One of the phrases I often use to describe the number of choices that you have for exemptions from registration under the SEC rules is “alphabet soup,” because you have a huge number of choices, and they all are just letters and numbers. In this video today, we’re going to go through what those choices are and how you choose from a pretty high level. But it should give you a guideline to start from.
When I needed to put a syndication together as my very first one, I was a real estate attorney. I hadn’t done a syndication yet, I knew vaguely what it was, but I never looked into exactly how I’d put one together. Suddenly, a deal came to me and I needed to make sense of what I called the alphabet soup. Because there were all these different numbers: 506b, 506c, Regulation A, Regulation CF. And how do they all fit together? Well, in this video, we’re gonna go through what they basically are and sort of how you choose. This video isn’t going to go into the specifics of them, but it’s going to offer you a sort of flowchart, if you will, on making that decision.
So let’s actually draw out a flowchart that can help you make that decision. We start at the start, right? The first question that you may want to ask yourself is, “Do I need to advertise?” Where are you going to be getting your investors from? Is it people that you already know? Or is it people that you don’t know and you need to advertise to them? That is a major key question to answer. Do we need to advertise? If the answer is yes, it takes us down one path. If the answer is no, it takes us down another path.
So if the answer is no, you want to do this just with some family and friends, but you still want to put together a syndication in the right way and not commit a securities violation by not doing it right. Then you have to ask yourself, “Do you want non-accredited investors?”
If the answer is yes, then you have two choices. You can choose Regulation D Rule 504. However, 504 is actually a very complicated exemption. Under Regulation D Rule 504, you basically need to go through each state from where your investors are coming from and analyze the deal under each state’s specific security laws, their blue sky laws, to see if it complies with that. And then you have to do an analysis to make sure that the whole deal applies across the board.
Your other option is Reg D Rule 506b (B, like boy). Under Reg D Rule 506b, you can definitely take non-accredited investors. But you’re limited to only 35 non-accredited investors in any 90-day period. So if you need to do more than 35 in a 90-day period, so you’re doing a pretty large raise, and you don’t need to advertise, maybe you would, but you have to have non-accredited investors, you would probably choose rule 504. But if you don’t need to advertise and 35 non-accredited investors in any 90-day period is acceptable, definitely Regulation D Rule 506b. Many of my clients, more than half of my clients, do it under 506b.
If you do have to advertise, however, that immediately gets rid of rule 506b. It’s not even an option. Because if you’re going to make a general solicitation to the world, then it needs to go out to the public. So if the answer is yes, that you do need to advertise, suddenly, now we need to ask again the question: “Do you want non-accredited investors?”
If you don’t want non-accredited investors, or you can live without them, then the easy answer is Reg D Rule 506c. Under Reg D Rule 506c, you can raise an unlimited amount of money from an unlimited number of accredited investors, you just have to go through an independent verification that they are in fact accredited investors. But this is probably your least complex and most cost-effective route to go.
If you do need to have non-accredited investors and advertise, you only have two options. And then we ask ourselves this question, assuming that the money works, because under Reg CF, there’s only $5 million that you can raise. Under Reg A, you can raise up to 50 million with different tiers, of course, but they’re vastly different in terms of complexity. Regulation A is very complex to do. It’s very expensive to do because basically, you can think of it as a mini IPO.
So if you need to advertise and you need to have non-accredited investors, you could ask yourself, “Is it okay that it only goes through an SEC-approved portal?” If all the traffic only goes through that SEC portal, which will put its own fees on top of it and have control over all of those investors, and if you’re okay with that and the fees, then you may want to consider Regulation CF.
A lot of people come to me originally thinking that Regulation CF was going to be the easy way, the cheap way, because basically they could advertise and do it with non-accredited investors. It’s not the cheap way. Regulation CF, many times the fees are in excess of 10%, which vastly hurts those returns that you’re trying to get your investors. Not only that, everything has to go through that registered portal. And the cost of filing the form CF, which is required to do it, to have an attorney prepare it, most of the time costs somewhere around $10,000 or more. So Reg CF offering oftentimes just doesn’t work because they’re charging similar fees to doing a Regulation D offering, but then also you’ve got this 10% portal fee, and it just kind of knocks it out of the running as a possibility.
If they are not okay with doing it through an SEC portal, then your only option is Reg A. Under Regulation A, it can be considered a mini IPO. This is also kind of like a registered registration that takes place. A package is put together typically by an attorney because it’s a very complex document given to the SEC, who reviews it and makes sure it’s up to their standards. And in part of that review, there’s a lot of going back and forth. Fees in general that attorneys charge for this can be around $60,000 or more when they put it together. Plus, there needs to be audited financials that are also part of that package most of the time. The total bill that I’ve heard most people are paying for a Regulation A product is well over $100,000, somewhere around $100,000 to $150,000. Plus, it takes at least six months to get through the process in order to be able to start your project, which probably kills it for almost everybody, certainly in real estate, where time is of the essence and we need to do things quickly.
In my opinion, Regulation D Rule 506b and 506c certainly offer the most opportunity and the fastest results at a good price for syndicators putting together a fund. That’s why we specialize just in Regulation D because it’s an answer that we can do very quickly, get them the results that they want fast, and then they can keep growing from there. There’s nothing to say that you can’t do a Regulation D Rule 506c offering at the same time as putting together a Regulation A offering, if that’s the direction you want to go. You certainly can do that. So while that time is tolling, you’re still gathering investors and putting together your fund.
I hope that helps you choose which pathway makes the most sense to you. If you’d like to talk more about how you would do a Regulation D Rule 506b or 506c offering, or you have something already in the works where that is definitely the right choice for you, feel free to give us a call. We can talk about your specific situation and make a plan to get you from where you are today to where you want to go in the next six months, three years, whatever your horizon is.