The following is a blueprint for soliciting investors for a Rule 506(b) offering, but it will increase your fund-raising effectiveness if you use it for all securities offerings.
a) Document the Relationship.The SEC says you need to have a pre-existing relationship with an investor prior to making an offer (not a sale).
The relationship is three-part and depends more on qualitythan timing. Think of this like dating; it’s more about the quality of the contact, and not how many times you have seen or talked to someone that determines whether that individual is a long-term prospect. a) Pre-Qualification.The relationship begins after you have met someone and know the person well enough to determine whether he or she is accredited or sophisticated, as required for a Rule 506(b) offering. You can use the pre-qualification questionnaire that the person fills out, your notes from an interview with him or her [you fill out the pre-qual questionnaire], the individual’s financials, or other information that makes him or her obviously qualified (e.g., the potential investor is the president of Ford Motor Company, runs an investment club, has owned self-storage or other investment real estate [aside from a personal home] etc.).
b) Determine Suitability.The initial meeting must be followed by contact (preferably a phone call or face-to-face meeting) from you to determine the person’s suitability to invest in the type of things you may have to offer in the future (this is not a place to pitch what you have available today). This conversation should be 70% about the potential investor and 30% about your company and what it does in general (see example dialogue below). It is possible to combine steps a and b.
c) Passage of Time.Finally, there must also be a passage of time between when you first met and when you make the investment offer during which the relationship ripens. It would be ridiculous to meet someone in a bar, have a follow-up phone call three days later, wait 30 days and ask that person to get married, right? Something else has to happen in between to further the relationship. So put that person’s contact information in your investor database after the suitability call, send out a newsletter or “welcome email,” get the investor on a drip system so he or she gets information about the self-storage industry (as an example), invite him or her to a webinar or self-storage educational event, or wait a week or two and invite the person to the password-protected area of your website, etc. The idea is to do something to nurture the relationship that furthers the other person’s knowledge about who you are and why he or she might want to invest with you, before you start making offers.
Make Offers.Your Investment Summary is an investment offer. Only after some passage of time during which the relationship ripens can you make offers (1 to 3 weeks or more would be ideal with several documented contacts). CAVEAT: DO NOT SEND OFFERS VIA EMAIL BLASTS, EVEN IF YOU HAVE ESTABLISHED RELATIONSHIPS WITH ALL RECIPIENTS. THE SEC CONSIDERS EMAIL BLASTS TO BE GENERAL SOLICITATION.
Technically, for a Rule 506(b) Offering, you should not make offers to people you met after your offering was contemplated or active. Your offering is active when you have documents in hand and are actively raising money. This rule can be relaxed if you take time to go through the steps in Number 2 above and document every contact for every investor. Ideally, you should develop a written policy on how you will do this that everyone raising money in your group follows. Additionally, you should consider a Customer Relations Management (CRM) software system such as Insightly (cheapest), Constant Contact, Salesforce, Filemaker Pro, etc., to keep track of investor contact information and contacts with your company.
Here are some example questions/dialogue for your Suitability Conference (No. 2 above): About Them:
Have you invested in real estate before?
Have you invested in a small group before?
Do you know anything about the self-storage industry?
What is your investment experience?
What kind of returns are you getting on your investments now?
How long would you be comfortable having your funds invested?
Have you ever had a bad experience with an investment? What went wrong?
Do you have a self-directed IRA?
How much are you looking to invest?
How soon would you be interested in making an investment?
About You: “We are a small investment company that pools funds from private investors to buy real estate [INSERT TYPE]. We buy properties at a discount through our network of nationwide brokers and industry contacts and then turn them around with capital improvements and a professional (or affiliated) property management team. Once we get the properties stabilized, we refinance them to cash out our investors, usually within three to five years. We typically offer annualized returns of 12% to 15%, depending on the amount invested. Our minimum investment requirement is $25,000. Does this sound interesting to you?” If yes, then, “Great, with your permission I will put you in our investor database so we can let you know when we have an opportunity that meets your criteria.” (You get the gist – you probably need to memorize and practice something like this). When you are ready to make the offer, you would send an individual email that would say something like: “Dear Investor, you may recall our conversation about investing in self-storage facilities. We currently have an opportunity for an investor in our private placement offering that meets your criteria. Please see the Investment Highlights below. If you would like more information, please click on the link to see the entire offering package.” You could attach your Investment Summary, or provide a link to the entire offering package. Call the investor to follow up and talk to him or her about the opportunity. Live contact is always the most effective. Remember, people invest in you, not in your offering.
We get potential clients who reach out to us every week who want to start a fund. While we could simply take their money and set them up with fund offering documents, we actually talk a lot of people out of doing a fund. Why? Because they don’t have the necessary...