Reg A, Reg CF, and Reg D funds: Everything You Need To Know

Boom, people. Welcome back. In this video, we're going to talk about the differences between a Reg A, a Reg CF, and a Reg D fund. What are— first off, what are they? What are the differences? What should you consider when choosing which one to go after? So, you know, all that. So down to the iPad of truth and justice here. We're on the 4-Step Fund Launch Formula. We're going to be zooming in right down here. And you can see I've, I've covered some stuff up here that I'm going to unveil here in a second. So I'm going to talk about most common now. We've talked about this. We've already talked about the GPLP structure. When you're talking about frame to structure your fund, these all these types will work within this framework. Now there's other frameworks. There's an LLC construct framework. There's other ones. But what I'm telling you here, 99% of all funds on earth use this structure right here. Furthermore, 90 I'm gonna say 98% of all funds, okay? Use right here a Reg D 506. So let's talk about that first, and then we can talk a little bit later about Reg As and Reg CFs as well and how those play in altogether. But I'm sharing the most common fund types. There's one more fund type we might touch on briefly, would be a Reg D 504. Anyways, we'll go from there. Now these are all under the SEC. The SEC has different, they have Reg A, B, C, and then this is Reg D. Under Reg D, there's a few different ones. There's Rule 506, and then there's a 506 and a 506, which you can see here. So let's unveil these. What are the differences of each one of these? Again, I'm starting with the biggest one. This is, I mean, 99% of all funds ever started are one of these 2 right here. So let's go in and let's look at the intricacies a little bit here. So let me, you know, undo this. So Reg D 506, okay? In a Reg D 506, you can have 35 non-accrediteds. You can raise unlimited amounts of capital. You cannot advertise and investors self-verify if they're accredited or not. Okay. That is in a Reg D 506. This is the most common. As of a few years ago, they came out with the Reg D 506. Okay. The C is right here. You can raise from accredited investors. You can raise unlimited amounts of capital. You can advertise, you can publicly do advertising, but the fund must verify accredited investor status. Now let me zoom out for a second here. Why would you even choose one of these? Okay, you are, you are choosing exemptions from different rules inside the SEC and pretty much every fund uses these exemptions. They've built these exemptions on purpose. So for people like me and you to go out and raise large amounts of capital without having too much regulatory headache, and if we didn't use these, you'd have to file like a public company to raise capital. These allow you to be exempt from some of those rules that you can file and raise money with, you know, different sub-items. So we follow the rules within each one of these categories. Okay. So under a Reg D, 506 or 506, a few nuances here. The advertising is a big one. So what does this mean? Let's just describe this for a second. Underneath these ones, you cannot advertise here. And what that more nuanced means is you cannot do, and I'm gonna use my little writer here, they do not want you to do general solicitation. Solicitation, okay. General solicitation, meaning running ads, big email campaigns, mass messaging. They do not want that under a 506. This is why you don't see Blackstone running ads. Okay, or KKR running ads. It's actually legally they cannot do it. And for a lot of different reasons, you know, they can't do it. Okay. Which is pretty interesting. So most of it has to be word of mouth or people that you already know. Then it's like, well, Bridger, then how do— man, how does anybody know if I can't advertise? Okay. Again, it's general solicitation. Now I've read a lot of these rules. I've talked to I could say probably a dozen different lawyers on this specific rule. The way the rule is written with no action letters, it's kind of a gray area. I'm being honest. I've talked to 12 different lawyers. I've gotten 12 different answers on specifics of general solicitation, what is okay and what's not okay. I've had some people tell me what you can do and can't do, and other lawyers say, no, no, you can do that. And it's a little bit up for interpretation. Yeah. And maybe it's written that way on purpose. And so I'll give you my sense here. So for example, what this means, general solicitation. If I, you know, we're sitting next to each other on a plane, okay? And we're talking, what do you do for work? And I say, oh, hey, I, you know, I can advertise, I can talk about the general partner and management company. Hey, I run a number of investment funds. You know, we help people in real estate or in, we do GP stakes. You know, we help with a lot of that. I can talk about what we do here, but I can't pitch you on my fund. I could not say on a plane the first time I've met you, hey, we've got a fund, our IRR is 23% and we're, you know, the investments have a period of a 4-year investment period and all the details of the fund. And hey, do you want to join? That would be considered general solicitation. We have to have a preexisting relationship. So for example, if we were on a plane and we met and we talked about it and we traded business cards and we said, hey, maybe 2 days later I text you and say, hey, do you want to go to lunch next week? Sure. And we go to lunch and then now we have a preexisting relationship. Then I can pitch you the fund. Okay. That's what one law firm would tell you. What they— again, they do not want you to generally solicit. So can you talk about your general partner? Yes. Can you— and your management company? Yes. Talk about that all day. I'm only going to pitch my fund, though, to people that I have an existing relationship with under this rule. And some firms will say you have to have a date, 15 days of relationship or 30 days of relationship or 2 days. I've heard all different answers, okay? Existing relationship. The other side, if you're trying to play this really safe, the other side is just don't do general solicitation. If you don't send mass email campaigns and post on your social media about your firm, you're probably gonna be fine. You're not doing general solicitation, okay? You're not going door to door. You're not speaking at a big conference and pitching your fund on stage, okay? General solicitation. Okay, hopefully that makes a little bit of sense. Over here on the Reg D 506, let's talk through this one. You can advertise. Both of my funds right now are Reg D 506s. So my Ugly Unicorn Fund and Fund Launch Partners are both Reg D 506s. We did that because I am on social media so much and I'm just— anyways, I, I'm probably going to talk about my funds, so I want to be able to advertise or talk about my funds online. That's what we did. Now, so what we have to do, the fund has to verify all investors are accredited. So for example, with Fund Launch Partners, someone comes in, they want to invest. Great, here they are. We do a couple of things. We have to verify that they are accredited. The easiest way to do that is we have a lawyer or their personal CPA. They sign a little paragraph document that Joe Smith is accredited. an accredited investor and they send that back to us. We actually have a DocuSign with a pre-thing. We just send it to them on DocuSign. They sign it, fill it back, come back to us. Pretty simple. If that doesn't work, there's another software called verifyinvestor.com. They have a team. They'll take your tax returns, whatever, to verify that you're an accredited investor. Okay. They send it back to you. Once that's verified, great. And you're accepted in the fund. Over on a Reg D 506, what happens We ask the same question on our documents, but the person Joe Smith by himself over here would just say they just check a box. Yes, I am an accredited investor. And the burden is on them, not on the fund. If Joe Smith says he's an accredited investor, then guess what? Joe Smith's an accredited investor. They, they self-verify that they are. So he could lie. I don't have to check. It's not my burden to check on a Reg D-506. It is my burden as a fund to check. I have to check and make sure they're an accredited investor. So Bridger, what's the big difference? It's a little more of a hassle to do this. It's a little bit more of a hassle to do a Reg D 506 because you have to verify. We've had a couple investors, it took us 3 or 4 weeks to verify that they're accredited. The vast majority, it's pretty easy. We've had a couple that's been a little bit hard. And anyways, that's just the nature of the game. But we are allowed to advertise. So we are, it's worth that trade-off. All right. Hopefully that makes sense. Okay. Continuing on, let's, let's continue on Reg D 506 underneath here. So once you choose, let's say, hey, I'm going to do a Reg D 506. Okay. That's the one I chose. Check underneath there. You are most likely almost always going to do one of these exemptions below. Again, further exempting from the Investment Company Act, all these other acts of the '33 Acts. Okay. So down below, there's a, there's 3 of the most common ones pretty much everybody will use. And I'm going to walk you through each one of those. Okay. The first one is a 3 exemption. So for example, on your Form D, you would select, hey, we are, we're doing a Form D, we're under the rule 506 and then 506. You'd select, there's a little box, you check the box, then underneath there we would check a 3. So if you see how it dovetails out of here, we would use that exemption further. What this exemption says is that we are going to raise from only 99 investors and all are accredited investors. Okay. That's what we're going to say there. So if you select a 506 and then do a 3, all of your investors are accredited and 99. This overrides the 35 non-accrediteds. It's my understanding. Now there's a few other ones that you can get those non-accrediteds in, but there's a lot of burden that happens when you bring them in. You have to over-disclose to them, et cetera. Okay. My fund currently is a— actually both of them right now are 3 The next one, 3, okay? 3 is for real estate. 80% of your portfolio or investments have to be in real estate. This also can work for private credit. So mortgages or loans on real estate, accredited investors only. And then you can raise from up to 2,000 investors, okay? Now, again, to define what's a— what are we talking about here? A non-accredited investor. Is below this. A credit investor is $1.1 million net worth. A qualified client is $2.2 million net worth. Qualified purchaser is $5 million net worth. Okay, so here they are. You can take a picture of that if you want. So back to here, you'd pick this. It's very good for real estate. You can grab this real estate exemption. Okay, moving on. The last one is a 3. This is what all the big funds use. 3 fund. You can raise from 1,999 investors and all have to be qualified purchasers. Every investor has to be, have a net worth of $5 million or more. So this is why people like Ray Dalio, for example, was turning away investors. To invest in Ray Dalio's fund, you have to have a $100 million minimum commitment and a $4 billion net worth to even talk to them on their funds. Why? Well, he's only got 1,999 spots in their fund. And they're going to fill up fast. We got to get the most out of each spot. What the SEC has said is if no one has 2,000 private friends, once you're over 2,000, you have to file like a public company and you can file like a, you're a REIT or a mutual fund or a public ETF. You can do any of those would be more public. If you want to stay as a private fund with all the cool benefits of being in a private fund, You have to fall under these rules. And 3 is by far the most common. Okay. So, and then to dovetail this back together, when we talk about international feeder fund structures, you're going to see that we have 3 here. You can do parallel funds. You have a 3 fund here that takes 99 investors here, and then a qualified purchaser fund that's a 3 that takes 1,999 investors. Okay. So you add those investors in, all of them would pro rata flow into your holding company. You can go check out this video if you want to see that one as well. All right. Hopefully that's making a little bit of sense here. Let's move on now to— I'll erase this. Let's move on to Reg A's and Reg CF. So a few years ago, the Frank Dodd Act came out after 2009, '08, and they had a bunch of things around crowdfunding and Reg A's. And it's been kind of this new space, okay, where this whole space has emerged. So you have 2 different categories here. Both are somewhat similar. You have Reg A offerings And then Regulation CF, Regulation Crowdfunding. So let's go through each one of them. Now, both of them together here to give you a summary, both can raise money from non-accredited investors, which is kind of cool. So you can raise from anybody. They can only invest 10% of their net worth or annual income. Okay? So if they make $100,000 a year, they can only invest up to $10,000 per person. Okay? You have to pre-identify the asset. They cannot be blind pool funds. And there's a— I would just call this thorough disclosure to investors. You have to be— there's a lot of disclosure that goes into these. It is probably— I'm gonna— I'm just gonna say 3 times the amount of cost of capital to run a Reg A than to run a Reg D. You have to hire— because these are non-accredited investors, the SEC is very concerned about them being You know, they're non-sophisticated investors. So you have to overdisclose to these investors. And there's a few nuances of each one of those, but there's just a lot more work. So you look at people like Grant Cardone or Fundrise or Crowd— there's all these crowdsourcing places. You know, the average check size for a Reg A— and I'll— sorry, I'll go down here for a second. Reg A funds, though, the average check size is about $550. Isn't that kind of crazy? Reg CF, it's about $250. So to raise a million bucks, you are raising from thousands, if not tens of thousands of people. In a Reg D 506, you're raising from maybe 5 people. So when over here you've got a lot of customer service, think of the tax documents, compliance, you're spending— $30,000 to $50,000 a month in software and administrative costs just to run some of these at scale. Now you can probably do a more, you know, more unique, but just a lot more money to run. They're also more money to set up. So what I tell people, I would only do these if you're ready to scale, if you have a strong marketing background and wanna scale. So what they are, Reg A, here they are. They call this a mini IPO. There's tier 1 and tier 2. This is the cap you can raise. You can only raise up to $20 million on tier 1. Tier 2, you have to raise up to $75 million. The big difference is reporting. Reporting is a little bit more if you're going to raise a Tier 2 fund. And then Reg CF, you can only raise $5 million within a 12-month period. You have to have a crowdfunding-approved crowdfunding portal that the SEC has approved, and you have to pre-identify the asset, meaning you can't do a blind pool offering. Over here, these are what they call blind pool, meaning Hey, put some money in this fund over the next 18 months. We're going to find some real estate properties to buy. In a Reg CF, you have to identify the asset upfront. Hey, we're, we're buying 123 Main Street for $7 million. It's pre-identified. It's in a crowdfunding portal. We can only raise up to $5 million. Oh, I said $7 million. That would've been— that's too high. We're raising up to $4 million. Okay, Reg CF. But the big benefit is you can raise from non-accredited investors. So what I tell people, if you're going to do— go down this path, it's a fine path. Plenty of people have made money down this path. I would just make sure you have a strong, strong marketing platform and a good backend to fulfill. If you're going to do a Reg A just because you've got some friends that are all non-accredited and you have 20 friends that want to put money in, I would not do it. It is not worth the cost. Okay? Just don't do it. Maybe you, maybe you go figure out to do the 35 non-accrediteds over here. Okay? This is not for just your offhand. This is for people at scale. You're Grant Cardone. You want to scale and do a lot of marketing every day and spend millions of dollars. Great. That's what I would say on here for Reg A and Reg CFs, just because the cost to set them up for so much. So anyways, there's a review. There's Reg Ds, 506Bs, 506Cs. The vast majority of you, I'm guessing, are going to run Reg Ds, 506Bs. That's where we're going to go. A few of you may run Reg As and Reg CFs. If you got the right background, right marketing structure, you can actually do very well with these. They're both, both good, both good options. Hopefully that helps. Let me know down below if you have any more comments.