Direct investment, specified pools, or blind pools: there are three different strategies for what you’re going to do with the money you’ve raised. This needs to be communicated in your private placement memorandum to your investors. Let’s go through what the three differences are and how you make a choice about exactly where you’re at.
The easiest to explain is a direct investment. We are going to raise $4 million to buy the property at 123 Main Street, or we are going to raise $4 million to buy business XYZ Corporation. Very simple. That is what a direct investment is.
There are two other kinds of investment strategies: specified pools and blind pools. A specified pool says we are going to buy this kind of asset in this kind of manner. For example, we’re going to buy 123 Main Street, 456 Second Street, the one that’s around the corner from that, and maybe the shop down on Willow Street. Once that’s been done, that is the specified pool. We’re raising all this money in order to buy those things. Sometimes a venture capital fund is also similar to a specified pool where we’re going to be buying these sets of businesses or investing in these sets of businesses. And then we’re going to be eventually selling them or having them go public.
Now compare that to a blind pool. A blind pool says, “Hey, look, we’re gonna raise this money, and we don’t know exactly what we’re gonna buy. We’re gonna buy things that look generally like this. But if some other opportunity comes our way, we’re gonna buy that too if it looks good. We’re raising just this amount of money, but we’re blind to what it is.” Those are the main differences between them.
When it comes to making a decision about what you’re going to do, one of the factors in figuring out what strategy your syndication or private offering is going to look like is thinking about these things. Certainly, a blind pool gives you a lot of freedom to invest in whatever, but it’s also harder to raise money for. It is harder to go in front of an investor and say, “Give me some money, I’m gonna invest it in some things that I think you might like,” versus “Give me some money, and I’m gonna buy that thing right there. That right there is mine, we’re going to buy that and that’s what we’re going to keep.” So that one is very simple; they can see the asset, they know what it is. Obviously, there’s a level of trust that needs to be developed, and it’s much higher when it’s a blind pool. Even a specified pool takes more trust than an individual asset because there’s more certainty in “it’s that one thing.” So that’s one of the considerations that you’ll have to make as you put a syndication or private equity fund together.
Now you notice I use the word “fund” and “syndication” in the same sentence. Let me just reiterate why: a syndication, by the pure definition of it, is a group of people coming together for a common purpose. A fund, by the pure definition of it, is a pool of money used for a common purpose. To me, that sure sounds like the same thing, sort of two sides of the same coin. So I use them interchangeably. That’s just the way I like to talk. I recognize that some people talk about funds more as these pools and then a syndication more as a direct investment. But either way, it’s people coming together for a common purpose, or funds coming together for a common purpose. That’s why we do it that way.
My name is Tilden Moschetti. I am a syndication attorney for the Moschetti Syndication Law Group. If we can help you put your Regulation D offering together, be compliant with the SEC, not get in trouble and have them knocking at your door should anything go wrong (like an investor getting upset for whatever reason, which can happen), please give us a call or set up an appointment through our website.