MY FIRST CAPITAL RAISE Around 2009, I was introduced to a highly successful real estate developer who had already successfully navigated many boom and bust cycles over his 40 years in real estate. In fact, he made far more money during the “busts” than he did during booms. Thanks to that track record, bank asset managers would call him to off-load properties that had been repossessed during a recession. After the housing crash and financial meltdown, many builders went under. In many cases, their developments were solid but their credit lines were pulled by banks that no longer had liquidity. The builders then could not finish their proj- ects and often lost them to foreclosure. That’s exactly what happened to a developer in Portland, Oregon, who was 70 percent complete on the construc- tion of 27 riverfront townhomes. His bank failed and the construction credit line was cut. The FDIC took over and was willing to sell the $12M note for just $3M. My new developer acquain- tance told me about this and asked if I could raise the $3M since he no longer could get financing either. Before the mortgage meltdown, an established developer could walk into a bank to get the $3 million for an incred- ible deal like this, but not in 2009. Banks were busy licking their own wounds. I sent out an email to my network of Real Wealth Network members to see if anyone would be interested in this deal. To my great surprise, I had $3 million committed within hours. I had no idea how very nearly I avoided disaster in the process! At the time, I didn’t realize there are very strict rules for raising money. Sending out an email is not on that list of rules! The Securities and Exchange Commission (SEC) governs the use of OPM very carefully because it rep- resents such a huge potential for gain, loss, and abuse of trust if you handle things poorly or lack ethics.
isting relationship with them. Even more luckily, the money came in so quickly that I didn’t mention it on my podcast. If I had, I would have unknowingly broken securities law because announc- ing a private placement to the public is a violation. It might have been an accident, but the SEC still could have fined me. If I had committed fraud in some way (by the way, I didn’t!), the S.E.C. could have thrown me in jail. That’s how seriously they take this stuff, and they should. That project ended up being very successful, and investors earned dou- ble-digit returns in the middle of the Great Recession. I was hooked, and it marked the beginning of my new role as a syndicator. I realized that if I was very careful about the projects I promoted
and the people I worked with, I did not have to be afraid of OPM and I could generate wealth for my investors, my company, and my family in the process. My original rule from the first time I heard about OPM from my mentor still stands firm, however: Don’t hurry the process or rush into anything. If you do, you might miss something important and find yourself in a bad position of having failed to help your investors generate the returns you all had hoped for. •
One of the strictest rules at the time was that you could only present deals to investors “with whom you have a pre-existing relationship,” which means exactly what it sounds like: You could only ask people to invest on big group projects, also known as syndication, if you already knew them in some way. This meant that you could not just call up someone you knew was really wealthy and ask them to participate in your deal or go to an investors’ associ- ation meeting and stand at the front of the room and call on a bunch of strang- ers to put funds to work with you. Fortunately, the people to whom I sent the email were members of my network and regular attendees at our network’s in-person events, so I did have a pre-ex-
TIPS FOR RAISING CAPITALAND STAYING OUT OFJAIL
If you raise funds from anyone who is not neces- sarily an active partner but
the investment and make sure the investors understand the risks in writing.
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will be, instead, a passive investor, your activity falls under securities law. Always check with a securities attorney to make sure your offerings are compliant from start to finish. Learn the difference be- tween a Reg D 506B, Reg D 506C and Title III. • Reg D 506B states that companies using this rule can sell securities to accredited investors without verifying those investors’ accredit- ed status personally, but they can only offer those securities to buyers they already know and believe are accredited. There is an allowance of 35 non-accredited investors. • Reg D 506C states that compa- nies can advertise their offerings publicly without creating a prior relationship with their investors, but they must verify accredi- tation by a third party (CPA, financial planner, or attorney.) • Title III allows companies to make securities offerings to non-accredited investors, but only allows a raise of $1 mil- lion in a 12-month period and restricts the amount of money an investor can invest in the offering based on their income. Disclose every single pos- sible risk involved with 2 3
Always issue a Private Placement Memoran- dum and LLC Operating
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Agreement so that your investors know - in writing - exactly what to expect, especially if things don’t go as expected.
Kathy Fettke is the co-founder and co-CEO of Real Wealth Network. She may be reached at www.RealWealthNetwork.com.
Never promise or guaran- tee returns. Give best- and worst-case scenarios in
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your pro-forma. Over-estimate timelines and expenses and un- der-estimate returns. Most importantly, don’t jump into a project you don’t fully understand, especially if you are using OPM to fund it. Even the greatest deal can go poorly with the wrong management in place. That’s why today I only do deals with people who have a long, ro- bust track record of success doing exactly the same thing they are planning to do with my project. Finally, things can go wrong and usually do. Keep your in- vestors updated with quarterly reports - and be totally honest. The syndicators who end up in jail tend to be those who cover up the losses by “robbing from Peter to pay Paul.” This is called a Ponzi scheme, and never works. Always do the right thing, and you can get though even the roughest of deals.
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