I don't know who wrote the following,  so I can't credit it to  anyone... I snagged it offa some website...   ~ Royal T ~ 

"Raising Private Money

Sooner or later your lending sources will dry up.

It might happen because of economic conditions in general, your economic condition in particular or seemingly no reason at all. Whatever the cause, you will find yourself out of business if you don't have ready access to private money sources.

I am going to talk about three ways to raise private money:

Each of these have their own pros and cons and I am going to talk about them in detail. I can't stress enough how important it is to be completely honest, upfront and transparent when using private money.

I’m not going to share my life story with you. I’m not going to spin a yarn of how I discovered this secret way to get funding. The truth is I was taught some of it, learned some it the hard way and just got damn lucky in others. You couldn’t care less whether I started with pennies in my pockets as an immigrant to this country or as a privileged son of a billionaire. What you care about, or should care about, is whether my technique works regardless of the starting point – and it does!

My commitment is to share everything I know in this area. Nothing is held back. I am going to share exactly how I and others quickly and easily setup investment pools, solicit private investors and private lenders allowing us to take down deals small or large for short term or long term profits. I will show you the mechanics but you still must use an attorney familiar with private equity and note funding. I also show you the problem areas and activities to avoid and stay out of trouble with the state and federal regulators. In short, showing you how to be your own private bank.

Background

The central tenet in dealing with any kind of private investment is honesty, integrity and total visibility of investors before, during and after their dealings with you.

The federal and state securities laws are vague and much of the vagueness is intentional. The legislators and regulators must walk a very fine line between protecting investors from fraud and deception while still allowing a capitalist free market system to function.

For that reason, just about any way you raise private capital violates various laws and regs if there is any kind of fraud or deception involved and it does not matter if it is intentional or not.

Since we know fraud and deception are the areas the regulators are tasked to worry about it is not surprising to often see things that are technical violations go unnoticed.

For example, it is a very common practice for entrepreneurs seeking venture capital to attend a public gathering where they are invited to present their proposal to a group of potential investors. That certainly fails the public solicitation test and since the investors were attracted usually through mailings and other advertising, it also fails the advertising test. Yet, these happen in every major city several times each year without any repercussions.

The balance of this learning material will show you how to attract and use private investors by selling equity shares and issuing notes and indentures.

Private Money is Necessary

Using private money is critical to a successful investor

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The first step in understanding this is to know why you need to do it. Every investor starts with their first deal. It may take a while for them to find it but if they stick with it, find it they do. They might put a little of their own money into it and they get a taste of possible things to come. Then they start their next deal and find it gets a little easier each time.

Soon, they find themselves in autopilot mode. They find deals and complete them with regularity. Then one day, seemingly out of the blue, they find themselves limited by the availability of money. They have more great deals than they can take down because of funding. They don't understand why lenders who were eager to loan them money because of their very strong credit are now completely uninterested. They really don't understand why the same lender who loaned them the funds for their first deal are not willing to loan them funds for their tenth or fifteenth or more deal. They can't comprehend why they have a higher risk profile with a few successful deals under their belt than they did when first starting out.

The reality, they are trying to use the wrong lending programs to fund their deals. They are talking to residential lenders with residential programs. Sure, these lenders accommodate investors but only to a point. Many of these lenders have specific limitations in their charters requiring them to be mostly residential lenders. Many of these same lenders have commercial divisions but the residential side and commercial side don't often communicate in any meaningful way. Sure, they are both in each other's corporate roladex but they don't know each other. Many times the residential side doesn't know what commercial programs are available. Ironically, the commercial side often knows about the residential programs available because they are dealing with clients who cross from the commercial side who need to buy a home. But, since these are usually non-conforming loans due to size or documentation they are not the mainstream of the residential side of the house.

That is the reason you need to understand this. If you are going to make the jump from the occasional deal maker to a real powerhouse in the real estate investing world you must do two things. One is diversify and there is plenty of information on this site discussing diversification. The other is to have ready funding when you need it no matter what you find. If you always have money ready and waiting in the wings, you can take down all of the great deals you find.

That’s why you would want to do this. If that doesn’t sound like the direction you want to take with your investing you still need to understand the concepts. Even if you aren’t trying to be the next Donald Trump you should understand and use private money if for no other reason than the privacy it affords. I have no desire to be the next “The Donald” but I do want to be as successful in my investing as I can and I am not all that keen to expose every aspect of my financial life to employees of lenders making a fraction of what I make each year who know less about lending than I do. That is not a statement of arrogance, it is just a statement of fact.

This isn’t a discussion about using hard money lenders. Yes, they are a private source but not the kind you want for the longer term. They can be a great alternative for you when you are struggling with your first few deals and can't get funding at more attractive rates. However, hard money lenders are not the way to go long term. I don't use them and I certainly don't want to be one.

Now you know why you must understand this. If you don't make the move to private sources of money you can never, ever hope to move to the even better source of funding - investment bankers.

Building Your Network

Your absolute first step in this process is to build your network. There is no way around this. Without your network you are stymied in this process. This site is an excellent first step in the process but you also need to go beyond this network, as great as it is.

The very first thing you must do is to sit down and make a list of everyone you know. Yes, I mean everyone, including those you dated early in your life and didn't think you would ever need to talk to again! The bully from the playground when you were a kid. You best friends in school, team mates from youth sports, coaches, teachers; list absolutely everyone you even remotely know.

Next, your must get current names, because sometimes they change, current stgreet addresses, phone numbers and email address.

I'm sure you see what is coming next, you have to actually contact them. It can be by mail, phone or email but you have to contact them to reestablish your relationship.

Now, as you confirm your list, you need to establish a constant contact mechanism. It can be cards you send on a regular basis, or emails or phone calls, whatever you desire but you must stay in regular contact at least quarterly!

I send out cards on a regular basis. Some years I send cards welcoming the season changes. Other years I send just little notes to stay in touch. It always includes my current contact information.

Why is it so important to build your network?

Because everyone you know, knows someone else and when you start talking about your investing success your direct conversation may lead to an introduction. That is the power of any vibrant network.

You can't do it anonymously on the interest. LinkedIn.com is fine for what it does but is almost totally useless for this purpose. It can be a great way to reestablish initially, but you must move beyond it. You must start a real interactive relationship with everyone you decide to keep on your list. You will need to continually prune as you manage your list. Some people you may want to keep on the list but contact less often. If nothing else, you will have a very large Christmas, Hanukkah or New Year's card list.

For most of your close list, you must have direct face to face contact whenever possible. People invest in people and they must be comfortable with you long before they are receptive to any investing idea.

This is why you network.

When I started building my list I encouraged, even begged, people I knew to introduce me to others. It is amazing how few people you need to start interacting with celebrities and the super wealthy.

Building your network is important however, you also need a track record. I am showing you the mechanics of all of this but it is up to you to document your investing successes. If you have never bought an investment property you are not going to be successful raising private money. If you are opposed to actually forming a company to do the investing in real estate you are not going to have mush success with raising private money. Update or start your investing resume. If you don't have one, compile notes on the last ten or twenty deals you completed and ten or twenty you lost. In the very near future, you might be glad you did!

What does that mean?

It means private money flows to a business run by a person. However, your funding sources remain extremely limited if you intend to remain extremely small. It is fine to say your only want enough properties to supplement your retirement. But, that means you don't need private money. You may or may not want to be a private investor in a group. That is a different conversation.

If you are looking for options to grow and expand to a sustainable source of income then private money will be a critical part of your success.

Personal Networking

Building your network is a full-time effort. You have to talk to people at any and every opportunity. If you don't like talking to people my best advice is to stick to investing in REITs if you want to be real estate investor. No matter what niche you choose or what niche chooses you, this is a people to people business. Raising private capital is no different.

Any time anyone asks you what you do for a living, you recite your elevator pitch. The concept of an elevator pitch is suppose you and some moneyed investor got into an elevator at the same time and as you are both there they ask, "what makes you so special?" Of course, they don't ask it that way, they usually say, "What do you do?" In that elevator you have a crucial seconds, perhaps a couple of minutes to make a lasting impression in a good way. Your elevator pitch is nothing more than a quick way to get someone's attention so they want to take the time needed to know more. If you want to learn why that is important and how to do it effectively, read The Psychology of the Deal in the learning center here.

Back to the elevator pitch. When anyone asks me what I do, I reply, "I make money and share it with my friends." Two things happen. One, they immediately want to be my friend and two they want to know more. They want to know how I do it, what do I do, what the returns are, time frames, everything. That gives me the crucial opening to further set my position in their head up front.

When they ask how I do it, I hand them a business card and ask for theirs. If they don't have one, I hand them another one of mine to write down their contact information. While this is happening, I say, "I pool my money, time and expertise with solid business minded people who expect an honest return on good investments with managed risk. We do that by investing in mortgage backed notes secured by properties we know very well and people we also know and trust but watch like a hawk. We make sure everything is transparent at all levels and everyone is on equal footing. We don't make any guarantees because past success is not proof of future success."

At this point, they often ask something like, "How much does it take to get into something like that?" To which I reply, "It depends, we form groups all the time and there is no one set seed amount. I have been in groups of 25 where they each contributed $10K. I've been in others where we each put in $100K or more. However, these are all private placements and are not for everyone. The SEC has strict rules we must follow before we are even allowed to talk about specifics. We can only work with accredited investors as defined by the SEC except in rare cases. I can't tell you any specifics about any current or future offering at this time. But, I can add you to my list of potential investors. You are under no obligation to work with us and we are under no obligation to make any offing available to you."

Then they want to know how long before something might come up. I explain there is no set time table. I further explain most groups disband after a few years with the members often reforming into another group with a larger seed amount. I share that I have been in one group that is stayed in tact for over twelve years while others have disbanded after two. There is no fixed amount of time required or recommended. But, if it is their first time, I recommend they either join a group with a definite termination date because it reduces their risk and increases their comfort level.

Then if they are interested and most are, they want to know how they get started. That is when we talk about their risk tolerance. While I have never lost my seed money in any group it is at risk and something could happen to wipe it all out and I never, ever say I have never lost my seed money. I make sure they understand they have to be able to use funds that if lost would not alter their life style. That is part of the test to determine their appropriateness for our type of investment as defined by the SEC. If they point blank ask me if I have lost money doing this I say, "Yes." Because I have, just not all the way down to zero. But, it is not a sure thing.

At this point, if they are still interested I make sure I have their up to date contact information and I tell them I will contact them when something comes up I think may interest them.

This is just one example of how the conversation may happen. You know the people in your network and you interact with them. And, you must learn to read people around you. Strike up a conversation about the weather if you have to. If you are persistent without being a total pain in the ass, at some point, you will have an opening to talk about what you do.

Advertising for Investors

This is probably the least understood area in dealing with private capital. It isn't really a surprise it is the least understood area because the laws and regulations covering this area are vague. They are consistently enforced even though the initial appearance may give other impressions.

You will often hear that advertising is completely off limits. Advertising a specific offering is most definitely off limits. Advertising for potential accredited investors, not tied to a specific offering or type of offering are often allowed. You should also know the regulations specifically state an advertisement does not by itself void any otherwise valid exclusions from securities registration requirements.

However, if there are problems at any point in the future any advertising you do will come back and be put under intense scrutiny through a hindsight lens. That means, if there is anything in it even hinting of the really big no nos, like guarantees, you are going to have trouble.

I never advertise offerings or do a general solicitation for an offering. I do advertise looking for potential investors, but not for an offering. The adverts are very general in nature. They are designed attract the intention of investors who can meet the accredited investor test as defined by the SEC. I specifically note in the adverts I am not seeking anyone or any fund not meeting that test. I also expressly state there is no offering in place or being contemplated for anyone responding to the advert and any future potential offering would be offered to known and accredited investors.

I never run classified advertisements because they scream of amateur status and are all but guaranteed to attract the attention of state and federal regulators. I have hosted breakfasts, lunches and dinners to attract potential investors. The most cost effective are the breakfasts. I have run radio adverts with great success. But, the bread and butter is in the financial sections of local papers, financial magazines and trade rags.

The path to investors is through your network. The advertising is to build your network. You must build your network and you must demonstrate it is a major part of your source of investors. The way I do this is by "seasoning" any interest I generate through adverts. That means, I will usually not make any kind of specific offer to them until they have been in my contact base and being contacted regularly for a few months. How many are enough? That is hard to say, but the longer the better. My list is large enough I can usually merge newer investors in quicker because they remain a smaller percentage in the number of participants. You obviously must have critical mass in your network of people you know to make this work. So, if your network doesn't have critical mass advertising can help that.

Offering Types

There are many different ways you can structure your offerings but I generally only use two. Unsecured note offerings and stock offerings. For larger projects it is often a combination of a stock offering at formation and then one or more note offerings later. For smaller projects, it can be either but I usually use just a stock offering.

Unsecured Notes

I am able to retain complete control since my investors are not also required to be stockholders. I can get them out of my life at any time by paying off any note they hold and sending them on their way.

If offered and executed correctly, through a properly created and maintained entity my personal legal liability to repay the borrowed funds is ZERO. I may have a moral obligation but those don't land you in civil or criminal court.

I decide the terms I will offer and they do not have to be uniform. I often sweeten the offering for the first 100 units placed. I decide what commissions will be paid as long as they are in compliance with the laws.

I am not sharing the profits with lenders. Those are reserved for shareholders.

I will often do two separate offerings. The first is a stock placement and then shortly after formation a debt placement. This gives me the most flexibility because I can share most of the profits with really close friends while allowing the next tier to participate as well.

Secured Notes - Mortgages

You must be very careful when using any kind of secured financing. Make sure the security is accurately described prior to the investor/lender sending any money and make doubly sure the security they actually get is at least as good as you advertised.

If offered and executed correctly, through a properly created and maintained entity my personal legal liability to repay the borrowed funds is still ZERO. I still have a moral obligation and the property being purchased is at risk.

I decide the terms I will offer and they do not have to be uniform between properties but if you decide to bundle investors into a pool, you must seek competent counsel and be very careful.

The safest way to do this is to find one "investor" who can take the whole financing amount off the take. If they pool together independent of you and your actions, that is fine. But, you should only be dealing with one entity.

I decide what commissions will be paid as long as they are in compliance with the laws.

Lenders ARE NOT Partner Investors

I do not share profits with lenders. Those are reserved for shareholders.

I will often do multiple separate offerings. The first is a stock placement and then shortly after formation an unsecured debt placement. This gives me the most flexibility because I can share most of the profits with really close friends while allowing the next tier to participate as well.

Then when deals actually start to come together, I will do one or more secured offerings to facilitate the purchase, rehab, carry and turn around of a property.

Stock Sales

With stock offerings you give up some control. You now have a larger shareholder pool with voting rights to elect (or expel) members of the board of directors.

It has the distinct advantage of not being debt and therefore does not incur a regular payment or obligation. Since the investors bought stock, if the company goes under the common stock holders are typically at the very bottom of the unsecured creditors list.

An investor who is a stockholder usually wants more continuing information and access to the principals of the company. While an investor who is a lender is interested in the financial health of the company, they are primarily interested in receiving the next payment with some assurance the balance of the payments will follow on time at their regularly scheduled rate.

Key Point to Remember

The key thing to remember about the difference between the two is with a stock offering you are physically selling a hard asset, ownership interest in the company. With an unsecured note you are simply pledging future earnings to repay the note.

How Private Placements Typically Get Into Trouble

There are many pitfalls and areas of potential trouble with dealing with selling shares or placing indentures in the hands of investors. There are almost no cases of the state or federal regulators starting a review of a private placement offering prior to receiving a complaint from an investor or other party. This isn't surprising because by its very nature, private placements do not appear on the regulators horizon until there is a problem. That is why it is important to use an attorney familiar with the securities rules and regs. If something is not done properly, you probably won't know about it until it is way passed any chance to correct it.

Typical Mistakes

Guarantees.

No Evidence of Placement.

Misrepresentation.

Fraud.

Don't claim you have done hundreds or thousands of deals if you have only done a handful or none. If the investment turns sour and the regulators get involved you will be invited to provide details of those hundreds or thousands of successful deals you used in your offering materials. If you decline to produce those details, or more to the point you can't because you lied, that is accepted a prima facia evidence of fraud in the offering. You can't be a "little fraudulent" once one item of fraud is proven you are toast. You are open to an unlimited amount of claims and that fraudulent act can and will be used to pierce any kind of asset protection you think you have in place.

Be honest. Stay transparent. Stay out of trouble.

Investment Banking

Investment banking is another often misunderstood area for investors. They often think using an investment banker is the realm of the super rich. A survey in 2002 indicated most people think investment banking is for those with more than $100M. Not at all. If investment bankers limited themselves to clients with $100M or more in liquid assets they would have few clients to spread across the myriad of investment banks.

Investment banks and bankers cater to anyone wanting to play in their market space. Yes, they do have minimum investment requirements. However, when you look at them they are quite modest.

How an investment bank can help with your offerings.

They can handle the offering as a private placement or a public offering. The fee structure is similar but the overall amount of costs and fees is higher with a public offering. I do not recommend anyone do a public offering unless and until you fully understand what it entails and means for the operation of your lending group. You and your founding shareholders lose a great deal of control when you lob your group into the public arena. I have never taken one of my lending groups public and have no desire to do so. You take a company public when you expect it to continue operations indefinitely. That is not the case with my lending groups. We exist only until we reach a maximum profit point to harvest the profits.

There is almost zero market for a new group doing a public offering from day one. Typically, several years of audited financial results are required for an investment bank to start the underwriting process.

Using an investment banker for a private offering as a startup is also difficult unless you or one of your founding shareholders already has a relationship with the bank.

How I use investment bankers.

Typically, on the larger groups. I have already gotten verbal commitments from everyone on the list I submit. The contact from the investment banker is a formality and a way to document everything in case the SEC decides to check into the offering.

So, in essence, I bring a fully fundable offering to the investment banker to handle the paperwork, state and federal filings when and where necessary.

I also maintain a line of credit with my investment banker.

I don't use the investment banker for all groups.

In the smaller group environment I am able to get to know them and learn whether they fit the criteria I have for my larger investors. In the small groups, I put the same amount into the group as everyone else. In my largest groups, I don't put any cash into the mix but I retain at least 25% of the voting shares and one or more seats on the board of directors. The big groups are the high stakes games and I only want the best of the best players there.

Many high profile and wealthy potential investors often use a surrogate to manage their day to day financial matters. Many times these managers are related to them. The last thing I want to do is get involved in a high stakes group and have it go to hell in a handbasket because the money manager is an amateur and cannot be fired.

As in all things in life, test, test, test."