s Interest

To start with, what’s an investor interested in? Making a significant return on their money. Let’s go back to what makes up an investment contract.

What’s the security aspect? It’s the pooling of people’s money for them to make a profit from your efforts. So, they must believe your efforts will create a profit.

It can have social, environmental, and climate components to it. Those add appeal and make your offering more compelling. They make people want to help and want to do more. However, at the end of the day, remember that they’re trying to make a profit.

Also, remember that your investors know that if something seems too good to be true, it probably is. Keep your story truthful, relevant to your investors, and compelling. For the sake of this example, we’ll use a real estate deal.

 

What’s the Story?

Let’s say you identify an amazing opportunity in the market. The interest rates are high, and the cost of real estate is going down. However, it will be a temporary issue that you want to move on quickly. So, you lock up the properties, and then the value starts going up. That value acceleration is the story – it’s the hook to get investors to jump in immediately. The opportunity is temporary. If they wait, it will pass them by, and they will miss the chance to reap more profits.

 

Planning Your Offering

Once you have the story in place, you need to know what you’re offering to the investors.  Will it be a preferred return? Are you going to share a split of the profits? Is there a performance hurdle? There are many ways to create a waterfall distribution plan.

Second, you must map out threats to the investors’ benefits. There are usually management fees. There may be salaries, acquisition fees, and asset management fees, depending on the investment you’re offering and operating. Standard fees are very accepted and expected within the investment industry. Then, of course, there are the entity structures, who’s managing it, and who the key players are. Ultimately, you may find there are 10 or 15 pages listing all the ways your investors can lose money.

The purpose is to be transparent with your investors. It’s about stepping up and explaining there’s always risk in investing.

However, the reality is that this is also protection for you. If things don’t go as planned, you can always point to the risk factors you shared with investors before they signed up.

That said, you must structure this information correctly. This is where lawyers come into play. They’re essential to planning your offering properly so that your investors are protected, you’re protected, and the overall structure and investment plan meet your goals and go along with your story. Once the offering has been planned, the documentation has been prepped, and the entities have been formed, you’re clear to launch the deal.

 

Frequently Asked Questions

  • Can I advertise on social media?
  • Can I use email blasts?
  • Can I offer webinars?

All three of these are considered general solicitation. General solicitation simply means advertising. Under some securities regulations, advertising isn’t allowed. Reg 506 B allows you to bring in accredited investors, but you’re not allowed to advertise.

However, other ways to raise capital do allow you to do email blasts and social media marketing. For instance, Regulation D, Rule 506 C allows for advertising, but you’re limited to only accepting verified, accredited investors. Verification generally involves a third party, often their CPA lawyer or financial adviser, but other companies can help, too.

Then there are other securities options, as well. One is Regulation A, which allows you to raise $75 million from any type of investor. It takes longer and requires a qualification process with the SEC, though. You should plan for a three to six-month strategy operation to get it all together before it’s even released to investors.

Finally, there’s Regulation CF, quite literally “regulation crowdfunding”. This allows you to put an offering online and solicit through social media, email campaigns, webinars, and more. Plus, anyone can invest in your deal. However, the limitation is that you must work with a crowdfunding portal.

Those portals come with strings attached, as well as additional risk. Specifically, a crowdfunding portal registered with FINRA and the SEC will charge commissions and fees for their oversight and compliance.

It’s not all about additional costs, though. Oftentimes, portals help with marketing, too. With regulation CF, you are capped at $5 million per year, versus Regulation A, which allows you to raise $75 million a year. With Reg D, you have no cap at all, plus there’s no reporting to the SEC. There are no audited financials required as there may be with regulation CF or Regulation A.

It comes down to what’s the best fit for your marketing plans and how you will find your investors. Most importantly, it’s about determining which securities exemptions make the most sense and what documentation is required to keep you legal and safe. When it comes to putting together a securities offering, the penalties increase if you fail to do your due diligence. Make sure you have a competent attorney that practices investment law to avoid hot water.

 

Regulation A

Let’s dive deeper into Regulation A. Regulation D is quick and easy to get out the door. Regulation CF is fantastic, but you’re capped at $5 million. While Regulation A takes a little longer and costs a little more because of the amount of work and expenses that all come together, it creates a platform for you to continue to grow and build up to $75 million. It can be a multi-year funding platform that ultimately saves you money.

While it seems like $75 million is too much, oftentimes securities lawyers create what’s called a series offering where they take the $75 million, chop it up into bite-sized chunks, and enable you to make multiple investments in different things. Maybe you’re interested in classic cars. You can create a series for that. If you’re buying apartment complexes, you can build syndications to name the property and bring in all the investors. It’s a classic real estate syndication model. However, you can advertise anywhere and accept anyone as an investor.

 

Reg A Process

Let’s say you have your goals figured out. You have your story. At this point, Regulation A requires audited financials.

  1.  You’ll need form 1A, which is a type of disclosure document filed with the SEC.
  2.  Generally, try to submit this form to the SEC within a month of your launch.
  3. The SEC has 30 days to review everything, and they’ll generally write a letter with comments, questions, and additional requests for information they need. They send it back, and your attorney will respond with any clarification or questions. It may even be a complete restructure of your deal.

That process continues until you receive a letter stating the SEC has no more comments. Your goal should be to avoid receiving a letter in the first place, but the SEC may weigh in if things aren’t crystal clear or structured exactly the right way. Again, an experienced securities attorney will help reduce the chance of things going wrong.

  1. Next, ensure all the escrows are set up. There’s generally a securities escrow that funds go into unless you’re an operating business. If you’re a currently operating business, you can use the money on day one, but they call it a conditional offering.

Escrow accounts offer protection to your investors. For instance, if you’re setting up this fund to buy real estate, but you don’t purchase any and you start using the money for other things, your investors have a loss without even a chance to earn a return. For that reason, funds are often held in escrow until you’re ready to go to the closing table and buy something.

  1. Finally, you must file in all the states you’re raising capital within.

Now, if you have experience raising capital from investors, you’re probably used to Regulation D, where you file with every state that investors come out of after they invest. With Regulation A, it’s different. You must file before investors invest. You must go into this process with your eyes open and follow a strategy. Do you want to incur $15,000 to file in different states? Will you take a systemic approach and only file in a few states, then roll out to additional states as funds start coming in?

 

Conclusion

These are some of the things to think about while you’re planning your Regulation A offering. A successful launch involves many moving parts. You must also understand all the rules and regulations that apply to your deal and how they vary from state to state. Working with an experienced securities attorney can ensure that you have the guidance and protection you need. Contact us today to schedule your free consultation and to learn more about how Crowdfunding Lawyers can help you thrive.

 

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