Day 77: How to Raise Money from Friends and Family for Self Storage (Without Ruining Relationships)

Welcome to day 77 of the Storage 100 series. I am Joe Downs. We are kicking off section 6 today, transitioning and managing. Weirdly though, before we get to that, which might not be for 3 days, even though it's in this section, we're going to do like a bonus 3 days before we really get to transitioning and managing. But you're going to love all 3 days. It's going to be awesome. Didn't have a really great place to fit these, so we stuck them here. And we're starting with a topic that can either accelerate your career Or destroy your Thanksgiving dinner, raising money from friends and family. But it's going to be great. You're going to love it. Before we dive in though, if you're watching this series and want a community of operators learning and doing together, join us at, for free, by the way, at storagemoguls.ai. So it's storagemoguls.ai. The AI, the .ai is important. It's not .com, it's .ai. Why is it so important? Well, because that's where you'll find us. But it's because I'm trying to make a point here. It's an AI-native platform with GPT tools, multimodal learning, and content across every storage vertical where you can start free, advance at your own pace, and it's launching soon. So go to the website now, just register real quick. Just give us your name, email, phone, tell us, answer a couple questions, register, and you will grab your very own seat. It'll be launching in a matter of a couple weeks. So register now. All right, back to the topic at hand, how to raise money from friends and family for your self-storage deals, and more importantly, how to do it the right way. So this isn't just about asking for money, it's about understanding the legal framework that governs these investments. So today we'll explore the rules and regulations to ensure you protect both yourself as well as your investors. All right, so let's dive into why this seemingly simple act of raising capital from your inner circle is actually a securities issue. And you, you might think, well, it's just my friends and family, so why is this a securities issue? Well, the SEC has a clear definition of, of what it is. It's called the Howey Test, and it was established by a Supreme Court case in 1946, and it determines if an investment is in fact a security. So if your offering meets these 4 criteria: it's an investment of money, is made in a common enterprise with expectations of profit from the efforts of others, it's a security and you must comply with securities laws. SEC, by the way, is Securities and Exchange Commission. So it's what governs the stock market, for instance, stocks, bonds, mutual funds, all the things you've heard of. You might not have heard or understood that even private placement memorandums, PPMs, we'll get to that, are securities. So this means when your friends or family invest money in your self-storage deal expecting a profit from your efforts, It's considered a security. So how do we navigate these regulations legally? We do it through exemptions, which brings us to Regulation D. Since your self-storage investment is a security, you need an exemption from full SEC registration. That's where Reg D comes in. Regulation D provides a few different rules, but we're going to focus on 2 key ones: Rule 506, as in boy, and Rule 506, as in Charlie. Rule 506 is often called the friends and family rule because it allows you to raise capital without general solicitation, and you can include a limited number of non-accredited investors. Rule 506, on the other hand, allows for general solicitation, meaning you can advertise your offering, but it comes with stricter requirements. So understanding the difference between accredited and non-accredited investors is critical for choosing the right path. The distinction between accredited and non-accredited investors is fundamental to Regulation D. So let's break it down. An accredited investor meets specific financial thresholds or professional qualifications set forth by the SEC. This typically means a high income or a significant net worth excluding their primary residence. Non-accredited investors are everybody else. They don't meet those specific criteria. So this distinction is crucial because the rules for how you can solicit and accept investments differ significantly based on the investor status. So now let's look at how these investor types play into the 506 rule often used for friends and family, because Rule 506 is your go-to for raising capital from friends and family without broad advertising. The key here is no general solicitation. You cannot publicly advertise your deal if that's the route you choose to go. So what you need is then is a preexisting and substantive relationship with your investors. So this rule allows you to have up to 35 non-accredited investors, but they must be sophisticated, meaning they have enough knowledge and experience to evaluate both the merits and the risks of the investment. You can have an unlimited number of accredited investors, but only 35 non-accredited. For any non-accredited investors, you must provide specific disclosure documents. This rule is designed to allow private offerings to a known network, which is perfect for your friends and family because you know them. Now let's talk about 506, which is the advertising exemption, because this rule changes the game for how you can find investors. But it comes with very specific requirements. The big difference here is that general solicitation is allowed. You can use ads, social media, webinars, and email marketing to find potential investors. However, every single investor must be accredited, and you must take reasonable steps to verify that status. This means self-certification is not enough. You'll need to review their tax returns, bank statements, Or better yet, get a letter from a CPA or an attorney that says they are accredited. CYA for you. This approach opens up your investor pool significantly, but demands meticulous verification. All right, let's move on to the essential documents you're gonna need for any of the capital raises. And these aren't suggestions. These are critical for legal protection and investor confidence. You're going to need a private placement memorandum, or what we shorten to PPM, which is your full disclosure document outlining all the risks. An operating or a subscription agreement defines investor rights and commitments. An investor questionnaire helps verify accreditation. And don't forget about the Form D filing with the SEC within 15 days of your first sale. Plus any blue sky state filings based on where your investors reside. Having these in order is non-negotiable because getting it wrong can be incredibly costly. I'm going to say them again: private placement memorandum, operating or subscription agreement, investor questionnaire, Form D filing, state blue sky filings. Need them all. Ignoring these rules and docs can lead to severe consequences, and the cost of getting it wrong is far greater than a slap on the wrist. You could face SEC enforcement actions, including fines and disgorgement of profits. Investors might have rescission rights, meaning they can demand their money back with interest. And state securities regulators have been known to be aggressive, and their violations can lead to personal liability, piercing the LLC veil and putting your personal assets at risk. In extreme cases, criminal penalties are possible. And beyond the legal ramifications, you could destroy relationships with friends and family forever. This is why understanding and following the rules is paramount. So let's look at the right way to approach this. To avoid these pitfalls, here's a checklist for raising capital the right way from friends and family. First, find your deal. Find it first before you raise capital. Then hire a securities attorney specializing in Reg D to guide you. Then you determine whether 506 or 506 is the right exemption path for your situation. Prepare your PPM and all the legal documents for full disclosure. Don't forget to verify the investor qualifications before accepting any funds. File Form D within 15 days of your first sale. And finally, communicate regularly and transparently with your investors. Following these steps will keep you compliant and build trust. Pro tip. Hire the right attorney who will handle all of this for you so you can focus on the business of finding and operating self-storage facilities. If you found this information valuable, please hit the like, subscribe, and share buttons because this is your way of telling and broadcasting to your entire network you're serious about self-storage investing. All right, next up, we will dive into tomorrow, day 78, where we are going to explore using your 401 to buy self-storage. Wait, what? Using my 401k to buy self-storage. Yeah, you heard that right. You can do that. We're going to talk about it tomorrow. Final thoughts: share this with anyone considering raising capital for any deals. They'll definitely thank you later. And remember, this is educational content, not legal advice. So always consult a securities attorney before raising capital because raising money from people who trust you is a privilege. My voice is cracking. I'm going to say it again because raising money. From people who trust you is a privilege, not a right. So treat it that way and you'll build a capital base that follows you for decades. Treat it wrong and you'll lose more money, or you lose more than just money. Probably lose some relationships, credibility, trust. Inside the Storage Moguls community, we talk about raising capital all the time, but talk about doing the right way with templates, frameworks, and real operator experience. Feel free to join us over there at storage moguls.ai. Storage moguls.ai. Your seat and a pretty freaking awesome free tool is waiting for your registration. We'll see you tomorrow.