Reg D 506(c) offering

Investor · Thousand Oaks, CA · Member since 2014 · 43 posts · 8 votes

I'm exploring the possibility of using a 506c offering to raise money from accredited investors for our new global real estate fund. Does anyone have advice and any idea of the legal/startup costs for this type of offering? Our plan is to raise money from our existing investors and use advertising to raise money from new investors through email marketing, google PPC, social media and other strategy advertising. Thanks! Brian

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Jillian Sidoti

Professional · Murrieta, CA · Member since 2013 · 405 posts · 458 votes

Everyone - I would recommend a minimum of NO LESS THAN $10,000. It's always those small investors that are the most trouble. Most of our minimums are $25,000 to $50,000. I just did one offering with a $250,000 minimum.

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Barry DeGroot
Lender · Jamison, PA · Member since 2017 · 13 posts · 14 votes
9y
We manage several of our own in house offerings with roughly 170m in assets under management at this point. Aside from entity formation, the only real startup cost is the preparation of your offering documents (i.e. private placement memorandum, subscription documents, operating agreement, etc.) and the legal advice along the way. You're probably looking at several thousand but nothing exorbitant. Although we are in PA, we use a securities attorney in Oregon who is very good. Although he drafted the original docs for the first fund years ago, we now prepare the docs on our own and just have him scrub through them as a final review. I would be happy to share his contact info if you would like. Just drop me a message.
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Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
9y
Costs vary depending on what you're doing, but $15k or so is pretty reasonable for a syndicated project.
Funds are significantly more complicated and can be much more expensive.
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Brian C.
OP
Investor · Thousand Oaks, CA · Member since 2014 · 43 posts · 8 votes
9y
@Bryan Hancock & @Barry DeGroot - I appreciate the help!
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Kim Lisa TaylorPro Member
Attorney · Saint Augustine, FL · Member since 2016 · 242 posts · 234 votes
9y
For a fund, it may somewhat depend on how much you are raising, but I suggest budgeting $15-$20k for legal fees, organization costs (for forming your companies) and for state securities notice filing fees. Specified offerings are generally cheaper than that, in the $12k to $15k range.
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Amy Wan
Attorney · Los Angeles, CA · Member since 2016 · 284 posts · 314 votes
9y
I would rethink your marketing strategy. Online, and offline, capital raising requires trust. (As a former GC of a real estate crowdfunding platform that did 506cs all day long, trust me. It's not a "hands-off, if you build it, they will come" type of business. Pure digital advertising should only be only one layer of an overarching 506c marketing strategy. Unless you list/post on someone else' platform (in which case, make sure you have a backup plan if they don't raise what they say they'll raise).
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Jim Groves
Lender · Chicago, IL · Member since 2015 · 191 posts · 86 votes
9y
Originally posted by @Amy Wan:

I would rethink your marketing strategy. Online, and offline, capital raising requires trust. (As a former GC of a real estate crowdfunding platform that did 506cs all day long, trust me. It's not a "hands-off, if you build it, they will come" type of business. Pure digital advertising should only be only one layer of an overarching 506c marketing strategy. Unless you list/post on someone else' platform (in which case, make sure you have a backup plan if they don't raise what they say they'll raise).
I agree with @Amy Wan on this. Although I don't have the direct experience she has, I've been studying this business for a long time and tested a few marketing strategies. Forget the legal formation costs--the real costs will be in your customer (investor) acquisition. Figure you're looking at $750-$1000 per registered investor, and maybe only 1/5 of them actually write a check to you at $1K-$5K average investment. You don't have to be very good at math to know those numbers don't work. The costs necessary to build an investor base are the real barrier to entry in the business, and the initial excitement over crowdfunding has worn off so acquisition is even harder now. You'll need to do more than one fund to justify the costs.
As others have mentioned in different threads, the sponsors are typically using the technology to more efficiently process their existing investors and the new investors simply complement them. If you cannot identify 75% of your investors right now with your existing contacts, you will likely not succeed. Even the folks in Indiegogo admit that at least half of your donations come from people you know will donate prior to launching the campaign. Same thing applies in this business.
I believe you're better off launching through Crowdstreet or Realshares on your initial fund. They already have a base of investors that will look at your offering, and the seal of approval from them gives you a decent shot of attracting money. The fees you will pay them will be a fraction of the costs necessary to launch this on your own. If you're successful launching the first fund, then consider doing the second on your own.
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Jillian Sidoti
Professional · Murrieta, CA · Member since 2013 · 405 posts · 458 votes
9y
@Brian C. our firm does a lot of work with Crowdstreet. Depending on the make up of your fund, I would most likely recommend them. There are now a bunch of new marketing firms cropping up that could help you with direct sales from your own site using something like FundAmerica or @Bryan Hancock's software. If you really wanted to do a bigger fund, you might want to research the possibility of using a broker dealer. We use a couple of BD's for deals here, but they have to be at least $20 million funds and the cost of using a BD can get expensive. Let me know if you have more questions.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y
@Jim Groves I don't think I will ever understand the motivation to raise money at 1 to 5k at a time.
seems like a bunch of brain drain and liability herding all those folks. but I guess if you get good enough and big enough it will pay off.. but just staffing for that and customer care must be expensive.
Look at some of the crowdfunders who we see talked about on this site and one of the major complaints is lack of customer relations. the 5k investor wants as much info as a 500k investor and they want it now... LOL... so when they don't get good communication they take to the internet and tell folks their fund is not communicating.. anyway.. just a thought.
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Ian IppolitoBusiness Member
Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
9y
Here's a very related question for those who know about marketing from the point of view of the sponsor.

I spoke to a person who works for a developer today who was interested in getting into crowdfunding to expand their investor base beyond the 600 or so that they currently have (he is already negotiating with Crowdstreet). That will give him some new investors, but obviously the point is to bring in more through other channels as well.

He also mentioned using Google ad words to bring in new investors. I pointed out that he would be competing with every single other platform out there on the ads, and they would almost certainly price him out of profitability.

He does not want to join a marketplace that runs using the SPV format, since its expensive to get those new investors and the point is to reduce the acquisition cost by getting them to continue to invest in future deals (rather than anonymously through a consolidated investment on a platform). And he is not interested in nonaccredited investors at this point because it's a bit of a hassle.

I told him I don't know much about the marketing of the sponsor side of the business and what his other options would be. How does he drive new investors, beyond what the crowdfunding platform will bring him? Is the best idea to purchase leads from a lead generation company that perhaps connects broker-dealers with high net worth individuals? Or is there a better way to do it?
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Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
9y
You don't need to set your minimum at $5k or $10k @Jay Hinrichs. The higher you set it the smaller your pool becomes though. Again, marketing is key to attract the right relationships. Nobody in the industry is doing this right now and we're working to fix this.
I agree with the bulk of the current value coming from your existing list. The projects we did on iFunding we pushed 70% or more of the money into them ourselves. The projects we've done on our own platform we did 100%.
Marketing, done properly, will attract new relationships that you specify over the time period that meets your needs. You control the process and harvest these relationships over time. I can't imagine outsourcing this to a marketplace and having them control/own whether or not they choose to accept my deal. As a sponsor I want to control the process on my own and benefit from the relationships formed over time across all my deal flow.
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Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
9y
@Ian Ippolito
The sponsor needs integrated marketing where he can pull investors both from the platform's marketplace AND from the other channels they choose to work. This is exactly what we're working on and what most of the industry wants.
The challenge is getting it to be affordable and to get things targeted. It's coming soon ;-)
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Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
9y
@Jillian Sidoti
Regarding broker-dealers.....MOST sponsors won't qualify. The broker-dealer also really only wants to engage on larger projects, many of which don't fit the needs of the average syndicator doing deals too small for the big and too big for the small.
This is why syndicators have traditionally targeted "retail accredited" money and have steered away from projects where they compete with REITs.
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Jillian Sidoti
Professional · Murrieta, CA · Member since 2013 · 405 posts · 458 votes
9y
Everyone - I would recommend a minimum of NO LESS THAN $10,000. It's always those small investors that are the most trouble. Most of our minimums are $25,000 to $50,000. I just did one offering with a $250,000 minimum.
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Jillian Sidoti
Professional · Murrieta, CA · Member since 2013 · 405 posts · 458 votes
9y
@Bryan Hancock - no, they won't qualify. that was my point.
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Jim Groves
Lender · Chicago, IL · Member since 2015 · 191 posts · 86 votes
9y
Originally posted by @Jillian Sidoti:

Everyone - I would recommend a minimum of NO LESS THAN $10,000. It's always those small investors that are the most trouble. Most of our minimums are $25,000 to $50,000. I just did one offering with a $250,000 minimum.
Most of the deals I see on CS, RS, etc have minimums of $10K-$15K. But to Bryan's previous point, the pool gets a lot more shallow. Google Adwords will be a very expensive way to find those leads.
I find it amazing that so many BP members are looking at crowdfunding as a way to get rich but it really should be viewed in the context of a balanced investment strategy. If alternative investments should make up 10% of your portfolio, and you'll need 10 investments to be reasonably diversified in RE, that would require an investor with $1MM+ of investment assets to be a reasonable candidate for a $10K minimum investment
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Jillian Sidoti
Professional · Murrieta, CA · Member since 2013 · 405 posts · 458 votes
9y
@Kevin Bull - do you have any comments on this? I think that would be helpful to @Brian C.
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Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
9y
Regarding the investment minimum....if you're using Reg. D, Rule 506(c) all of the investors are accredited. Many of the investors that choose to invest at $5k or $10k COULD do a larger investment. The relationship, however, is new and was formed online. What better way would the investor have to decide whether or not they'd do a $25k or $250k investment in subsequent investments than to invest at a lower amount to start? The "investor acquisition cost" is a misnomer. The cost is in forming a relationship that can be harvested over N deals for the rest of the sponsor's investing career. When viewed through that lens the cost is nominal. The only sponsors that should be concerned with these costs are the ones that intend to do a one-time investment and piss the investors off enough that they won't invest going forward.
The pool gets larger with smaller minimums. The degree to which the sponsor can control the deal also increases with lower minimums. Screening for PITA investors can also be done properly by the sponsor if their process is designed properly. They don't have to accept subscriptions from people they don't like or that aren't a good fit.
The marketplace model takes the approach that 99%+ of the sponsors and deals are screened out. This is similar to the model that institutional financiers have without the sophistication. For the deals that don't fit the marketplace's model, they can't underwrite properly, or they don't understand the sponsor is left without an adequate solution. Further, the more successful sponsors won't use this model because they don't want a third party intermediating their relationship with investors.
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Ian IppolitoBusiness Member
Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
9y
Originally posted by @Bryan Hancock:

@Ian Ippolito
The sponsor needs integrated marketing where he can pull investors both from the platform's marketplace AND from the other channels they choose to work. This is exactly what we're working on and what most of the industry wants.
The challenge is getting it to be affordable and to get things targeted. It's coming soon ;-)
He's actually one step earlier than what you are building. He's asking to know what are the other channels that are actually cost effective to bring in new investors (other than a marketplace). Perhaps if he had multiple effective channels, and they were getting unwieldy, then perhaps he would want integration and management of them through a tool like you perhaps. But that is much further down the road from where he is now.

So does anyone know any other effective channels for bringing in new investors? Ultimately this is a part of what the OP was asking about as well.
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Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
9y
@Ian Ippolito
The channels are only part of the equation. Your martech readiness, funnel design, messaging, etc. all matter as it does with any complicated sale. The same channel will pull very differently depending on what is being offered, who is offering it, and how. This is not something most real estate sponsors know how to do or wish to learn. They're often very, very busy chasing deals and devoting time to higher payoff activities.
What a sponsor really wants is a solution that helps with this, measures it, does more of what works, and discards what doesn't. This decreases friction and cost over time. The correct channels will be a function of what you're trying to do and what investor persona you're targeting. The degree to which your deal flow is similar also matters so that what you wish to attract can be bundled and targeted.
The marketplaces all 150 or so platforms have built should be viewed as ONE channel among many for acquiring investors. With other secondary solutions like Alpha Flow and Crowdseekr springing up there are clear signals that these eyeball aggregators will form over time.
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Ian IppolitoBusiness Member
Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
9y
@Bryan Hancock, You're talking about things that I'm sure are very useful for some but are way beyond what this particular person is looking for. He does not want to list on 150 marketplaces as there are only a handful that meet his requirements and he has no problems managing them now himself. He's looking for a solution that works today in 2017, versus an aggregator that may one day have a solution for him.

The problem he has is he needs a 2nd channel to bring in new investors that is in addition to what he gets from the crowdfunding sites (and in addition to the 600 the company already has on their own). That's what the OP is also asking about when he is talking about Google ads, etc. So I would be very curious to know if someone knows of something like this that actually works in a cost-effective manner. I suspect there are lead generation firms that do this, but would like to know for sure from someone who has done it successfully before.
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Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
9y
@Ian Ippolito
When we did our campaigns BiggerPockets pulled better than any other source. And yes, there are many other channels like Zack's Direct, Equities.com, etc. Sites like White Coat Investor could be used for sponsors like our former Optometrist apartment syndicator.
Again, the correct channel is only part of the equation. "Reasonable cost" also depends on what you're trying to do and how these new investor relationships will be utilized over time.
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Ronald RohdePro Member
Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
9y
Originally posted by @Bryan Hancock:

Regarding the investment minimum....if you're using Reg. D, Rule 506(c) all of the investors are accredited.
Well, you can have up to 35 non-accredited investors as well.
https://www.sec.gov/fast-answers/answers-rule506htm.html
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Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
9y
@Ronald Rhode
Those are the old 506(b) rules. The new 506(c) rules that are useful with the advertising being discussed in this thread will ONLY allow accredited investors.
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Ian IppolitoBusiness Member
Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
9y
@Bryan Hancock, thanks so much for the information. I will pass it along.
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Bryan Hancock
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
9y
You're welcome @Ian Ippolito. I have 8000 posts on BiggerPockets though so this is a clear demonstration of why the channel is not the sole thing to focus on. Different channels will pull in different manners based on the sponsor, offering, ad copy, etc.
Crack The Crowd is a firm dedicated to building marketing campaigns too. Unfortunately it is too expensive for most people and the marketing function is separate from the platform. This is something we'll be solving with our solution in the long run.
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