April 30, 2025 • 23 mins
Today’s chat on the Papertrail podcast dives into the nitty-gritty of capital raising strategies, helping listeners figure out which method is the best fit for their unique deals. They kick things off with a rundown of the four main options: Regulation D506B, D506C, Regulation A+, and Regulation CF, breaking them down like a pro chef slices veggies for a stir-fry. Each option comes with its own pros and cons, folks—like choosing between a cozy blanket or a sleek comforter, it all depends on what you need for your specific situation.
For instance, if you're looking to keep things low-key and have a tight-knit network, the 506B is your best bud. But if you want to blast your message far and wide and don’t mind the extra hoops to jump through, then D506C might just be your jam. They make sure to highlight that while it’s tempting to go for the biggest, flashiest option, sometimes the simpler paths can save you heaps of cash and hassle. So, whether you’re a newbie or a seasoned pro, there’s something in this episode to help you navigate the wild world of capital raising with style and confidence.
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Diving into the world of capital raising, the Papertrail podcast kicks things off with a bang, breaking down the nitty-gritty of different investment strategies. Our host, full of energy and charm, doesn’t just skim the surface; they dig deep into the four main capital raising options that can make or break your investment game. From the no-nonsense Regulation D506B, which keeps things exclusive and private, to the loud and proud Regulation D506C that’s like throwing a party with a guest list of accredited investors only, the discussion is lively and packed with insights.
But wait, there’s more! Regulation A+ comes into play, giving everyone from seasoned investors to newbies a shot at getting in on the action, albeit with a few more hoops to jump through. And then there’s Regulation CF – the crowd-funding hero, perfect for those local startups and tech projects looking to raise smaller amounts. With humor and relatable anecdotes, our host makes the complexities of SEC regulations feel like a casual chat over coffee. They emphasize that understanding these options is not just about raising money but about aligning your strategy with your business goals, ensuring that listeners leave with actionable takeaways that can save them a ton of headaches down the line.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:43):
Welcome back to the Papertrail podcast.
Today I want to talk aboutwhich capital raising strategy actually
fits your deal.
So whether you're a noteinvestor looking to start your first
fund or other types of realestate investors and you're launching
that fund raising firststartup, scaling your portfolio,
knowing the rules can not onlysave you time, but money and most
(01:07):
importantly, a ton of headaches.
So let's first start with thefour main options with some pros
and cons of ways to raise money.
First, we'll talk about aregulation D506B, as in boy offering.
(01:28):
Now this is a private roundinvestment and what I mean by that
is you cannot advertise.
The sec, this is an exemptionor doesn't allow you to advertise.
It's open to accreditedinvestors which are people who either
have a net worth of a milliondollars outside of their primary
(01:49):
residence, have made over$200,000 a year or combined 300,000
over the last few years andcontinue to look at that.
Now you also can include whatthey define as 35 sophisticated investors
with the accredited investors.
(02:09):
Now these can be nonaccredited, but you have to still
vet them.
So as part of this, when yourrule that you can do again, you cannot
advertise.
It's usually the most costeffective way to set up a fund or
entity and we'll talk aboutthat later.
(02:30):
The second that we'll brieflytalk about is what's regulation D506C.
Now on a 506C.
Now some people nickname thisthe megaphone round.
Why?
Because you can advertisepublicly anywhere but and here's
the big but, every investormust be accredited and you're required
(02:52):
to also verify that.
So it's your responsibility toverify the investor is accredited.
So you've got 506B which is noadvertisement accredited and 35 sophisticated
506C can blast it out, buteveryone's going to be accredited.
Third, this is what we havedone is the regulation A plus offering,
(03:16):
which we'll nickname theretail round, which is like a mini
IPO.
Now, with Regulation A Plusoffering, you can raise up to 75
million per year and it's opento anybody.
So retail, as long as you'reover 18, you can invest.
Now, there's limits if you'renot accredited on what you can invest
(03:39):
and then you can of coursehave the accredited.
I will say it is expensive,it's time consuming, it requires
an SEC qualification and youalso need audited financials.
Lastly, there's regulation cfwhich is a crowdfunding round Some
people call this communityround ideal for local projects startups.
(04:03):
You can raise up to 5 millionthrough an online portal.
It's open to everyone butcomes with limits and a lot of platform
fees.
I view Reg CF not as much as areal estate avenue, but more for
tech startups.
But we still see some realestate people doing that reg CF offering.
(04:24):
So I've tried to highlightquick snapshot of four types of offering.
Again, you got reg 506B, 506C,reg A, reg C F.
Now let's break these downinto some categories on how much
you can raise advertising, whocan invest, the speed on which it
(04:47):
can get qualified and ofcourse the cost.
So we're going to go probablysimplest to most challenging.
506.
You have unlimited funds.
You cannot advertise again.
And I apologize if I'mrepeating this, but people again
really need to get anunderstanding to see what fits within
(05:11):
their profile.
So that 506B unlimited raiseno ads accredited and 35 non accredited
super fast.
Meaning you could have yourPPM and documents up and running
in two to four weeks as low cost.
We'll talk cost later butconsider a 506B, 10 to 15,000 to
(05:34):
get going.
506C unlimited like the B, youcan advertise.
So that's a difference withthe B accredited only slightly different
than the B.
But speed and cost are thesame whether you're putting a 506B
or 506C together.
Every attorney that I've doneand I have done a B and a C as well,
(05:58):
it's the B is a little bitmore documentation but but they consider
them unequal footing.
Now let's talk aboutregulation A plus again it's limited.75
million per year, which mostreal estate investors not a problem
because that's investor money.
So if you're doing a 75 or$100 million multi family project,
(06:21):
you know you're probably goingto get 60 or 50 million in financing
and raise 50 or 40 million youstill match.
You can advertise like a 506C.
The difference again isanybody can invest.
So retail investors can investand you'll typically see the regulation
A offerings have lower minimums.
(06:41):
We'll talk about that a little later.
The speed is very slow.
It can take three to sixmonths to get qualified by the sec.
Which the B and the C.
You just submit form D withthe sec which is you file it that
day and you're good.
Regulation A, the SEC actuallyreviews it and provides comments
(07:04):
and feedback.
Again, it's like a mini IPO,cost high.
You're going to spend sixfigures getting it qualified and
reg CF.
Now, again, it's limited tothat 5 million and this is why you
don't see a lot of it in real estate.
Yeah, you can do the ads.
Anyone can invest.
It's not as slow as a reg A,but it's not as fast as A Reg D,
(07:29):
506B or C.
And the cost is medium in thatmedium level.
So if you're going to go realestate, I would tell you cut out
the reg cf, but we'll stilltalk about it, give you the information.
But for most people it'sreally not that fit.
So.
So the takeaway from this, thefaster and cheaper you want your
(07:51):
raise, the fewer bells andwhistles you do get, the more inclusive
and retail friendly you want it.
The more blue ocean strategyof people you want to be able to
invest, the more time, costand compliance unfortunately you're
going to face.
Now let's dive into costs.
Okay.
(08:12):
For a 506B and a 506C, yourattorney will create, they'll create
an entity.
So there's probably anoperating agreement, LLC documents.
There should be what's calleda private placement memorandum, which
is 30 to 50 page documentoutlining what's your investment,
what are you investing in?
(08:34):
So that's called theprospectus on a public company is
what it would be considered.
And then what's called asubscription agreement, which is
the actual contract that saysI'm investing $100,000.
Here's all the rules.
So many important things toreview in that.
And one of the things I alwaysrecommend, have your attorney review
(08:55):
that your attorney shouldreview any contract you're signing.
If you're signing a $100,000contract to invest, let them review
because do you know whatrights you have in regards to documentation?
If there's a conflict, can you sue?
Is it arbitration?
Is it a class action?
(09:16):
Can you not do a class action?
There's so many finite detailsin there.
And you also want tounderstand the ownership structure
in regards to are youinvesting in an entity that's investing
in the fund and that entitybasically goes belly up.
You could get wiped out from everything.
So much you need to look intowithin the 506B and C.
(09:38):
As an investor and as asponsor, you want to make sure this
is clearly defined as well.
Because you want to make sureyou have a path to understand if
things go wrong, what is thepath and leave it up to you, not
different investors to come upwith different paths.
And as I mentioned, a 506B or506C can be done 10 to $15,000.
(10:02):
I'm recording this in 2025 andagain, depends on the attorney and
the experience.
But that's typically, I think,where most of them fall.
Now let's dive into theregulation A because I have a lot
of people call me, say I wantto do a reg A.
Now when you hear the term regA or reg A plus, it's the same, they're
(10:24):
interchangeable.
Technically a reg A plus, butyou can raise a lot of money.
We've raised 40 plus million dollars.
It's open to everybody.
It levels the playing field.
So we have investors whoinvest 5,000, we have investors who
invest 500,000.
If you've got set up a IRA forwith $6,000, you can invest that
(10:48):
in an alternative like aregulation A offering and not have
to worry about the 50 or$100,000 minimums.
But let's follow the papertrail and see what it really costs.
So you have to draft anoffering circular which is a PPM
on steroids.
The legal fees to draft thiscan be anywhere from 25 to $75,000.
(11:16):
Now, if you've done multiple,yes, it can be slightly less, but
anticipate spending 25 to 75,000.
Maybe you got a good attorneythat can do it for less.
That's what I would ballpark.
Then you have to have annualaudited financials.
Now, if you just started yourcompany and you're doing your first
audit, I call it a snowflake audit.
(11:38):
Because you put a hundredbucks in a bank account for that,
you don't need a powerhouse auditor.
You could.
For ours, we spent I thinkabout 7,500 bucks for that initial
audit.
Now, when people think of anaudit, I just want to be clear.
You think, oh, it's just the money.
No, it's a lot more behind it.
(12:00):
Especially for an SEC audit,they want to know your process, your
rules, who, who's approved.
Is it one person who can paythe bills and move money around,
or is it multiple?
They want to know that youhave documentation, if you have employees,
that their salaries are in writing.
There is a ton of thingswithin these audited financials that
(12:20):
need to prove not just wherethe money goes, it's all about the
operations of the company.
Now, once you're up andrunning, you're going to spend anywhere
from 30 to $75,000,000 a yearon audits.
Now that legal fees, that'sjust a startup.
We'll get into continuingcosts, but you'll have your audits
(12:42):
as well.
So let me just talk aboutcontinuing costs.
On legal Every year you haveto submit in a regulation A plus
offering a semiannual reportwhich is unaudited financials with
updates to the company.
Expect that to cost 5 to$10,000 depending where you do it
(13:03):
in house or still have to haveattorney reviews.
You have to after your auditedfinancials you have to submit what's
called a 1k form which Iincluded that 30 to 75, that's part
of that cost.
And then every year you haveto resubmit your offering circular.
You have to refresh it everyyear to keep going and that is going
(13:25):
to be another five to $10,000in costs.
Now for us, our first year wesubmitted, got renewed and these
okay, you're qualified, re qualified.
Second year they came backwith about 10 pages of comments.
It was the same exactoffering, but it was just a different
reviewer.
(13:45):
And we had to spend thatsecond year, probably an extra $10,000.
So it's very unpredictable onwhat those costs could be.
Promoter and marketing fees.
Now we work with a brokerdealer for blue law compliance about
raising money in all thesestates which they take anywhere from
a half a point to 1% of themoney raised.
(14:05):
So think about that and if youare marketing and you are a new sponsor,
you've never raised moneybefore, expect your marketing fees
to be about 10%.
If you could get it for 5 orless, be thankful.
But it's going to be expensive.
(14:28):
It's going to cost you amillion dollars to raise 10 million.
And I know you're going to saythat's not feasible or viable.
If you look at it over a spanof your offerings, five years, you
know it's about 2% per year,amortize over that time, you should
have 2% within your numbers.
(14:48):
But I see people doing 12month offering or shorter term offerings,
I don't know how they makemoney but that is the one area, the
marketing fees where people underestimate.
And let's say you goinstitutional route and you have
working with an ra, awholesaler, broker, dealers, their
(15:11):
fees are going to range from 5to 10%.
When I see people talkingabout oh it's going to cost me 1
to 2% to raise money, 99% ofthe people will never be able to
hit that number.
Now for your first million or2 million, yeah, you might have friends
or family and people who cancontribute, but if you're looking
to raise 25, 30, $50 million,you are going to spend a considerable
(15:36):
amount in marketing fees,commissions and other costs.
Now, other costs that you may incur.
We have the broker, dealer, wehave an escrow agent so the money
doesn't come right into ourbank account.
We also have a transfer agentwho holds a capital stack so an investor
(15:59):
can call up and say how many,confirm how many shares and stuff
they have.
So if I disappeared off theface of the earth, which some sponsors
have, it's a third partycompany that says, hey, you still
have this.
So just to launch, to add upthe legal, audited financials, marketing
fees, everything else, it'sgonna cost you over a million dollars.
(16:23):
Now take away the marketingfees in just the legal auditing and
just getting qualified, youknow, I would anticipate spending
100 to 150,000 before you'reallowed to raise money.
So I want to say that again.
It's going to cost you 100 to$150,000 before you can raise money.
(16:48):
If you don't have that moneyalready, you're not going to be able
to get qualified because yourattorneys and everybody else are
going to get, need to get paidthe cheapest.
I think I've seen somebody doit has probably been for about 40
to 50,000, but that was bare bones.
(17:08):
But if you're thinking you cantry and get something done for 10
or 20,000, it's not going to happen.
So regulation A is powerful,but it's not a beginner's game.
Designed for sponsors who havesome money, an established brand
and bigger goals and like Isaid, deep pockets.
(17:30):
With all that being said, wewrap up this episode.
Who should use what?
So here's my advice and whereI think you should which type of
offering you should use.
If you're raising money fromyour own network, doctors, lawyers,
(17:52):
high net worth, friends andpeople, go with a 506B.
Low cost, private, flexible,can't advertise, but you already
have a network of people.
So that's what I would recommend.
Especially if you're going toraise up to 5 million, go with that
network, go with the 506B.
That's probably, you know,your best bet.
(18:15):
If you have some type ofbrand, some type of influence, podcasts,
big email lists, social mediafollowing, use a 506C.
You can advertise, but it'sonly for accredited investors.
But just because you might bea good marketer, you still got to
have a really good businessplan and get these people through
(18:38):
your marketing funnel.
Want to invest in youroffering because a lot of times These
are not your own network.
These are people that you, youhave to outbound marketing with.
If you're looking to raise 30million or more and have that brand
and are offering something alittle bit different, a reggae may
(19:01):
be worth the cost of effort.
It just really depends betweenthe 506C and the regulation A plus
now it really depends on ifyou're doing a large multifamily
deal.
I would do a 506C.
If you're doing an evergreenfund like we have, I'd consider it
a regulation A because it'sopen and you can allow investors
to continue to come in and leave.
(19:24):
So that's where the regulationA fits in.
Also depend on your offeringdebt funds.
I actually prefer theregulation A because when I try and
compete against multifamilyinvestors who are offering 20% returns,
they may get it, they may not.
But you know that's an equityplay, an income play like a debt
(19:46):
fund that provides paymentsmonthly or quarterly but it's more
consistent with little to no upside.
You'll get more get regulationA people or non accredited people
in that offering as well.
Lastly, if you're launchingreally small deal and your startup
under 3 or 5 million, try theright CF.
(20:08):
Personally again, I'm not afan of the reg CF.
I know people who have doneit, but not many for real estate.
And again, if you have someapp or technology, reg CF is awesome
now.
So I'm not discouraging reg CFfor real estate is where I'm wondering
if it is actually the right fit.
(20:31):
But just remember, there's noone size fits all when it comes to
raising capital.
There's only the right toolfor your specific audience and goals.
And I want to just eat that alittle bit into the ground because
just because I am doing aregulation A doesn't mean you should
be doing a regulation A.
Just because they're doing a506B doesn't mean you should or I
(20:54):
should do a 506.
You need to map out what fitsyour plan and what is best for you
and what are you going to tryand get to accomplish your goals.
So at the end of the day, yourcapital raise should align with your
business strategy, not foryour business to fit the raise.
(21:18):
Lastly, I'll leave you with this.
Know the rules, pick your pathand follow it with clarity and confidence.
And again, know the rules.
I can tell you I know threeofferings right now that are competing
against mine that are 506 thathave never filed the exemptions with
the SEC and theirdocumentation and paperwork.
(21:41):
Looks like it was made withChatGPT and not an attorney.
And this goes back to what Imentioned earlier.
Do it right whether thesponsor or an investor use the right
attorney.
So thanks for listening tothis episode or watching.
If you want in the comments,put Cheat Sheet and I will send you
(22:05):
an infographic and put it inthe show notes to outline everything
we talked about today withkind of a nice chart of where each
type of raise fits in.
And if you want helpstructuring your next raise, feel
free to reach out.
I'm always happy to share myexperience and and talk to you about
not only what we think we didright, but some of the mistakes we
(22:27):
made along the way.
So thank you for listening tothis episode of the Paper Trail.
Make sure to subscribe, leavea review, and share this episode
with someone who is planningtheir next raise.
Welcome back to the Papertrail podcast.
Today I want to talk aboutwhich capital raising strategy actually
fits your deal.
So whether you're a noteinvestor looking to start your first
fund or other types of realestate investors and you're launching
that fund raising firststartup, scaling your portfolio,
knowing the rules can not onlysave you time, but money and most
(01:07):
importantly, a ton of headaches.
So let's first start with thefour main options with some pros
and cons of ways to raise money.
First, we'll talk about aregulation D506B, as in boy offering.
(01:28):
Now this is a private roundinvestment and what I mean by that
is you cannot advertise.
The sec, this is an exemptionor doesn't allow you to advertise.
It's open to accreditedinvestors which are people who either
have a net worth of a milliondollars outside of their primary
(01:49):
residence, have made over$200,000 a year or combined 300,000
over the last few years andcontinue to look at that.
Now you also can include whatthey define as 35 sophisticated investors
with the accredited investors.
(02:09):
Now these can be nonaccredited, but you have to still
vet them.
So as part of this, when yourrule that you can do again, you cannot
advertise.
It's usually the most costeffective way to set up a fund or
entity and we'll talk aboutthat later.
(02:30):
The second that we'll brieflytalk about is what's regulation D506C.
Now on a 506C.
Now some people nickname thisthe megaphone round.
Why?
Because you can advertisepublicly anywhere but and here's
the big but, every investormust be accredited and you're required
(02:52):
to also verify that.
So it's your responsibility toverify the investor is accredited.
So you've got 506B which is noadvertisement accredited and 35 sophisticated
506C can blast it out, buteveryone's going to be accredited.
Third, this is what we havedone is the regulation A plus offering,
(03:16):
which we'll nickname theretail round, which is like a mini
IPO.
Now, with Regulation A Plusoffering, you can raise up to 75
million per year and it's opento anybody.
So retail, as long as you'reover 18, you can invest.
Now, there's limits if you'renot accredited on what you can invest
(03:39):
and then you can of coursehave the accredited.
I will say it is expensive,it's time consuming, it requires
an SEC qualification and youalso need audited financials.
Lastly, there's regulation cfwhich is a crowdfunding round Some
people call this communityround ideal for local projects startups.
(04:03):
You can raise up to 5 millionthrough an online portal.
It's open to everyone butcomes with limits and a lot of platform
fees.
I view Reg CF not as much as areal estate avenue, but more for
tech startups.
But we still see some realestate people doing that reg CF offering.
(04:24):
So I've tried to highlightquick snapshot of four types of offering.
Again, you got reg 506B, 506C,reg A, reg C F.
Now let's break these downinto some categories on how much
you can raise advertising, whocan invest, the speed on which it
(04:47):
can get qualified and ofcourse the cost.
So we're going to go probablysimplest to most challenging.
506.
You have unlimited funds.
You cannot advertise again.
And I apologize if I'mrepeating this, but people again
really need to get anunderstanding to see what fits within
(05:11):
their profile.
So that 506B unlimited raiseno ads accredited and 35 non accredited
super fast.
Meaning you could have yourPPM and documents up and running
in two to four weeks as low cost.
We'll talk cost later butconsider a 506B, 10 to 15,000 to
(05:34):
get going.
506C unlimited like the B, youcan advertise.
So that's a difference withthe B accredited only slightly different
than the B.
But speed and cost are thesame whether you're putting a 506B
or 506C together.
Every attorney that I've doneand I have done a B and a C as well,
(05:58):
it's the B is a little bitmore documentation but but they consider
them unequal footing.
Now let's talk aboutregulation A plus again it's limited.75
million per year, which mostreal estate investors not a problem
because that's investor money.
So if you're doing a 75 or$100 million multi family project,
(06:21):
you know you're probably goingto get 60 or 50 million in financing
and raise 50 or 40 million youstill match.
You can advertise like a 506C.
The difference again isanybody can invest.
So retail investors can investand you'll typically see the regulation
A offerings have lower minimums.
(06:41):
We'll talk about that a little later.
The speed is very slow.
It can take three to sixmonths to get qualified by the sec.
Which the B and the C.
You just submit form D withthe sec which is you file it that
day and you're good.
Regulation A, the SEC actuallyreviews it and provides comments
(07:04):
and feedback.
Again, it's like a mini IPO,cost high.
You're going to spend sixfigures getting it qualified and
reg CF.
Now, again, it's limited tothat 5 million and this is why you
don't see a lot of it in real estate.
Yeah, you can do the ads.
Anyone can invest.
It's not as slow as a reg A,but it's not as fast as A Reg D,
(07:29):
506B or C.
And the cost is medium in thatmedium level.
So if you're going to go realestate, I would tell you cut out
the reg cf, but we'll stilltalk about it, give you the information.
But for most people it'sreally not that fit.
So.
So the takeaway from this, thefaster and cheaper you want your
(07:51):
raise, the fewer bells andwhistles you do get, the more inclusive
and retail friendly you want it.
The more blue ocean strategyof people you want to be able to
invest, the more time, costand compliance unfortunately you're
going to face.
Now let's dive into costs.
Okay.
(08:12):
For a 506B and a 506C, yourattorney will create, they'll create
an entity.
So there's probably anoperating agreement, LLC documents.
There should be what's calleda private placement memorandum, which
is 30 to 50 page documentoutlining what's your investment,
what are you investing in?
(08:34):
So that's called theprospectus on a public company is
what it would be considered.
And then what's called asubscription agreement, which is
the actual contract that saysI'm investing $100,000.
Here's all the rules.
So many important things toreview in that.
And one of the things I alwaysrecommend, have your attorney review
(08:55):
that your attorney shouldreview any contract you're signing.
If you're signing a $100,000contract to invest, let them review
because do you know whatrights you have in regards to documentation?
If there's a conflict, can you sue?
Is it arbitration?
Is it a class action?
(09:16):
Can you not do a class action?
There's so many finite detailsin there.
And you also want tounderstand the ownership structure
in regards to are youinvesting in an entity that's investing
in the fund and that entitybasically goes belly up.
You could get wiped out from everything.
So much you need to look intowithin the 506B and C.
(09:38):
As an investor and as asponsor, you want to make sure this
is clearly defined as well.
Because you want to make sureyou have a path to understand if
things go wrong, what is thepath and leave it up to you, not
different investors to come upwith different paths.
And as I mentioned, a 506B or506C can be done 10 to $15,000.
(10:02):
I'm recording this in 2025 andagain, depends on the attorney and
the experience.
But that's typically, I think,where most of them fall.
Now let's dive into theregulation A because I have a lot
of people call me, say I wantto do a reg A.
Now when you hear the term regA or reg A plus, it's the same, they're
(10:24):
interchangeable.
Technically a reg A plus, butyou can raise a lot of money.
We've raised 40 plus million dollars.
It's open to everybody.
It levels the playing field.
So we have investors whoinvest 5,000, we have investors who
invest 500,000.
If you've got set up a IRA forwith $6,000, you can invest that
(10:48):
in an alternative like aregulation A offering and not have
to worry about the 50 or$100,000 minimums.
But let's follow the papertrail and see what it really costs.
So you have to draft anoffering circular which is a PPM
on steroids.
The legal fees to draft thiscan be anywhere from 25 to $75,000.
(11:16):
Now, if you've done multiple,yes, it can be slightly less, but
anticipate spending 25 to 75,000.
Maybe you got a good attorneythat can do it for less.
That's what I would ballpark.
Then you have to have annualaudited financials.
Now, if you just started yourcompany and you're doing your first
audit, I call it a snowflake audit.
(11:38):
Because you put a hundredbucks in a bank account for that,
you don't need a powerhouse auditor.
You could.
For ours, we spent I thinkabout 7,500 bucks for that initial
audit.
Now, when people think of anaudit, I just want to be clear.
You think, oh, it's just the money.
No, it's a lot more behind it.
(12:00):
Especially for an SEC audit,they want to know your process, your
rules, who, who's approved.
Is it one person who can paythe bills and move money around,
or is it multiple?
They want to know that youhave documentation, if you have employees,
that their salaries are in writing.
There is a ton of thingswithin these audited financials that
(12:20):
need to prove not just wherethe money goes, it's all about the
operations of the company.
Now, once you're up andrunning, you're going to spend anywhere
from 30 to $75,000,000 a yearon audits.
Now that legal fees, that'sjust a startup.
We'll get into continuingcosts, but you'll have your audits
(12:42):
as well.
So let me just talk aboutcontinuing costs.
On legal Every year you haveto submit in a regulation A plus
offering a semiannual reportwhich is unaudited financials with
updates to the company.
Expect that to cost 5 to$10,000 depending where you do it
(13:03):
in house or still have to haveattorney reviews.
You have to after your auditedfinancials you have to submit what's
called a 1k form which Iincluded that 30 to 75, that's part
of that cost.
And then every year you haveto resubmit your offering circular.
You have to refresh it everyyear to keep going and that is going
(13:25):
to be another five to $10,000in costs.
Now for us, our first year wesubmitted, got renewed and these
okay, you're qualified, re qualified.
Second year they came backwith about 10 pages of comments.
It was the same exactoffering, but it was just a different
reviewer.
(13:45):
And we had to spend thatsecond year, probably an extra $10,000.
So it's very unpredictable onwhat those costs could be.
Promoter and marketing fees.
Now we work with a brokerdealer for blue law compliance about
raising money in all thesestates which they take anywhere from
a half a point to 1% of themoney raised.
(14:05):
So think about that and if youare marketing and you are a new sponsor,
you've never raised moneybefore, expect your marketing fees
to be about 10%.
If you could get it for 5 orless, be thankful.
But it's going to be expensive.
(14:28):
It's going to cost you amillion dollars to raise 10 million.
And I know you're going to saythat's not feasible or viable.
If you look at it over a spanof your offerings, five years, you
know it's about 2% per year,amortize over that time, you should
have 2% within your numbers.
(14:48):
But I see people doing 12month offering or shorter term offerings,
I don't know how they makemoney but that is the one area, the
marketing fees where people underestimate.
And let's say you goinstitutional route and you have
working with an ra, awholesaler, broker, dealers, their
(15:11):
fees are going to range from 5to 10%.
When I see people talkingabout oh it's going to cost me 1
to 2% to raise money, 99% ofthe people will never be able to
hit that number.
Now for your first million or2 million, yeah, you might have friends
or family and people who cancontribute, but if you're looking
to raise 25, 30, $50 million,you are going to spend a considerable
(15:36):
amount in marketing fees,commissions and other costs.
Now, other costs that you may incur.
We have the broker, dealer, wehave an escrow agent so the money
doesn't come right into ourbank account.
We also have a transfer agentwho holds a capital stack so an investor
(15:59):
can call up and say how many,confirm how many shares and stuff
they have.
So if I disappeared off theface of the earth, which some sponsors
have, it's a third partycompany that says, hey, you still
have this.
So just to launch, to add upthe legal, audited financials, marketing
fees, everything else, it'sgonna cost you over a million dollars.
(16:23):
Now take away the marketingfees in just the legal auditing and
just getting qualified, youknow, I would anticipate spending
100 to 150,000 before you'reallowed to raise money.
So I want to say that again.
It's going to cost you 100 to$150,000 before you can raise money.
(16:48):
If you don't have that moneyalready, you're not going to be able
to get qualified because yourattorneys and everybody else are
going to get, need to get paidthe cheapest.
I think I've seen somebody doit has probably been for about 40
to 50,000, but that was bare bones.
(17:08):
But if you're thinking you cantry and get something done for 10
or 20,000, it's not going to happen.
So regulation A is powerful,but it's not a beginner's game.
Designed for sponsors who havesome money, an established brand
and bigger goals and like Isaid, deep pockets.
(17:30):
With all that being said, wewrap up this episode.
Who should use what?
So here's my advice and whereI think you should which type of
offering you should use.
If you're raising money fromyour own network, doctors, lawyers,
(17:52):
high net worth, friends andpeople, go with a 506B.
Low cost, private, flexible,can't advertise, but you already
have a network of people.
So that's what I would recommend.
Especially if you're going toraise up to 5 million, go with that
network, go with the 506B.
That's probably, you know,your best bet.
(18:15):
If you have some type ofbrand, some type of influence, podcasts,
big email lists, social mediafollowing, use a 506C.
You can advertise, but it'sonly for accredited investors.
But just because you might bea good marketer, you still got to
have a really good businessplan and get these people through
(18:38):
your marketing funnel.
Want to invest in youroffering because a lot of times These
are not your own network.
These are people that you, youhave to outbound marketing with.
If you're looking to raise 30million or more and have that brand
and are offering something alittle bit different, a reggae may
(19:01):
be worth the cost of effort.
It just really depends betweenthe 506C and the regulation A plus
now it really depends on ifyou're doing a large multifamily
deal.
I would do a 506C.
If you're doing an evergreenfund like we have, I'd consider it
a regulation A because it'sopen and you can allow investors
to continue to come in and leave.
(19:24):
So that's where the regulationA fits in.
Also depend on your offeringdebt funds.
I actually prefer theregulation A because when I try and
compete against multifamilyinvestors who are offering 20% returns,
they may get it, they may not.
But you know that's an equityplay, an income play like a debt
(19:46):
fund that provides paymentsmonthly or quarterly but it's more
consistent with little to no upside.
You'll get more get regulationA people or non accredited people
in that offering as well.
Lastly, if you're launchingreally small deal and your startup
under 3 or 5 million, try theright CF.
(20:08):
Personally again, I'm not afan of the reg CF.
I know people who have doneit, but not many for real estate.
And again, if you have someapp or technology, reg CF is awesome
now.
So I'm not discouraging reg CFfor real estate is where I'm wondering
if it is actually the right fit.
(20:31):
But just remember, there's noone size fits all when it comes to
raising capital.
There's only the right toolfor your specific audience and goals.
And I want to just eat that alittle bit into the ground because
just because I am doing aregulation A doesn't mean you should
be doing a regulation A.
Just because they're doing a506B doesn't mean you should or I
(20:54):
should do a 506.
You need to map out what fitsyour plan and what is best for you
and what are you going to tryand get to accomplish your goals.
So at the end of the day, yourcapital raise should align with your
business strategy, not foryour business to fit the raise.
(21:18):
Lastly, I'll leave you with this.
Know the rules, pick your pathand follow it with clarity and confidence.
And again, know the rules.
I can tell you I know threeofferings right now that are competing
against mine that are 506 thathave never filed the exemptions with
the SEC and theirdocumentation and paperwork.
(21:41):
Looks like it was made withChatGPT and not an attorney.
And this goes back to what Imentioned earlier.
Do it right whether thesponsor or an investor use the right
attorney.
So thanks for listening tothis episode or watching.
If you want in the comments,put Cheat Sheet and I will send you
(22:05):
an infographic and put it inthe show notes to outline everything
we talked about today withkind of a nice chart of where each
type of raise fits in.
And if you want helpstructuring your next raise, feel
free to reach out.
I'm always happy to share myexperience and and talk to you about
not only what we think we didright, but some of the mistakes we
(22:27):
made along the way.
So thank you for listening tothis episode of the Paper Trail.
Make sure to subscribe, leavea review, and share this episode
with someone who is planningtheir next raise.
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