Considering a capital raise that you can publicly promote? This overview chart is designed to compare key features of direct offering strategies that permit an issuer to solicit investment from its network. None of these strategies require the use of a broker but all have options to allow you to list your offering on a listing portal like SVX.us.com or a Reg CF listing portal. Some strategies are better suited to issuers trying to raise capital primarily from a large group of community (nonaccredited) investors, others are designed to reach a mix of high net worth (accredited) and community investors and one is limited only to accredited investors. Some are limited to one or a few states while others can be nationwide.
There are many factors beyond those noted in the chart that go into deciding what capital raise strategy is right for your enterprise given the location and makeup of your network and the amount to be raised. Some of these strategies allow for testing the waters before moving forward with a direct offering. Note too that there are a lot of details and nuances to consider for setting up a raise that are not captured on this chart. If you are considering a public raise, we are available to help you choose a strategy and design the direct offering that best fits your goals. Contact us for a free consult call to learn more.
Compare and Contrast: Direct Public Offering Strategies
Historic preservation projects are designed to protect a community’s heritage often through the expansion and enhancement of historic properties for public use. Community capital is designed to empower a community’s investment in itself through public offerings that are structured to engage a variety of investors. Preservation projects could meet their goals faster and gain additional political and monetary support through the use of community capital raising strategies.
Community investment strategies differ from typical private strategies as they allow investment broadly from community members rather than restricting investment only to the highest net worth individuals or institutions. Community capital does not have to be the only source of capital for a project, but it can have an impact beyond the funds raised.
Community members can be great allies (or in some cases, strong adversaries) to real estate development projects. Restoring or repurposing a historic building is made easier if a developer has both capital and community support. Why not combine the two?
Including community members as investors in projects not only affects the project’s bottom line, but also impacts the level of community acceptance of the proposed purpose and use of the property. With a community capital approach, community members share in the potential return on investment and can become great ambassadors for the project as it wends its way through any approval process, and later as the property opens for its new or improved purpose.
At Cutting Edge, we work to identify, design and build capital raise strategies that meet client goals and strive to involve community stakeholders. Depending on the purpose and scope of the project, community capital raise strategies might include single, or multi-state, direct public offerings, Title III Regulation Crowdfund offerings or larger Regulation A campaigns. Or, a developer or manager can put together a community investment fund that can support various enterprises or projects. These approaches work not only for real estate projects but across a wide range of industries.
We will be highlighting these capital raising options in greater detail in a webinar (Crowdfunding Historic Preservation: Direct Public Offerings and Other Ways to Raise Funds) with the National Trust for Historic Preservation hosted by the California Preservation Foundation on Tuesday April 17th from 12:00 PM to 1:00 PM PT. To learn more and register, visit here.
For a free consultation with Cutting Edge Capital, visit here. Questions? Email email@example.com.
While Cutting Edge is best known for community capital raising strategies such as direct public offerings, we help many of our clients utilize private placement strategies instead of or in addition to other types of capital raises. The term “private placement” refers to the process of raising capital in an offering that is not registered with securities regulators and is not offered broadly to the public.
Private placements include offering types ranging from friends and family investments in a new retail establishment, to angel investments in a social enterprise, to institutional and venture capital investment in a growth company. Any kind of security can be offered in a private placement, including notes, stock (common or preferred), revenue share securities, convertible notes, SAFEs (security agreement for future equity) or others; and the attributes of each one of these can vary quite a bit (differing rates of return, exit options, valuation, etc.). As clients look at options and assess their potential investor network, we often get questions about whether private placements can include non-accredited investors, whether a private placement can be advertised and what the regulatory or disclosure requirements are.
Below is an overview of options and a brief discussion of key factors.
Accredited Investor Definition. To understand the options, we need to start with understanding what is an accredited investor. An accredited investor is an individual whose net worth either individually or jointly with their spouse equals or exceeds $1 million (excluding primary residence). Or, an accredited investor has “income” in excess of $200,000 in each of the two most recent years and who reasonably expect an income in excess of $200,000 in current year (or $300,000, jointly with their spouse). Businesses can be accredited investors too if they have $5 million in assets. There are a few other types of accredited investors. A full description can be found here.
Statutory exemption, Section 4(a)(2): Non-public Offering. This is the broad private placement exemption of the of the Securities Act of 1933 and it exempts from registration “transactions by an issuer not involving any public offering.” There is no limit on the number of investors but state law may provide limits such as on the number of nonaccredited investors and may require a notice filing to offer or sell securities to residents of the state. Investors must either have enough knowledge and experience in finance and business matters to be “sophisticated investors” (able to evaluate the risks and merits of the investment) or be able to bear the investment’s economic risk as well as have open access to necessary information. There is no bright line test for sophistication or financial ability to bear the risks. Therefore, there are significantly higher risks to use this exemption rather than one of the other exemptions or the safe harbour of Rule 506. The securities issued under this exemption are restricted securities and may not be transferred or sold without registration or use of another exemption.
Regulation D, Rule 504: Small offering ($10 million limit) exemption. Rule 504 provides an exemption for the sale of up to $10,000,000 of securities in a 12-month period and may include sales to accredited or non-accredited investors. There is no requirement to provide specific information to potential investors as in Rule 506 offerings. In general, you may not use general solicitation or advertising to market the securities using this rule unless you have registered the sale at the state level. As with previous exemption, an issuer must comply with state law requirements for any potential state level private placement exemption. Purchasers generally receive “restricted securities” and may not sell them without SEC registration or using another exemption.
Regulation D, Rule 506(b): Unlimited raise allowing 35 non-accredited Investors. Rule 506(b) is a “safe harbor” for the non-public offering exemption in Section 4(a)(2) of the Securities Act, which means it provides specific requirements that, if followed, establish that the offering falls within the Section 4(a)(2) exemption. Rule 506 does not limit the amount of money your company can raise or the number of accredited investors, but to qualify for the safe harbor, your company must: (1) not use general solicitation or advertising to market the securities; (2) not sell securities to more than 35 non-accredited investors (but all non-accredited investors, either alone or with a purchaser representative, must meet the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment); (3) give non-accredited investors specified disclosure documents that generally contain the same information as provided in registered offerings; (4) be available to answer questions from prospective purchasers who are non-accredited investors; and provide the same financial statement information as required under Rule 505. Rule 506 offerings, pursuant to Section 18 of the Securities Act, are exempt from state registration and review. The states still have authority to require a notice filing (and related fees) and may also investigate and bring enforcement actions for fraud.
Regulation D, Rule 506(c): Accredited investors only, advertising permitted. Rule 506(c) is also a safe harbour to the exemption under Section 4(a)(2). There is no raise limit under this Rule. This exemption permits advertising and general solicitation of investors but then limits investors to only those who are accredited. The issuer must take reasonable steps to verify that the purchasers are accredited investors before the purchase. Purchasers receive “restricted securities.” As explained above under Rule 506(b), offerings under Rule 506 preempt states from imposing registration and review requirements but states may still impose notice filings and fees.
How to choose? The preceding is merely an overview to help map out possible strategies. We are happy to discuss any of these options with you and go over the risks, pros and cons of each. Each raise can be as unique as the business and its potential network of investors. And, we haven’t touched how the security can be structured. We can help you map out a strategy that works for your business. Contact us for a free strategy call.