Private Money pledged to "fund"

4 Replies

My partner and I have been discussing the idea of starting a "fund" for our LLC that would allow private individual to "buy in" to our Property Acquisitions capital. The more they invest, the better their return or obviously, ownership of the fund (shares?). This would be similar to crowdfunding, but we would be offering the fund ourselves, rather than on one of the bigger crowdfunding exchanges, and the fund would be used as a Line of Credit by us, not simply attached to the rehab of a particular property.

I'm pretty sure we would need the assistance of someone who is Series 7 or Series 13 licensed, and possibly an attorney.

Does anyone have any experience with this sort of things and can point me in the right direction as to where/how to get started?

Thanks in advance!

You will absolutely need a good securities attorney.  For the most part you will be limited to people you already know and have an existing social relationship with.  If you want to advertise to strangers you can use the new JOBS act exception, but you will then be limited to accredited investors only.  This is a heavily regulated area.  Plan for significant expenses to set this up, somewhere in the $10-25K range.  A conversation with a securities attorney would be a good place to start.   @Bryan Hancock does deals like this and will probably more specific advice.

This is a rather complicated subject and there are some mixing of ideas above.  Here is one idea:

The more they invest, the better their return or obviously, ownership of the fund (shares?).

These are two separate things.  Investing more should equate to more shares the same way you'd buy more shares of anything if you invest more.  Tying what investors get based on how much they invest is a completely separate thing.  What fund managers frequently do for this type of incentive is structure compensatory shares that can be subordinate to cash shares to give people an incentive to buy more or to buy sooner.  They can bonus investors with these shares if they invest more.  

This would be similar to crowdfunding, but we would be offering the fund ourselves, rather than on one of the bigger crowdfunding exchanges, and the fund would be used as a Line of Credit by us, not simply attached to the rehab of a particular property.

How would you generate traffic and where would the investors come from?  Would they be local, intra-state, international, etc.?  This matters a lot as to how the fund would be set up and what exemptions you'd select.  There would be no reason to use this as a line of credit because you'd control the funds.  I think you're mixing a few different concepts here as well unless you plan to offer the investors the opportunity to buy into a line of credit that would be structured as a secured or unsecured debt raise.  I think some clarity is needed here.   

I'm pretty sure we would need the assistance of someone who is Series 7 or Series 13 licensed, and possibly an attorney.

It depends on what you're trying to do.  If you're selling the shares yourself you may not need a securities license.  You definitely WILL need an attorney though.  This is NOT a do-it-yourself project.  Proceed with extreme caution.  Note that if you plan to enlist someone to broker securities on your behalf you will need a licensed individual.  People with these types of licenses infrequently broker securities for small operators though.  

As far as pointing you in the right direction if you PM me I can introduce you to some of the best securities attorneys in the country and specifically folks privy to the new securities laws Jon Holdman mentioned above.  

Consider speaking to, or reading the blog of, Mark Roderick, a real estate/securities crowdfund attorney at http://crowdfundattny.com/. He spoke at an event with our firm iFunding and came across as very knowledgeable. Regards, Scott Lichtman

Hello Joaquin, 

Bryan gives the sagest of advice.  And getting with a good securities attorney will help

to flesh out what you are trying to accomplish.

The biggest question that I have when counseling people is whether or not they have a 

profitable business model that can weather a change in the real estate market.

If you are flipping, and the market turns sideways, how are you going to get your investors

their money back?  Any fund that you have/create is going to have a definite life cycle (you

can extend it, if that provision is allowed in your offering documents) and how are you 

going to deal with investors getting their capital back?

Just some things to think about as you conceptually work through this process.

And just remember, always think about what's in it for your investors, and always protect

them first.