The problem with raising money usually comes in three forms:

1. Advertising issues
2. Accredited investor issues
3. Cost issues

Under Regulation A, you can solve #1 and #2 by qualifying an offering with the Securities Exchange Commission (SEC). However, it can be costly, time consuming, and still leave problem #3. Regulation A also doesn’t make sense if only a small amount of capital is contemplated for the raise.

Under Regulation D, Rule 506(b), you can eliminate #2 and #3, but then how do you get people to know you are raising money? It can be done, but it is not as direct as saying, “Who wants to invest in my deal?” or “I am offering a preferred return of 8 percent,” as announcements such as these are prohibited under the general solicitation ban under Rule 506(b).

Under Regulation D, Rule 506(c), you can eliminate #1 and #3, but what happens when your cousin, who is a good guy, but not accredited, wants to invest? You can’t take his money under Rule 506(c).

Under Regulation CF, utilizing the services of a crowdfunding portal, you somewhat eliminate all three issues. It’s not that expensive to file a Form C, you can advertise on the portal, and you can take any investors. The problem is that the cost of capital (i.e., the money that the portal receives for their services after the fact) and the limitation on the amount of money raised (only up to $1,000,000) make Regulation CF not so palatable.

Are there any other options?

Yes. In many ways Rule 147 offers solutions to all three issues above: depending upon the state, general solicitation for investors is allowed; suitability standards for investors are much laxer; and it is a far less expensive alternative to Regulation A. Rule 147 of Section 3(a) (11) of the Securities Act of 1933 has always existed as an exemption that allows issuers to raise capital from investors within one state and use capital for that state’s purposes. Recently, the SEC made changes to this rule that made it even easier to raise money under Rule 147.

Rule 147 allows general solicitation and has no suitability requirements. The suitability requirements and general solicitation rules would be vested in the individual state in which the issuer elects to conduct its business.

The old Rule 147 (still a good rule) was applicable and allowed issuers to raise capital under the following circumstances:

1. All of the investors must reside in the state of the offering.
2. 80 percent of the business conducted must be within the state.
3. The officers, partners, or managers primarily direct or control activities within the state.
4. Offers are limited to in-state residents or persons the issuer reasonably believes are in state.
5. The issuer entity must be registered in the state in which they are conducting the offering.

With the recent advent of crowdfunding and the increased use of the internet, it was difficult to conduct a Rule 147 offering without violating point #4 above. On October 26, 2016, the Commission adopted a new Rule 147, named Rule 147(a), that allowed flexibility with both points #4 and #5 above eliminating the need for cautious advertising over the internet for those relying on the rule and those entities formed in other states.

It’s great in big states like California

Rule 147 may be used in any state as long as you follow the state’s laws. Some states have some friendly rules, including California, Texas, and Colorado. Other states, such as Pennsylvania, Arkansas, and the New England states, do not. It is important to consider your own state’s rules before attempting an offering like the ones contemplated below. Just because there is a great federal exemption in Rule 147, it does not mean that the state will be as receptive to your offering.

Using a Rule 147 exemption is great if you are in the state of California and most of your business or properties reside there. If they do, you might want to consider a registration specific to California. This process is called Registration by Permit. It is under Section 25113 of the California Corporations Code. To register by permit, you need to take your offering to the state of California to get approval. Once you get approval, you are issued a permit and can sell securities throughout California.

Example of Issuers that have raised capital using Rule 147: Lenders

Many lenders focus on the California market have utilized Rule 147 and the California permit rules to raise money for lending to California based entities. For example, the Brownstone Diversified Mortgage Fund set out to raise $25,000,000 for the purposes of making and acquiring mortgage loans on residential and commercial property as well as specialty lending.

RCTC Fund, LLC is a Delaware limited liability company that was organized for the purpose of making or investing in loans secured by deeds of trust which were secured by California commercial and residential real estate. RCTC received their permit for $50 million in February 2017 and allows a minimum investment of $5,000.

One entity that was simply named “Mortgage Funding” is a California corporation that sought to sell its corporate obligations (Bonds) to fund loans for the purchase and/or improvement and/or modification of manufactured or modular homes or residential developments of up to four (4) units at a time.

BaySierra Capital Fund, LLC received their most recent permit in late 2016 to raise $50,000,000 to make loans secured by first deeds of trust, primarily located in California. BaySierra’s deeds of trust secured primarily by non-owner occupied residential properties and improved commercial, industrial, multifamily and mixed-use properties.

Single Family Flip Businesses

Since 2010, the single-family flip business has been great throughout California. Finding deals at the beginning of the comeback from the Great Recession was not a problem, but financing all the deals was a problem. Dodd Frank also changed rules regarding the status of accredited investors: no longer were investors allowed to calculate their primary residence as part of their net worth to be qualified as an accredited investor. Since so many California investors’ wealth was tied up in their homes, this change removed a large contingent of investors from the accredited investor pool.

The California permit allowed developers to raise funds from investors throughout California with little investor requirements.

Large Commercial Developers

Many of us know the company Rich Uncles and their real estate investment trusts (REITS) from their ads on radio and their public offerings. But when Rich Uncles first started out, they didn’t use a big public offering and instead relied on Rule 147, using the California permit offering rules to raise $25,000,000.

ActivCare, a San Diego based memory care facility developer, used the California permit and Rule 147 for a $30 million offering for four southern California property development projects.

The Shopoff Group in Irvine, use the rules to conduct a $50 million commercial property development offering for various retail, industrial and office spaces throughout California.

BravoZero REIT started a $50 million real estate investment trust that not only focused on property purchases but also lending to real estate development borrowers.

Other business outside of real estate

Although real estate is seemingly the most perfect industry for these types of offerings, others outside of real estate have attempted to use the California permit and Rule 147 to build their business:

Cuvee Club – The proprietors of the Cuvee Club intend to establish a cabaret venue combining fine dining, boutique beverages, music and performances by jazz musicians, bands and throwback comedy in Temecula, California. Since this type of business is usually best financed by locals, a California permit made sense.

MyRacehorse – MyRacehorse, LLC used the new Rule 147(a) and formed a Delaware series limited liability company. They then registered the interests of each series in the state of California under one permit. This would allow them to sell interests in separate race horse purchases made in separate series allowing investors to “choose their horse.” This type of offering may have never been approved by the SEC under Regulation A or allowed on a crowdfunding platform.

For the lender that wants to raise money in their own hometown to lend in their own hometown, using the exemption provided by Rule 147 and their own state’s securities registration rules might be the way to go. Always be sure to consult an experienced securities attorney to see if Rule 147 is right for your business.