A Very Succinct Outline for Legally Raising Capital

[Don Konipol]

There’s lots of confusion, incorrect information, and false assumptions being made about the legality of raising capital for investment.  So here is a very short, quick outline of the legal process in the U.S.A.

1. Any capital raised for investment purposes, in which one or more parties is NOT active in the management of the investment entity, is a securities offering.  
2. All securities offering must be REGISTERED with the Securities and Exchange Commission, unless the offering is covered under an exemption from registration.

3. There are three primary exemptions from SEC registration.  The exemption for intra state offerings (the offer is made to investors residing in a single state), the exemption for investors with FEDERAL accreditation (Federal banks, investment banks of a certain size, Federal funds dealers, etc) and the private placement exemption.  Since single state offerings are very limiting, and many states require state registration and compliance with inherent costs, the private placement exemption remains the most popular. 

4. There are two methods of “private placement”. The old traditional one was the general exemption for private placement.  The sponsor, with the help of a securities attorney, determines that the offering meets the (often ambiguous) requirements for determination of private placement and proceeds with the offering.  The advantageous of this type of offering is simplicity, cost, and speed. 
The second method of private placement, is compliance with the SEC “safe harbor” Reg D.  Sec 504, 505, or 506 b or c.  This will necessitate the production of a Private Placement Memorandum (PPM), Operating Agreement, and Subscription Agreement.  Current cost are $8,000 to $15,000 for legal fees, inclusive of Form D filing with SEC and notification filing for the states the initial investors reside in.  The advantages of the Reg D are (1) if the sponsor complies with the Reg D requirements, the offering as to it being a private placement will NEVER be challenged by the SEC.  Further, if disgruntled investors sue, the sponsor has a “definitive defense” as well as a “statutory defense” in a lawsuit. This means that by merely complying with the Reg D requirements, the sponsor should have enough of a defense to beat any lawsuit.  I can tell you from personal experience that a small few investors will consider suing EVEN IF THEY MADE MONEY; and that no attorney will take their case (at least not on contingency) if the sponsor complied with Reg D, absence fraud.  
As important, all sophisticated investors will only consider investment in private offerings that are Reg D, or occasionally Reg A, compliant.  The most important aspect of Reg D is the 506 c offering, which ALLOWS general solicitation and advertising, and eliminates the requirement of the sponsor and investor having an established relationship. 

I’d be happy to answer any questions or provide any clarifications; and encourage comments of any kind. 

[Chris Seveney]

Quote from @Don Konipol:

Quote from @Robert Ellis:

Quote from @Don Konipol:

There’s lots of confusion, incorrect information, and false assumptions being made about the legality of raising capital for investment.  So here is a very short, quick outline of the legal process in the U.S.A.

1. Any capital raised for investment purposes, in which one or more parties is NOT active in the management of the investment entity, is a securities offering.  
2. All securities offering must be REGISTERED with the Securities and Exchange Commission, unless the offering is covered under an exemption from registration.

3. There are three primary exemptions from SEC registration.  The exemption for intra state offerings (the offer is made to investors residing in a single state), the exemption for investors with FEDERAL accreditation (Federal banks, investment banks of a certain size, Federal funds dealers, etc) and the private placement exemption.  Since single state offerings are very limiting, and many states require state registration and compliance with inherent costs, the private placement exemption remains the most popular. 

4. There are two methods of “private placement”. The old traditional one was the general exemption for private placement.  The sponsor, with the help of a securities attorney, determines that the offering meets the (often ambiguous) requirements for determination of private placement and proceeds with the offering.  The advantageous of this type of offering is simplicity, cost, and speed. 
The second method of private placement, is compliance with the SEC “safe harbor” Reg D.  Sec 504, 505, or 506 b or c.  This will necessitate the production of a Private Placement Memorandum (PPM), Operating Agreement, and Subscription Agreement.  Current cost are $8,000 to $15,000 for legal fees, inclusive of Form D filing with SEC and notification filing for the states the initial investors reside in.  The advantages of the Reg D are (1) if the sponsor complies with the Reg D requirements, the offering as to it being a private placement will NEVER be challenged by the SEC.  Further, if disgruntled investors sue, the sponsor has a “definitive defense” as well as a “statutory defense” in a lawsuit. This means that by merely complying with the Reg D requirements, the sponsor should have enough of a defense to beat any lawsuit.  I can tell you from personal experience that a small few investors will consider suing EVEN IF THEY MADE MONEY; and that no attorney will take their case (at least not on contingency) if the sponsor complied with Reg D, absence fraud.  
As important, all sophisticated investors will only consider investment in private offerings that are Reg D, or occasionally Reg A, compliant.  The most important aspect of Reg D is the 506 c offering, which ALLOWS general solicitation and advertising, and eliminates the requirement of the sponsor and investor having an established relationship. 

I’d be happy to answer any questions or provide any clarifications; and encourage comments of any kind. 

 Could you do more of deep dive into Reg A offering and 506 C and when you should do each one? We are doing single development offerings in SPVs through a 506 C offering for projects that are ground up like in Columbus Ohio but for larger deals in Miami Florida where an acre of land can be 100 million dollars in an unlimited height district you really need to be raising from institutions and the largest publicly or privately held companies in the country. We've also looked at subdivision funds that would purchase and develop a subdivision and take it all the way to completion with project sizes approximately 25-30 million in construction, land, and entitlements with exits around 50 million but I wanted to know which structure is best used. these are two very different markets. one we could be fine with check sizes 50k-500k, the other one we would need minimum checks of 3 million and up. it could be a 7-8 year development with a billion dollar sell out if your building is as big as those that are 1-2 million square feet in Miami. thanks for posting hope this isn't too much to ask. 

I’m no expert in Reg A, so my help with it will be limited.  Historically Reg A was a way for small companies to raise capital in a small PUBLIC offering, with the available use of general solicitation and advertising, often or hopefully leading to having a trading market in their securities.  A few things happened in 2015.  First and foremost with Reg D 506 c established  with the use of general solicitation and advertising eliminating the necessity of going the Reg A route in order to advertise your offering or to not be under the restrictions of a private offering.  So essentially Reg D 506 c is a hybrid between a private and a public offering.  Reg A is a non registered PUBLIC offering.  In 2015 the amount that could be raised was greatly increased and two “tiers” created - up to $20 million and up to $75 million.  As a public offering the sponsor is responsible for compliance with many SEC requirements that a private offering under Reg D is not, especially as it relates to reporting financial and other information on a periodic basis with the SEC, providing investors with financial statements, adherence to investor control in electing board of directors, etc.   However, Reg A offerings are not restricted to accredited investors as are Reg D offerings.

I’m not sure that Reg A is any more likely to attract “big” capital than Reg D is. I believe @Chris Seveney has successfully completed a Reg A offering.  Perhaps he can describe his experience and better answer your question.  

 Yep we have done a regulation A offering (Getting ready for our next one now). There is also Reg CF. If raising $5M or less Reg CF is the way to go, with Reg A you can raise up to $75M per year (not sure any real estate firm has ever done that with a Reg A). Reg A will easily cost you $100k to get it setup and then the question becomes do you do it on your own or bring in a Broker-Dealer, Escrow Company, Technology Company, Transfer Agent and other players or do it yourself.If you are doing a Reg A do not expect it to be like a 506c where you can do it with one or two people - you are gonna need a team. Also you have to have SEC compliant audited financials. That could cost you another $50-$100k between the firm who does the audit and if you have someone who could do it in house or use a third party.

I would not do a Reg A for a single deal, I would recommend it for an evergreen fund. 

Last thingI will mention, we have 800+ investors (I believe or close to that) - your accredited investors will be the bulk of the money.