Should I market my 506(c) debt fund as "bond" replacement?

5 Replies

My 506(c) fund is invested in real estate. However, the investors become LP's in a company. The company agrees to pay them a preferred return with a promote. This is a debt structure and not an equity structure. Yes, they are lending funds to a real estate company... but strictly speaking, it makes no difference if the company sold bagels or software or manufactured toilet seats. Instead of trying to persuade people to invest with me in real estate, I'm thinking that I should just argue that investing in the 506(c) is very similar to investing in corporate bonds. Am I crazy wrong about this?

@Rick Amos

I don’t quite understand what you’re proposing. You’re required to provide a placement memorandum that accurately describes the investment. You don’t have a choice to present the investment as something different because you perceive that it will receive a better reception.

@Don Konipol thanks for engaging. I’m proposing that the funds would be fully explained using the PPM in every respect. The nuance is that a DEBT 506(c) could be explained to an investor as being extremely similar to a corporate bond in its structure and function.

FROM INVESTOPEDIA

What Is a Corporate Bond?

A corporate bond is a type of debt security that is issued by a firm and sold to investors. The company gets the capital it needs and in return the investor is paid a pre-established number of interest payments at either a fixed or variable interest rate. When the bond expires, or "reaches maturity," the payments cease and the original investment is returned. The backing for the bond is generally the ability of the company to repay, which depends on its prospects for future revenues and profitability. In some cases, the company's physical assets may be used as collateral.

@Rick Amos

I would not make such a comparison. Structurally you are right, but I would argue that is where the similarities end. 

From my perspective all that matters is the underlying asset, which is not a corporate bond. When I hear pitches that try to make comparisons between vastly different assets like this, it makes me more concerned than anything else. In fact, I would be even more skeptical, which may work against you in the diligence process. 

That is just my perspective though...

But it's NOT like a corporate bond. Corporate bonds are subject to all sorts of extra scrutiny and financial accounting standards being publicly-traded securities on highly regulated exchanges backed by companies who subject themselves to all of this scrutiny in the interest of providing transparency. Astute investors will realize this and will likely interpret this comparison as an attempt to either beguile them or that you're green and don't really understand the risks that your investment carries. Also imagine a plantiff's attorney blowing this statement up in a court room after your investment goes sideways or south and how silly it will make you look in the eyes of a supposedly impartial third party.

Great investment opportunities don't need hyperbole.  The sponsor's ability to discuss risks and articulate how they'll deliver outsized value relative to the risk taken is the art of raising capital and should not be accompanied by any statements that gloss over risk, which include comparisons to publicly-traded securities with hoards of scrutiny you aren't going to be able to afford to provide in your project.  Recognize where you are in the capital markets and how your project plays in the minds of investors seeking a financial return net of fees, risk, and taxes.  

Thanks for the thoughts. My objective is not to minimize the risks or misrepresent the offering -- just to explain what it is in a way they will understand. However, "accredited" investors and "sophisticated" investors should already be able to grasp the structure and dynamics of the offering. THANKS FOR YOUR INPUT!