Raising capital legally for a real estate syndication, private equity fund, or other private investment offering requires navigating complex securities regulations. While daunting, this process is very achievable with the right knowledge and guidance.
In this comprehensive guide, we will demystify the landscape of private placements under SEC Regulation D and provide proven strategies to connect with qualified investors.
You will learn the critical differences between accredited and non-accredited investors, advantages and nuances of Rule 506(b) and 506(c) exemptions, what constitutes prohibited solicitation, and how to verify investor eligibility.
We then dive into relationship-based tactics for systematically finding investors by leveraging your spheres of influence, cultivating referral partners, executing organized outreach campaigns, and creatively grabbing attention.
With the principles and step-by-step game plan outlined here, you will gain clarity on legally fundraising for your venture and be equipped to build a pipeline of capital partners excited to invest.
While navigating securities regulations is complex, taking an educated and strategic approach enables you to raise the private capital you need to scale your business and investments successfully.
Legal Background – Regulation D for raising capital legally from investors
Accredited and Non-Accredited Investors
When raising capital for real estate syndications or other private investment opportunities, a key consideration is whether you can accept investments from any member of the general public or if you must limit participants to accredited investors only.
The Securities and Exchange Commission (SEC) draws a distinction between accredited and non-accredited investors under Regulation D of the Securities Act of 1933. The regulation provides exemptions that enable companies to raise capital through private securities offerings without having to formally register the deals with the SEC.
An accredited investor is someone who meets defined income and/or net worth thresholds set by the SEC. For individuals, this includes having $200,000 in annual income ($300,000 jointly with spouse) for the last two years or a net worth over $1 million. Certain institutions like banks and insurance companies also qualify.
Accredited investors are deemed to have sufficient financial sophistication to participate in unregistered securities offerings. Non-accredited investors do not meet the income or net worth criteria and are considered to need the SEC’s investor protection oversight.
Under Rule 506(b) of Regulation D, companies can sell securities to an unlimited number of accredited investors but no more than 35 non-accredited investors. Rule 506(c) offerings can only be made to accredited investors. The type of investors you can accept depends on the exemption you utilize.
Regulation D Rule 506b
Rule 506b under Regulation D provides a “safe harbor” exemption that allows companies to raise an unlimited amount of money through the sale of securities without registering the offering with the SEC. This makes it easier for small businesses and startups to access capital.
To qualify for the 506b exemption, companies can sell to an unlimited number of accredited investors. Accredited investors include individuals with $200k annual income ($300k joint with spouse) or $1 million net worth. Certain institutions like banks and insurance companies also qualify.
Additionally, issuers can sell securities to up to 35 non-accredited yet sophisticated investors. These investors must demonstrate sufficient knowledge and experience in financial matters to evaluate the investment.
General solicitation of investors is prohibited under Rule 506b. Issuers must have a pre-existing substantive relationship with potential investors, developed through questionnaires, meetings, and other vetting communication prior to making an offering.
Non-accredited investors must receive extensive disclosures and financial information from the issuer. This ensures they can make informed investment decisions.
While powerful, Rule 506b contains complexities around compliant investor communications and relationships. Hiring an experienced securities attorney is critical to steer clear of pitfalls and utilize 506b successfully.
Regulation D Rule 506c
Rule 506c is an exemption under Regulation D that allows companies to raise an unlimited amount of capital through private securities offerings without registering with the SEC. Advertising and general solicitation of the offering are permitted.
However, issuers can only sell securities under Rule 506c to investors who qualify as accredited. Accredited investors include individuals meeting defined income and net worth thresholds as well as certain institutions.
Companies must take reasonable steps to verify an investor’s accredited status before selling them securities. This can be done by checking documentation like tax returns and bank statements or by using a third-party verification service.
The main benefit of Rule 506c is the ability to advertise to attract investors combined with no limit on the amount of money that can be raised. The tradeoff is the restriction to only accredited investors versus Reg D Rule 506b which allows up to 35 non-accredited yet sophisticated investors.
Given its advantages, Rule 506c can be ideal for startup fundraising, real estate syndications, and other private capital raises. Careful compliance is critical, making experienced securities counsel invaluable.
What is solicitation under Regulation D
Solicitation refers to any form of advertising or general promotional activities to attract investors to a securities offering. This includes things like newspaper and online ads, email blasts, seminars, cold-calling campaigns, and other public communications.
Rule 502(c) of Regulation D prohibits the use of general solicitation for private placement offerings seeking to qualify for exemptions under Rule 504, 505, or 506(b).
General solicitation could cause a company to lose its exemption status if securities are offered to a large enough number of prospective investors that it appears public. This is why Rule 506(b) offerings rely on pre-existing relationships and accredited investor verification.
However, under Rule 506(c), general solicitation is permitted as long as sales are made only to verified accredited investors. The tradeoff is that no non-accredited investors can participate.
Issuers should be careful about conditioning the market with premature communications even to known contacts. Discussing deals before the offering documentation is complete can be risky.
Spheres of influence for finding investors for your syndicate or fund
Here is a draft introduction for the “Spheres of Influence for Finding Investors” section:
When it comes to finding investors for your real estate syndication, it’s important to start with the people closest to you and work your way outward. This concept is known as spheres of influence – the idea that each person you know falls into a certain sphere or category based on their relationship with you.
In this section, we’ll cover the five main spheres of influence and how you can leverage each one to find potential investors:
- Inner circle – This sphere consists of your closest friends, family members, business partners, and other people with whom you have a tight personal relationship. Don’t underestimate this group when seeking investors.
- Previous clients – Any person or company you’ve done business with in the past falls into this sphere. Former clients can be great sources of investment capital.
- People you’ve met – This sphere contains professionals and acquaintances you’ve met but don’t have an established business relationship with yet. With some nurturing, they could become investors.
- Target people you haven’t met – Also known as “whales,” these are people in your community who you have identified as prime investor candidates but haven’t contacted yet.
- The public – This is the outermost sphere, comprising people you don’t know at all yet. Tools like advertising and direct mail allow you to reach this broad audience.
Let’s explore each of these spheres of influence in detail and the strategies you can use to convert them into syndication investors.
Inner circle – friends, family, partners, closest relationships
The inner circle refers to your closest friends, family members, business partners, and other people with whom you have a tight personal relationship. When seeking investors for your real estate syndication, don’t underestimate this group.
Even though these people may not be accredited investors who can participate in a 506(c) offering, they can likely still invest in a 506(b) raise. The personal connection you have with your inner circle allows you to communicate with them directly about investment opportunities without any solicitation restrictions.
Leverage your existing strong relationships with your inner circle to find potential investors. Let them know what you are working on and give them the chance to get involved. The law of reciprocity means they are more likely to want to support your venture since you have a close interpersonal bond.
Be sure to show appreciation to any inner circle members who do invest with you or refer you to other investors. Find thoughtful ways like taking them out to dinner or sending a gift to say thanks. Continuing to nurture your inner circle will pay dividends when seeking investors.
Previous clients – people you’ve done business with before
The previous clients sphere refers to people or companies you’ve done business with in the past, whether in real estate or other ventures. Tap into your client base as a source of potential investors.
These are people who already know you and have seen you in action by working with you before. This established trust and familiarity makes them more inclined to consider investing with you compared to a complete stranger.
Your previous clients are especially promising investor targets if you did an excellent job for them and have an ongoing relationship. Make sure any past clients you reach out to had a positive experience working with you.
While previous clients may not qualify as accredited investors for a 506(c) raise, you likely built enough of a connection through your past business dealings to approach them for a 506(b) offering.
Maintain regular contact with your past clients, even if you no longer work with them actively. When you have an investment opportunity, reach out and give them the chance to get involved first before opening it up more widely. The opportunity to partner with you again is often appealing.
People you’ve met – know who you are but no business relationship yet
This sphere refers to professionals, acquaintances, and other contacts you’ve met previously but don’t have an established business relationship with yet. They know who you are, but you haven’t worked together.
People you’ve met represent promising investor targets because there is existing name recognition and familiarity. However, since you haven’t done business together yet, they likely don’t qualify for a 506(b) raise.
To nurture these relationships into potential investors, focus on continuing to build trust and providing value. Follow up after you meet someone new with notes, information, and other helpful resources.
Aim to move contacts from this “people you’ve met” sphere into your inner circle or previous clients groups over time. Deepen the relationship by meeting for coffee, golf, meals, or other activities.
The goal is to turn these acquaintances into friends and sources of referrals. They may not invest right away, but by strengthening the relationship you are laying the foundation for future investment potential.
Be patient and persistent with follow up when cultivating your “people you’ve met” sphere. With consistent effort over time, many of these contacts will become investors.
Target people you haven’t met – “whales” in your community
This sphere refers to people in your geographic or professional community who you have identified as prime investor candidates but you do not have any relationship with yet. These individuals can be thought of as “whales” – big fish you want to build a connection with.
The people you haven’t met represent major potential sources of investment capital for your syndication. The key is researching and identifying who these high-net-worth or highly invested people are in your area.
Once you create your target list, the next step is making initial outreach and introducing yourself. This sphere will require more work to move contacts through the stages from complete stranger to invested partner.
Start by mentioning any common connections you share or expressing your knowledge and interest in their work. Provide value by sharing useful information and resources about real estate investing.
Aim to set up an in-person meeting or call to begin building the relationship. Nurture it consistently over time through value, reciprocity and appreciation. If they are a true whale investor, the effort will be well worth it.
Turning “people you haven’t met” into partners requires persistence, creativity and adding value. But landing a major investor from this sphere can significantly impact your ability to raise capital.
The public – people you don’t know at all
The outermost sphere of influence is the general public – people you have no existing relationship or connection with. Reaching complete strangers requires different strategies like advertising, direct mail, and other broadcast methods.
Blanket marketing efforts allow you cast a wide net but lack the personalization of directly contacting leads you already know. To successfully attract investors from the public, campaigns must grab attention quickly and motivate responses.
Some effective tactics include:
- Paid search ads to reach people searching for terms related to real estate investing
- Social media ads targeted to specific demographics and interests
- Print ads in industry trade magazines and local publications
- Direct mail letters personalized to the recipient as much as possible
- Webinars advertised through multiple channels
- Podcast sponsorships and guest interviews to reach investors tuning in
The public sphere lets you scale your investor search rapidly. But it lacks the trust and reciprocity inherent in tapping existing relationships. Expect a lower response rate from the public so you must cast a very wide net.
Combine broad-based marketing to the public with outreach to your closer spheres of influence. This allows you to attract new investors efficiently while leveraging established connections.
Get started building relationships with referral partners
Referral partners can be invaluable for finding new real estate or private equity syndication investors. By developing relationships with professionals who can refer prospects to you, you gain access to an expanded network of potential capital sources.
In this section, we’ll cover strategies for identifying and building mutually beneficial referral relationships including:
- Educating and adding value – Provide useful info and resources to establish your credibility.
- Asking for help – Don’t be afraid to clearly ask for introductions to potential investors.
- Rewarding referrals – Find ways to thank partners for any referrals whether or not they invest.
- Givers get – Nurture referral relationships through consistent generosity and support.
- 5 steps for building referral relationships – Tactical sequence for developing new referral partners.
Strong referral relationships don’t happen overnight. They require an ongoing commitment to providing value, communicating clearly, and actively appreciating your partners.
But over time, cultivating win-win referral relationships will connect you with more qualified investors interested in your syndication opportunities.
Educate and add value
The first step in cultivating productive referral relationships is establishing yourself as an expert resource who provides meaningful value. Take time to educate partners and contacts on topics related to real estate investing and your syndication business.
Share information, data, analysis, reports, and other resources to display your knowledge. This could include market insights, investment strategy overviews, risk evaluations, due diligence processes, or lending environment updates.
Present information tailored to each partner’s level of familiarity. Make introductions to commercial real estate accessible for outsiders but also discuss advanced strategies for seasoned investors.
Consistently delivering value builds trust in your capabilities and judgment. Partners will be more inclined to refer prospects to you if you have demonstrated expertise and commitment to educating.
Make adding value a habit, not just a one-off tactic. Look for new ways to share helpful knowledge with your partners on an ongoing basis whether or not you currently have an investment opportunity.
Ask for help
Many people fail to build strong referral relationships because they neglect to directly ask for help making connections. Don’t be afraid to clearly articulate how partners can assist you.
Tell them specifically what kinds of investors, profiles, backgrounds, and criteria you are looking for. The more details you provide, the easier it will be for partners to know who to refer to you.
Ask for introductions to their own network of high-net-worth contacts who may be looking for real estate investment opportunities. Referral partners are often connected to “whale” prospects.
Phrase the ask in a win-win manner. Highlight how you can provide value to any referred prospects through your expertise and investment diligence.
If a partner refers someone who becomes an investor, report back to thank them for the introduction and provide updates on the opportunity. This positive feedback loop will encourage further referrals.
Following up consistently with appreciation and results demonstrates you actively work hard on introductions you receive rather than taking them for granted.
When you receive investor referrals, whether or not they ultimately invest, it’s important to reward the referral partner who made the introduction. This positive reinforcement will encourage more referrals.
While you can’t provide direct commission-based referral fees for raising capital, there are still thoughtful ways to show your appreciation:
- Send a gift basket, bottle of wine, gift card, or other token of thanks
- Take them out for a special meal at a nice restaurant
- Offer tickets to a sports game, show, or other event
- Write a personalized thank you note highlighting how much you value their help
- Offer to reciprocate by introducing them to contacts who could help their business
- Spotlight referral partners and thank them on your website or in communications
- Provide special access to deals, events, info, and other VIP perks
The referral rewards you offer don’t need to be overly extravagant. The thought and recognition matters more than the monetary value.
Reward partners promptly after receiving a referral. This positive reinforcement makes them more inclined to send introductions again.
Givers get – put everything into the relationship
“Givers get” reflects the mindset that if you consistently put care, effort and value into your referral relationships, you will gain productive introductions and partnerships in return.
Rather than viewing referral partners as one-off passive conduits, nurture them as long-term relationships. Check in regularly to provide helpful information and resources.
Don’t only reach out when you need something. Add value on an ongoing basis whether or not you currently have an investment opportunity open.
Build authentic friendships rooted in mutual understanding and a desire to help one another succeed. Partners will be eager to introduce great prospects to someone they know truly cares.
Be generous with sharing your knowledge and connections. Proactively make introductions that would benefit your partners as well. A rising tide lifts all ships.
Creating knock-on effects through valuable introductions demonstrates you are invested in the relationship, not just yourself. This breeds reciprocity.
The more care you put into developing win-win referral relationships, the higher quality investor referrals you will earn over time through the “givers get” effect.
5 Steps for building referral relationships
Successfully building referral relationships doesn’t happen by accident – it requires an intentional, strategic approach. In this section, we’ll explore a 5-step process for systematically developing a network of referral partners who can connect you with new real estate syndication investors.
The five steps include:
- Build a list – Identify specific types of professionals who could be good referral sources and create a target list.
- Make contact – Reach out to your list of targets and initiate a relationship.
- Follow up – Continue nurturing new relationships through ongoing communication.
- Provide exceptional service – Go above and beyond if someone refers an investor to you.
- Show appreciation – Find ways to thank referral partners for their help.
Following this sequence enables you to methodically grow your referral network over time. Combined with the other relationship-building principles we’ve covered, these five steps will equip you to turn contacts into consistent referrers.
Executing this plan requires dedication and persistence, but the payoff in high-quality investor introductions is well worth the effort. Let’s explore each of the five steps for building referral relationships in greater detail.
1. Build a list
Create a targeted list of professionals who could serve as good referral partners including real estate agents and brokers, wealth managers, accountants, consultants, financing professionals, and real estate agents. Identify specific companies and individuals within those fields who you want to get started at build relationships with. Organize and prioritize your list in a CRM.
2. Make contact
Proactively reach out to your target referral prospects through phone calls, emails, dropping by their office, sending notes, and linking up in-person. Book coffee meetings or schedule introductory calls to begin establishing a connection. Leverage any mutual contacts to help facilitate an introduction.
3. Follow up
After initial outreach, nurture the new relationship through consistent, value-focused follow-up. Share useful info, check in periodically, and look for ways to be helpful. This follow up is key for converting new contacts into referral partners over time. Use CRM to track and automate follow up.
4. Provide exceptional service
If a referral partner introduces an investor to you, provide white-glove service and communication throughout the process. Make sure the referred investor has an amazing experience working with you. This reflects positively on the partner who made the referral.
5. Show appreciation
Find sincere ways to show referral partners you appreciate any introductions and are grateful for their help. Send thank you notes, take them to dinner, give small gifts, and publicly recognize them. Make sure they feel acknowledged.
Finding investors who are ready to invest
Now that we’ve covered building relationships with referral partners, let’s shift our focus to strategies for directly finding and connecting with potential real estate investors.
Even with great referrals, you will still need to source investors and raise money proactively through targeted outreach, marketing and lead generation. In this section, we’ll explore proven approaches to identifying and connecting with investor prospects including:
- Educating and adding value – Establish your credibility by providing useful investor education.
- Showing up like no one else – Differentiate yourself through world-class service and communication.
- Caring – Take time to understand what each prospect is looking for.
- Givers get – Nurture relationships by consistently giving value.
- Steps for finding investors – Tactical sequence for identifying and qualifying investor prospects.
By providing education and resources relevant to investors, being responsive, taking a genuine interest in their goals, and putting care into each relationship, you will be able to build a pipeline of prospects excited to fund your deals.
Combining these relationship-based principles with proactive lead generation and outreach will enable you to continually expand your investor network. Let’s examine some tactical steps and best practices to move potential investors from initial discovery through to funded capital partners.
Educate and add value
Build credibility with investor prospects by consistently providing useful educational resources and insights about why they should invest in real estate or your fund. Share reports, analysis, articles, and your track record to demonstrate your knowledge and expertise and why you are the syndicate for them. Add value by teaching investors about topics investment fundamentals, market conditions, investment strategies, risk management, due diligence, and more.
Show up like no one else
Differentiate yourself by providing best-in-class service, communication, preparedness and professionalism during every investor interaction. Be highly responsive through calls, emails, and meetings. Go above and beyond investor expectations and you will stand out from other sponsors.
Care – ask what they are looking for
Take time to understand each investor’s specific needs, goals, concerns, and interests when evaluating opportunities. Ask thoughtful questions, listen carefully, and see the world through their eyes. Prospects want to know you genuinely care about more than just obtaining their capital – they want to know that it matters if your business plan matches what they need.
Build investor relationships for the long-term by consistently giving value, education, strong communication and exceptional service whether you currently have a live fundraise or not. This nurtures trust and reciprocity. In giving first, you will eventually get back through investment.
5 Steps for finding investors
Just as we outlined a process for building referral relationships, there is also a systematic sequence we can follow to source, qualify, and convert direct investor prospects. In this section, we’ll explore a 5-step approach for finding real estate syndication investors:
- Build a list – Identify and compile a list of potential investor targets.
- Categorize – Organize your list into different groups based on relationships.
- One-on-one outreach – Schedule calls and meetings with top prospects.
- Call/email campaigns – Execute organized communication campaigns.
- Create a prospecting plan – Develop a strategy to find new investor prospects.
Executing these steps enables you to work your networks, leverage existing contacts, execute targeted campaigns, and proactively grow your investor pipeline.
Combined with the relationship-building principles we already covered, this systematic process will generate qualified prospects to keep your fundraises moving. It provides structure while still allowing for organic relationship development.
Finding investors and raising capital certainly involves some art along with the science. But you improve your odds of success by approaching it methodically. Let’s examine each of these five tactical steps for locating and connecting with potential real estate syndication investors in more depth.
1. Build a list of potential investors
Create a master list of potential investors from your contacts and networks. Include friends, family, past clients, professionals you know, and targeted whales you want to build relationships with. Organize this list in a CRM or spreadsheet.
2. Categorize the list according to your spheres of influence
Sort your list into groups like inner circle, past clients, contacts, whales you haven’t met, etc. This allows tailored outreach to each group. Segment by location, profession, or demographic data too.
3. Develop a ‘One-on-one’ program for top prospects
Identify your top prospects for one-on-one outreach. Schedule phone calls, in-person meetings, video conferences, and other direct contact. Build these critical relationships with consistent, personalized nurturing over time.
4. Develop a call/email program
Develop organized, consistent email and call campaigns to nurture ongoing relationships with your broader list. Track these interactions in your CRM and set reminders for future follow up.
5. Develop a prospecting plan
Build a strategic plan for finding new qualified prospects through marketing tactics like networking events, seminars, webinars, referrals, and possibly some limited advertising. Connect these new prospects to your categorized CRM.
Other ideas to raise money from investors in your real estate syndication or private equity fund
In addition to the structured outreach programs and prospecting strategies outlined so far, there are a few other effective channels you can leverage to connect with potential real estate syndication investors.
Specifically, we’ll cover how to use:
- Events – Hosting or speaking at live events to attract investor prospects.
- Direct mail campaigns – Reaching high-potential prospects through personalized mailers.
- Coffee meetings – Getting face time with investors to create deeper relationships.
- Shock and awe – Wowing investors with remarkable mail packages.
Events, direct mail, coffee meetings, and creative packages help you grab investors’ attention in memorable ways.
Used strategically in conjunction with your relationship-building efforts, these tactics enable you to expose new prospects to your offerings and convey your professionalism.
Let’s explore some best practices and execution tips for each approach. A diversified outreach strategy combining multiple investor contact channels will generate more high-quality prospects.
Hosting or speaking at live local events allows you to position yourself as an expert and interact directly with investor prospects in the same room. Partner with companies like wealth managers to co-host. Offer food, drinks, giveaways to boost attendance. Have a clear investor-focused theme and takeaway.
Direct mail campaigns
Create personalized mailers with your brand, services/products overview, and contact info to send to targeted high-potential investor prospects. Include a letter with a compelling hook and useful enclosures like market data. Automate mailings for consistent nurturing. This should be more than just sending out private placement memorandums.
Make time for in-person coffee or casual meals with prospects to build deeper relationships. Meet in their neighborhood when possible. Listen more than pitch. Offer to pick up the check. Ask good questions and show genuine interest in their investing motivations and goals.
Shock and awe packages
Wow top prospects with high-touch care packages containing thoughtful gifts, cool branded items like custom coffee gift cards, your business card, brochures, and a nice personalized note. This creative approach makes you memorable.
Raising capital privately for real estate syndications, private funds, and other alternative investments is a learnable skill. By educating yourself on securities regulations, strategically leveraging your spheres of influence, and executing organized outreach campaigns, you can systematically build a network of invested capital partners.
While at first glance Regulation D seems complex, the core concepts are understandable with guidance from an experienced securities attorney. The rewards of accessing private capital without prohibitive regulatory burdens outweigh the diligence required.
Success ultimately comes down to consistently providing value, nurturing reciprocal relationships, actively listening to what motivates partners, and delivering an exceptional investor experience.
Keep this article handy as you put these principles into practice over time. Refer back to the summaries and steps outlined in each section. Experiment with new tactics and track what works for your particular venture.
Fundraising is challenging but immensely empowering when done effectively. You now have a blueprint for legally, ethically and efficiently attracting the investors you need to achieve your business goals. Partnering with the right securities counsel provides indispensable support and confidence along the journey.
I wish you the best as you undertake this exciting endeavor of raising private capital and bringing new investment opportunities to your partners. The work you do to educate and provide value will come full circle to create lasting success.