4 Legal Considerations For Raising Capital
Starting a business can be challenging, especially in the real estate world. There are many things to consider, one of which is raising capital for your startup. Although you may be able to build a business with your own money, you’ll likely need some external funds at some point. This setup is especially true when forming a real estate syndication business.
Essentially, real estate syndication refers to a partnership wherein the investors combine their financial resources to purchase properties for business. Under this business setup, a syndicator or a sponsor is tasked to acquire the property, make repairs, and manage it on behalf of the passive investor. However, raising the necessary capital for this kind of business isn’t easy, especially regarding the legal aspects. You may end up in potential legal trouble when you can’t follow the rules and regulations.
Read on to learn the four legal considerations for raising capital for your business.
- Registration Exemption With The U.S. Securities And Exchange Commission (SEC)
Raising capital for a real estate business is never easy. Even if private placements can be considered the best alternative for getting funding, there are still rules and regulations that should be followed to prevent investor misinformation, fraud, and other illegal activities. One of these regulations is registering the securities with the SEC of the United States.
Thankfully, there are exemptions to the said requirement involving private offerings. This is where Regulation D enters the picture. It outlines specific rules and regulations allowing companies that sell securities not to register with the SEC. It aims to help businesses gain easy access to the capital market without paying the costs of an SEC registration.
Under Registration D, two rules should be kept in mind when it comes to raising capital. These can include:
- Rule 506(B): It provides that businesses selling securities can raise any amount of capital from accredited investors, individuals, or entities dealing with securities unregistered by any financial authorities. Moreover, these businesses are prohibited from executing general solicitations or doing any advertising activities for their offerings.
- Rule 506(C): It allows businesses to promote private offerings to raise capital but prohibits them from obtaining funding from non-accredited investors.
Indeed, there are Regulation D rules that should be kept in mind if businesses selling securities want to be exempted from the standard SEC registration. However, some SEC regulations may be rigid or harsh for companies. This is where the enactment of a new piece of legislation that defines the JOBS Act enters the picture. Its primary objective is to loosen the regulations imposed on startups and small businesses. As such, some changes it provides may include making crowdfunding much easier and exemptions available to a wider range of securities issuers. It also simplifies the disclosure and reporting documents required for companies generating less than USD$1 billion in revenue.
- Drafting Of A Private Placement Memorandum (PPM)
Another legal consideration you need to take when raising capital for real estate businesses is drafting a PPM. It’s an essential document that should be filled out to raise funds for real estate. It’s also a document mandated by the SEC for real estate syndication businesses. Without a PPM, you can’t present investment opportunities to accredited and sophisticated investors.
So, if you want to obtain external funding for your real estate business, make sure to draft a quality PPM.
- Avoiding Unregistered Finders
It’s also essential to stay away from unregistered finders when raising capital for your business. Generally, using a finder classified by the SEC as an unregistered broker-dealer to find investors and sell securities on behalf of the business is prohibited under the securities laws.
When you violate this condition, your investment offering may become invalid, your business may be required to refund the investors for the money they invested, and your company may incur civil and criminal liability.
- Working With Legal Professionals
Raising capital for a real estate business can be a huge undertaking. Hence, working with legal professionals to avoid mistakes in obtaining funding is crucial. Because it requires compliance with some SEC rules and regulations, you need trustworthy legal professionals who can help you with the process. For example, the lawyer you hire should have valuable securities law experience to help guide you through the capital raising process without legal problems.
Indeed, raising capital for businesses in the real estate industry can be a challenging process. With all the rules and regulations involved, it can be easy to lose track and make mistakes. Thus, if you don’t want to get into any legal trouble, keep the information mentioned above in mind, and you’ll be able to obtain funds legally and seamlessly.