Raising capital and investment is a multi-faceted process. You could have a different experience each time, but it’s helpful to have some general idea of what to expect – whether you’re at the stage of raising capital, selling investments, or something in the middle. By the end of this post, you’ll have a better grasp of expected timelines and know some of the more common questions that arise along the way.
Timing
Let’s start with the concept of timing. When can you expect things to get done? How quickly will they move, and how hard will you need to work to keep up?
Raising capital is a timing issue. Our firm gets things done in three weeks (on average), from the initial engagement to the point of actually raising capital under Reg D. It can be expedited and moved along faster if necessary. It’s important to test the waters and figure out what to expect.
For example, assume you have 60 days to close (although you’ll typically have more than that). You’ll have 30 days for due diligence, meaning by the end of 30 days you should be identifying investors interested in coming into your deal. However, you don’t really need their funds for another 30 days. This is where testing the waters comes in handy – you can begin talking to investors and figuring out where your capital is coming from. Your testing-the-waters phase is over once you get that call saying, “We’re going to do this type of offering. Here’s the PPM. Let’s get it going.”
Marketing
If you’re doing a Regulation D 506-B-type offering, you won’t be allowed to go online, do webinars, and so on. You’re dealing with the 506 B regulations that cut out marketing and general solicitation, and you’re limited to the marketing rules as they apply to the particular security. Now all of a sudden, if you choose to do that, you’re stuck with the 506 B regulations that say no more marketing, no more general solicitation.
Fortunately, we handle it in a way that renders it a non-issue with the syndications.
Investment Distribution Plans
Now that you have a general timeline and know what you have to work with, let’s move on to investment distribution plans.
To begin, if you’re coming into this as Mr. Anonymous, this is the point where it’s important to get introductions to professional salespeople. Our firm can help with that, and the documentation reflects how you plan to raise your capital. In the vast majority of deals, management is raising the capital. Expect certain disclosures if there’s an unlicensed issuer exemption that says you won’t get compensated for raising capital. It’s included in the documents that management isn’t being compensated for raising the capital.
Alternatively, Mr. Anonymous might have a broker-dealer involved and a selling agreement with dedicated or pooled sales agents licensed under the broker-dealer. If so, all of the terms of commissions that are paid to the broker-dealer must be disclosed as well.
RIA means a registered investment advisor, and it’s different from a broker-dealer in that they can’t charge a commission but can charge management fees or hourly fees. This situation is where you could see a “2% of assets” charge under management. You can absolutely work with RIAs to fund your business, but they have their own regulations they have to fly beneath the radar with.
Unaccredited Investors
Using unaccredited investors really comes down to the securities regulations you’ll be using. It makes a difference in the direction you’re going, and it’s something that our firm revisits several times throughout the whole process.
Maximum Offering
Maximum offering is one more quick term to note. That means the total amount of money that you may raise, and you won’t be going over that total amount.
Selling the Investments
We’ve pinned down a rough timeline and gone through the process of raising capital, whether you’re working with a broker-dealer, RIA, or whatever path you choose. Now, let’s move along to selling. More precisely, where are you selling the investments?
When it comes to selling investments, the most common reason for an issue is using Regulation D as the default regulation. Now, you can sell the investment anywhere in the United States. Under Regulation D, there is one filing that goes to the SEC and filings that go to every state your investors come from, regardless of whether you have a single investor or a hundred of them. Those numbers don’t matter – it’s one filing per state.
Fees range, of course, but on average you should expect $100 to $500, or $100 to $200 for smaller states. You’ll see that $500 number in bigger states. The outliers are Florida, which charges nothing, and New York, which charges $1800 for the state filing fee. Yes, even if there’s only a single investor. Expect that to cost the company another grand in state filing fees.
Selling investments internationally is an option, too. If you choose that route, those fall under regulation S, which is a whole other wide-ranging discussion. Just keep in mind that it is a possibility.
Sellability and Attractiveness
On the subject of selling, let’s briefly touch on the idea of sellability. All investors want the sponsor and the skin in the game. What are you putting into the deal? You may say, “I’m going to put in five percent of the capital, but I’m going to do it just like you. I’m buying Class A units for that five percent. I’m keeping my carried interest back as a separate interest.”
With a sponsor, and class ownership, that’s your GPS. When putting the deal together, we must disclose who has ownership interests and disclose if there’s higher than 10% ownership. We disclose everybody within the operating agreement and LLC documents.
Conclusion
There’s no one correct way to approach raising capital or selling investments, but the post above gives you a general idea of your options and what to expect. Crowdfunding Lawyers help clients launch a myriad of successful deals, and we can do the same for you. Reach out today to schedule your free consultation, and we’ll see what we can do to help you succeed.