How do you raise capital from non accredited Investors?

Question

BiggerPockets community,

Here is my dilemma.

My primary LPs are friends and family that fall shy of the accredited investor income requirements. They are mostly Spanish speaking small business owners in Pilsen and the lower West Side of Chicago.

Part of my strategy as a GP is to leverage YouTube shorts (Spanish) and MeetUps to widen my investor base.

A 506(c) syndication would make sense but it only allows for accredited investors. And a 506(b) syndication is a great alternative because it permits up to 35 sophisticated investors but I cannot rely on my prior advertisement efforts.

What is the best way to integrate my current LP pool with the correct syndication structure?

Charles Seaman · Answer

@Adriel Cisneros If the people that you're referring to are all friends that you have preexisting, substantive relationships with, then you can invite them to invest with you in a 506(b) offering. Just make sure that you document any evidence of your preexisting, substantive relationship with them. This will important if your records ever get audited by the SEC.

Clayton Bownds · Answer

There is a legal mechanism to start your syndication's capital raise structured under the 506b exemption to allow your sophisticated, but non-accredited friends and family to invest before transitioning to a 506c to allow marketing your deal to a greater audience that might not meet the prior substantive relationship requirement. Recently, Mauricio Rauld with Premiere Law Group shared some detail on this in a livestream for which you can check out the replay on YouTube.

Full disclosure - I've not done this and I highly recommend reaching out to an SEC attorney to get the skinny on specific requirements to stay within the letter of the law.

Hope this helps!

Cheers,
Clayton

Ash Hegde · Answer

Charles is correct, if you already know them then it gets around the "accredited" requirement, and definitely document the relationship in case it is ever looked at.

Adriel Cisneros · Answer

An alternative may be to allow for a direct investment through a holding company (LP) that holds an LLC under which the asset is acquired, managed, and ultimately liquidated.

Rick Martin · Answer

@Adriel Cisneros start welcoming new, non-accredited into your biosphere and invite them to your educational outlets like YouTube, etc. By engaging and learning from your content, they are beginning that relationship and familiarity with you. Invite them for an educational phone conversation where you can learn about each other. Try to verify their financial wherewithal, as you do not want to be wasting each other's time.

Though they may not meet accredited status, they must still have a substantial net worth and liquidity. As a rule of thumb, a minimum investment should make up at most 10% of their net worth. So if your minimum investment is $50k, they should have a net worth of $500k. Above all, verify their understanding of the investment, i.e., make sure they understand it is illiquid and have read over a sample deck and PPM. Another rule of thumb is that this verification process takes about 30 days, but there is no hard and fast rule. Friends, family, and referrals (I would confirm this one) can come in right away.

Chris Seveney · Answer

@Adriel Cisneros

You could also do a regulation CF or a regulation A+ offering

They will have higher up front costs but accept $ from non accredited investors.

We went the regulation a+ route after doing several 506c’s because of ability to open the investor pool

How do you raise capital from non accredited Investors?

How do you raise capital from non accredited Investors?

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