Reg D and PPM
I recently read through as many posts on BP as I could regarding raising a small amount of money to use for my acquisitions. After going through - what appears to be a normal knee jerk, 'I'll just start a company and have friends and family invest in the company and I'll use the money at my discretion to buy whatever good deal comes along' - I've realized it's a little more complicated than that. Not much, but thanks to the posts here, I stopped making projections and started figuring out what actually needed to be done to be legal when asking other people for their money.
So, this is just an informative post for anyone else looking to raise capital - big or small fund.
In my case, I'm looking to raise less than a million. If you call up a big corp and securities attorney in your area, you may get similar responses...from no response to, 'well i guess you gotta start somewhere' with no indication that they wanted to waste their time on a peanut fund. I simply shrugged those statements off and kept doing some research and listened to the great podcast BP just put up about raising capital:
http://www.biggerpockets.com/renewsblog/2013/01/31/raising-money-getting-started/
I finally heard back from my RE attorney (who has already done PPM and reg d filings for himself and others and used to be a corp attorney) and got a price of $10k to setup the reg d offering. I also found some online resources claiming to do it for $3500 and they set you up with a consultant, help with the marketing of your fund, and have a list of brokers who can help sell it as well.
It might seem like overkill if you're just going to borrow money from you family/friends but if you want discretionary power and the ability to draw the funds quickly without getting a bunch of signatures from the investors, this is the way to go and still be covered. As many have said - so said my attorney - the docs are to protect the guy controlling the funds because you're disclosing the risks to the investors. My advice (for what it's worth), if you're looking to raise money and you don't want to do a DOT for every single deal, spend some time speaking with your attorney and it shouldn't be very difficult to set it up the right way the first time so you can ask friends and family while looking like an absolute professional.
Now, that said - I'm curious what others have done to setup a return that is fair for the investor and fair for the fund and fair for the manager. @brian burke mentioned in his podcast that his guys made close to - or more than - 20% in the first year. I've run some scenarios for realistic projections based on previous rehabs and number of rehabs and I can project the same type of returns for my investors but I'm not sure on some of the specifics. For example, when do you pay out the profits, are there penalties to the investors if they pull out of the fund before a certain number of years, do they roll over the profits they've made and if so, are there incentives for that other than compounding, are you paying out - or allocating - ALL of the profits to investors or yourself each year (meaning if the fund closed tomorrow would you keep the chunk of money left over after paying out the investor profits and initial investments or would you divide that chunk up between all the investors), are you paying yourself a salary for managing the fund and if so, are you also profit sharing??? I ask that last one because once I switch over to a fund like this, the money I am currently pulling out of each deal to live on, would need to stay in the fund and I'm left with no income until the end of the year if that's when the fund distributes profits.
So, now I'm going to sit down and speak with my attorney about those questions and how to setup the fund to be as attractive to investors as possible but I'd love to get some real world experience in on this convo. If you've done a fund like this in the past, any info you can provide would be helpful.