Raising capital is often the first, and arguably most critical, step in scaling a real estate development business. Without sufficient funding, even the most promising project can stall. However, securing that capital isn’t simply a matter of circulating a pitch deck or collecting checks from enthusiastic backers. It’s a legal and financial process that must be carefully navigated, particularly as projects grow in size and complexity.
At scale, real estate fundraising shifts from informal relationships to regulated activity. Developers must understand how to structure offerings, comply with federal and state securities laws, and meet investor expectations. The consequences of missteps – whether it’s failing to register a security or using the wrong entity structure – can be costly and long-lasting.
So how do you raise capital the right way? Here is a closer look at the key considerations.
Understanding Securities Laws: Regulation D and Private Placement Exemptions
One of the most significant legal hurdles when raising outside capital is compliance with securities laws. Once you start offering a share of project profits or equity in exchange for investment, you’re likely issuing a security, even if it’s a private deal.
For most real estate syndications and capital raises, developers rely on exemptions under Regulation D of the Securities Act of 1933, specifically Rule 506(b) and Rule 506(c).
- Rule 506(b) is the most flexible and commonly used exemption, but it prohibits general solicitation. This means you must have a pre-existing relationship with prospective investors. If sales are limited to accredited investors only, you can raise an unlimited amount of money from an unlimited number of investors. This exemption also allows sales to up to 35 non-accredited investors, but sales to non-accredited investors imposes specific disclosure requirements for those non-accredited investors, including audited financial statements.
- Rule 506(c) permits general advertising, but requires that all investors be accredited, and that the issuer takes “reasonable steps” to verify that status. (Learn more about that here.)
Understanding the difference between these options, and choosing the right one for your project, is foundational to avoiding legal exposure.
Failure to comply with federal or state “blue sky” laws can result in regulatory action, rescission rights for investors, and reputational damage. For instance, a developer who promotes an offering online without meeting Rule 506(c)’s verification requirements risks voiding the exemption entirely, exposing the deal to enforcement.
Structuring Investments to Attract Capital and Mitigate Risk
Beyond legal compliance, the structure of your offering plays a major role in your ability to attract and retain investors. As projects grow, so do investor expectations around clarity, control, and returns.
LLCs Taxed as Partnerships
Most real estate deals are structured through limited liability companies (LLCs) that elect partnership taxation. This approach provides flexibility in allocating profits and losses and allows for pass-through tax treatment. For developers, it means retaining control while offering customized terms to different investor classes.
When REITs Might Make Sense
For developers with ambitions to raise capital at scale and aggregate large portfolios, real estate investment trusts (REITs) may be worth exploring. While more complex and costly to administer, REITs can provide liquidity to investors and access to public capital markets. They’re best suited for long-term strategies involving multiple assets and investor tranches.
Key Investment Documents
To raise capital properly, developers need more than just a spreadsheet of returns. They need clear, well-drafted documents that articulate the terms of the deal and protect all parties:
- Operating Agreements define ownership, management authority, distributions, and investor rights.
- Subscription Agreements outline the terms under which investors purchase interests.
- Private Placement Memorandums (PPMs) provide detailed disclosures of risks, conflicts of interest, and project details to help satisfy disclosure obligations and reduce liability.
These documents are not just formalities. They’re critical tools in aligning expectations and shielding sponsors from disputes down the line.
Building Investor Confidence
Securing funding is about more than offering strong returns. Investors want to work with developers who demonstrate transparency, professionalism, and a long-term mindset.
Crafting a Compelling Investment Pitch
A polished, data-driven pitch is essential. This means presenting not only your vision, but:
- Pro forma financials.
- Market research.
- Risk analysis and mitigation strategies.
Investors want to see that you understand your numbers and your market.
Maintaining Transparency and Trust
Strong investor relations don’t stop once the check clears. Frequent, honest communication – especially when challenges arise – helps foster long-term trust. Whether it’s via quarterly reports, site updates, or investor portals, consistent engagement builds credibility and positions you for future raises.
Raising Capital Is a Strategic Discipline
Developers who scale successfully treat fundraising not as a side task, but as a core part of their business. That means staying current on regulatory changes, working with experienced legal counsel, and building systems to support investor onboarding, communication, and compliance.
It also means having the humility to know what you don’t know. When in doubt, ask. A call to your securities attorney before launching an offering is far less costly than a regulatory investigation after the fact.
Laying the Legal Foundation for Growth
At Avisen Legal, we help real estate developers structure offerings that comply with the law and resonate with investors. From selecting the right exemption to drafting customized operating agreements and disclosures, our team ensures that your fundraising efforts are both strategic and compliant.
In the next article, we’ll turn our attention to tax implications and essential documentation – a crucial aspect of scaling that often gets overlooked until it’s too late.
If you’re planning to raise capital for your next project and want experienced legal support, we’re here to help guide you through every step.
