Everyone raising money should know THIS first – Capital Raises – Raising Capital

If you raise money in the United States, you must know about the Investment Company Act. The Investment Company Act is a series of rules that regulate registered investment advisors, a type of company that basically helps investors make more money. So the main idea is most people, when they talk about raising money in the United States, a lot of people focus on the Securities Act, which is obviously super important.

And the Securities Act is really big on regulating types of activities when it comes to selling deals to investors. And, the, either you’re selling deals to investors as a registered person or entity with FINRA in the United States, or you’re using an exemption, which is a rule, that allows you to carry out that activity without registration.

So either you’re registered and you’re doing it, or you’re using an exemption and you’re doing it through an exemption. The most common exemptions with the Securities Acts, we’ve talked about those in other videos and if you haven’t seen them, you may want to click around on the channel to get up, back up to date.

But, when it comes to Investment Company Act, these are more rules that are more focused on the types of activities as a registered investments advisor. If you have a fund, basically, and you want to help people raise money, or you want to create a fund and launch a fund. Especially in real estate or in business acquisitions, it’s really key to look at the types of funds that are out there and how you can make the most out of it.

Everyone raising money should know THIS first – Capital Raises – Raising Capital

So when it comes to this one, the Investment Company Act says that, oh, either you manage a fund as a registered investment advisor or use an exemption. From registering as a registered investment advisor, and so the exemptions you have the three C one, the three C five, and the three C seven, and so it’s just the panel just opened up on the screen there, and these are really common exemptions.

So the three C one investment company acts exemption from registering just means that, hey, you can use a rule called the three C one to create a fund without needing to register as a registered investment advisor. And so this rule says that you can have 99 investors max into the fund. You’re not allowed to do an initial public offering and you’re not allowed to charge performance fees to accredited investors.

So this is at the time of the recording of this video. So a performance fee is just a fee that is a percent of It’s basically a fee that is related to how much money you make. Let’s say you make an investor a certain amount of profits on their money. You charge them 20% of the profits you make for them.

Everyone raising money should know THIS first – Capital Raises – Raising Capital

That’s a performance fee. And then the other type of fee is usually the management fee, which is a fee based on how much money they put in. So accredited investors are usually the only type of, usually they’re only two type of investors people talk about. They’re accredited investors who have. Over 1 million in assets outside of their personal home or somebody who makes 200, 000 per year.

So those are usually what people call accredited investors, but they’re actually levels that are above this. And in the United States, you have a qualified client and a qualified purchaser. So not to be confused with a qualified investor, which some people mistakenly call it an accredited investor. So let’s not get confused.

So basically the qualified clients is somebody that has over a million in assets with a registered advisor, investment advisor, but their net worth is above 2. 1 million. A qualified purchaser is a person with over 5 million in investments. So the main idea is these are people that are Richard Dunn accredited investors and people can only charge performance fees to these types of investors.

Everyone raising money should know THIS first – Capital Raises – Raising Capital

For this type of exemption, if you want to create a fund in the United States using this exemption, you’re using this rule. So that’s the first one. So basically, it’s the small fund type of, this is the small fund exemption basically, for lack of better words. The 3C5 is super common, and that one is the next one we’ll talk about.

It mostly has to do with real estate. So if you want to create a real estate fund, this is the one that everybody does. 55% of the deals that you acquire, if you’re doing one deal at a time, It’s basically 100% of the deal, so you’re good. If you’re doing multiple deals, you want to have slightly more real estate.

But then, 55% of your, the deals that you get involved with in a fund using this rule has to be towards something called qualified interest, which is basically real estate. And the other 25% of that should be real estate related. And then the other 20% can be quote unquote other. So 55% real estate directly.

25% real estate related, whatever that means. And you may want to get a lawyer because it sounds like a really gray area. And the other 20% can be anything other than real estate. So I really recommend this just to be real estate. And then the last one, and there’s no limits on how many people you can bring in, because the 506D regulation, I guess regulation D506C, rather, 506C, Says that you can raise money from an unlimited amount of investors so if you combine both these exemptions and you can raise money from an unlimited amount of investors and Usually the thing that prevents you from following that 506 C rule, which is a rule.

I don’t want to get it So if you don’t know what it is, just click around in the channel, but basically it’s something it’s an exemption from registering with FINRA So if you follow that rule says that you can invest in an unlimited amount You can find it an unlimited amount of you can raise an unlimited amount of capital with, unlimited amount of investors.

Everyone raising money should know THIS first – Capital Raises – Raising Capital

So it’s these rules that seem to limit the amount of investors that you get if you do a fund. So anyway, moving on. 3C7, they must be qualified purchasers or above. And you can do under, it must be under 2, 000 investors. So 1, 999 investors max. And you can basically charge anything, performance fees, it can be any type of asset.

But they must be qualified purchasers or above only. This is basically the big boy fund. So you have the small, the little boy fund, the real estate fund in the middle. And then you have the big boy fund, which is for qualified purchasers, the biggest type of investor or above. That’s pretty much a quick overlay and all this gets submitted to something called the form D and I’ll try to dig into form D, but basically the main idea is, so essentially after you investors invest in your deal, you have to submit something called a form D to.

And many people never talk about the… Section 3c2 and the other ones, perhaps we’ll make videos and address them. But the one that 99% of people talk about is usually these three. And the last point is if you want to raise money, but your deal isn’t in real estate, how can you make real estate? How can you charge accredited investors performance fees?

That’s a question that we started to get a lot of. So one thing that you can do is if you have a fund where you’re buying a business, Make sure that if the business is attached to real estate, then you may be able to just use the 3C5 if you’re able to create a strong argument that more than, I guess more than 80% of the fund is attached to real estate.

Everyone raising money should know THIS first – Capital Raises – Raising Capital

So you can have one part of the fund, you can create something called parallel funds, where one part of the fund is only for that real estate part of it, and then the other part is for the business part of it, where you’re just targeting qualified purchasers and above. So that’s one way of doing it.

Another way of doing it is making sure that the accredited investors invest through a different situation where they may be called a qualified purchaser. So sometimes if they work with, the right RIA, perhaps they may be able to invest that way. And then that’s something to talk about with securities lawyers and so on.

And so the last thing you can look at is just targeting accredited investors for your real estate part of the deal. And making sure that the management fee is aligned with the profit of the deal. And you can make sure that the people that are qualified purchasers can partake into the non real estate side of the deal.

And so that’s just some ways you can do it, but just make sure that, make sure that you just recognize this rule. The next step is, when you’re raising money to acquire a business and so on, this can apply for one deal at a time or multiple deals at a time. With this, don’t be overwhelmed or anything, but if you have any questions about any of this, just make sure you head to raises. com or click around the channel if you want to learn more. And so we’ll see you then.