How to Work with Investors to Raise Capital for Self-Storage Deals
Investing in self-storage is an excellent option for the individual who is looking for asset class diversification through real estate investments. The advantage of self-storage investment is that it provides a more stable and predictable cash flow than a volatile stock market. The first step is to find a deal, after which you need to raise capital. The following is not legal advice, but a general overview of the information that an issuer needs before beginning the process of raising investment capital.
When raising capital for a self-storage investment, you have to be cautious as to whether your investors are accredited. You must be in compliance with Rule 506(c) which states that issuers can advertise to the general public but must take reasonable steps to verify that all of the final investors in the project or venture are accredited.
Rule 506(c) is a way to allow developers and owners to obtain investors outside of their traditional circles, but compliance is key. As stated before, actual investors must be accredited. Qualifications for an accredited investor are:
- A net worth (excluding value of primary residence) of more than $1,000,000.00
- Earned income that exceeds $200,000.00 ($300,000.00 if married) in each of the two previous years
- The same level of income should be reasonably expected for the current year
Secondly, reasonable verification of accreditation must be done by the issuer. The SEC has provided a non-exclusive list of verification methods.
- Review copies of IRS Forms such as W-2, 1099, or 1040
- Review bank statements, brokerage account statements, and/or credit reports from one of the three major credit bureaus, as well as a verification of net worth statement from the investor
- A written third-party verification from a licensed attorney, CPA, SEC-registered investment advisor or broker dealer that reasonable steps have been taken to verify that the investor is accredited.
Rule 506(b) has less rigid restrictions than Rule 506(c). In a Rule 506(b) offering, the issuer may take the investors word that they are accredited unless there is reason to believe that the investor is not being truthful. In a Rule 506(b) offering you can advertise the brand but not the deal (actual investment) as you would in a 506(c) offering. For example, a website can attract investors who then sign up and complete questionnaires. Through this process the issuer can have conversations with the potential investor in which they learn about his or her investment knowledge and experience. After they develop a relationship, then, and only then, can an investor be shown actual investments.
SEC Regulation D
The Jumpstart Our Business Startups (JOBS) Act, is a law that is intended to encourage funding of small businesses by easing some of the security regulations. It was quietly signed into law by President Obama, with bipartisan support, on April 5, 2012. The JOBS act added new flexibility for raising funds. Under this act, issuers are allowed to raise an unlimited amount of capital through a private offering to an unlimited number of accredited investors and up to 35 non-accredited investors.
The Crowdfund Act – Equity Crowdfunding
There are several different types of Crowdfunding, but for our purposes only equity Crowdfunding is applicable. Equity Crowdfunding allows contributors to become part-owners of your company by trading capital for equity shares.
Title III, the Crowdfund Act, creates an avenue for companies to use crowdfunding to issue securities. Crowdfunding is a method of raising capital through the collective efforts of friends, family, and individual investors. The use of online crowdfunding platforms taps into large groups of individuals, primarily online via social media and provides issuers with greater exposure.
Traditional methods of raising capital are very much like a funnel. You and your investment pitch are at the wide end, and your audience of investors is at the closed end. If you don’t point the funnel at the right investor at the right time, that is money lost.
Crowdfunding platforms streamline the traditional model by giving you a single platform to showcase and share your resources. You’re reaching a much wider investor pool with more fundraising options. Your presentation can be condensed into an organized, easily digestible format, and you can promote your campaign through email and social media. As potential investors express interest, you’ll be able to refine your process based on their questions. With Crowdfunding you can streamline your efforts by presenting everything online in an accessible format, leaving you more time to run your business.
Again, the key to all of the above methods of raising capital is compliance with SEC Rules. This blog is provided only as an overview and not intended to, nor does it constitute legal counsel. Issuers should seek advice from their own legal teams prior to considering any offering.