How to Not Scare Away Investors - Your Private Money Offering Documents

When I first started raising private money, I had no idea that securities laws and offering documents were part of the process. It was one of those "live and learn" things that happen - where you suddenly realize that you need to do something yesterday.

As a real estate investor, you're focus when raising private money is on marketing your opportunity, preparing your presentation for investors, meeting with investors and, of course running your business so that you can find deals that will be profitable for you and your investors. It's easy to relegate the paperwork part of raising private money to the 'back burner' - or, worse - completely ignore it.

It's just a simple fact that there are rules that govern what you can and cannot do when it comes to raising private money. These rules are called

securities laws. And, frankly, it's no different than the other rules that govern real estate (such as real estate law) or other parts of the broader business world (think OSHA, EPA, etc).

What About the Legalese?

The very first time I looked at a prospectus I thought I was being subjected to Chinese water torture. The document was long, spoke about risks and gave a bunch of information that I wasn't even sure meant anything to anybody. Eventually, as I learned more, I started to see why the prospectus was written in the format it was. Also, I learned more about why real estate investors and others raising capital must provide these documents to their private investors - it was for the investors protection. To try and prevent the Bernie Madoff's of the world from getting their money.

As you begin raising private money, you might think that your private investors will be scared off if you give them a questionnaire, PPM or prospectus. You might think they will put their checkbooks away, lock up their cash and head for the hills. "Won't they be scared off from all the legalese?" you wonder to yourself. Absolutely not.

Here are some techniques you can use to keep your investors close and ready to place funds as you give them your securities offering documents:

1. Approach them the right way - approaching your investors from the standpoint of providing an investment opportunity will likely calm any worries they might have about the legal documents you must provide. If you mislead the investor or are vague with them at the beginning then you can expect them to be leery.  So, instead of:  "hey Mr. Investor, I'd like to show you a little about my business";  Try:  "Mr. Investor, my company is currently accepting new investors at this time and I would like to show you the opportunity."

2. Lay the groundwork ahead of time - in your initial discussion with the investor(s), be sure to mention that you do everything the right way in your business. And, the right way to raise money from outside investors involves some legal paperwork. Often, simply mentioning that there will be some paperwork for them to review is enough to alleviate any concerns they may have. Typically, people that will invest money with you have invested money before, so they will expect some paperwork to be involved - it shouldn't be daunting to them.

3. Compare and contrast - this is the best approach of all. Do yourself a favor and download a mutual fund prospectus from a large financial company, like Fidelity or T. Rowe Price. Mutual funds are a popular investment choice for the general investing public and, most likely, your private investors have heard of them and invested in them. If you read one of these prospectuses, you'll quickly see that your private money securities offering documents compare favorably in terms of the volume of material and language. Most of the time these mutual funds offerings are very complicated in how they are structured, how fees are paid and what you can expect as an investor. If you simply compare and contrast your offering in a conversation with your investor, you can show them how your documents are simpler and easier to understand.

A proactive approach always works best when raising private money - especially with the securities offering documents.