Inside The Kore #75

The 75th issue of Inside The Kore is out!

Follow Kore All-In-One Platform company page to stay in touch with the latest news on the Private Capital Markets!

Have a good read.

Who is the missing Intermediary when Real Estate Sponsors are raising capital?

Raising capital for real estate projects is a complex process that often requires the involvement of various professionals to ensure compliance, efficiency, and the best financial outcomes. While real estate sponsors frequently turn to legal advisors, financial analysts, and broker-dealers during their capital-raising campaigns, there is often one critical professional missing from their team—the tax advisor.

Missing this key player can be a costly mistake. A tax advisor can significantly impact your fundraising.

The Overlooked Role of the Tax Advisor in Real Estate Capital Raising

When real estate sponsors set out to raise capital for projects, their focus is often on securing financing, regulatory compliance, and investor relations. However, the tax implications of raising capital, especially in large amounts, can sometimes be overlooked. This oversight can have serious financial consequences, including unexpected tax bills, missed opportunities for tax savings, and poorly structured deals, all of which can significantly reduce profits.

An anecdote comes to mind: A real estate development company was preparing to raise $10 million for a new luxury apartment complex. They assembled a team of financial analysts, legal experts, and marketing professionals but overlooked the inclusion of a tax advisor. It wasn’t until they completed their capital raise and began filing taxes that they realized they could have structured their equity offering in a way that would have reduced the tax burden on both the company and its investors. The absence of a tax expert ended up costing them hundreds of thousands of dollars in unnecessary tax payments—money that could have been reinvested into the project.

In this example, the real estate sponsor learned the hard way that understanding tax liabilities and benefits is just as crucial as financial modeling or legal compliance. A well-structured deal can reduce the overall tax burden, enhance investor returns, and make the project more attractive to potential investors. This is where the tax advisor’s role becomes critical.

How Technology Helps Companies Raise Capital Under JOBS Act Regulations

The JOBS Act has opened up opportunities for companies to raise capital in ways that were previously restricted. Regulations such as Regulation CF (Crowdfunding), Regulation A+, and Regulation D have allowed companies, including real estate sponsors, to reach a broader pool of investors. But with these opportunities come challenges, particularly in staying compliant with various tax and securities laws.

Technology plays a crucial role in helping companies streamline the capital-raising process while maintaining compliance. Technology Platforms by companies like Kore simplify the complexities of running a compliant capital raise by automating much of the regulatory paperwork, tracking investor contributions, and ensuring that offerings are conducted within the bounds of the JOBS Act regulations. This technology enables real estate sponsors to reach both accredited and non-accredited investors more easily, expanding the investor pool and providing greater flexibility in structuring deals.

Once a raise is completed, it’s important to continue using technology to manage shareholder relationships and compliance. Tools like Shareholder Communications facilitate ongoing communication with investors, keeping them informed of project updates, issuing reports, and enabling online voting. Cap table management tools are another essential component, helping sponsors keep track of who owns what, ensuring transparency, and avoiding ownership disputes.

Even with advancements in technology, the complexities of tax issues surrounding capital raises cannot be fully resolved by software alone.? Collaborating with a tax advisor from the beginning is crucial. Integrating technology with expert tax guidance ensures that the capital raising process is not only streamlined but also structured to maximize tax advantages.

Challenges Facing Companies Raising Capital

Raising capital presents unique challenges that go beyond finding investors. One of the biggest hurdles is navigating the regulatory roadmap—understanding which exemptions under the JOBS Act are most appropriate, ensuring all filings are accurate and timely, and maintaining ongoing compliance. This requires working with trusted partners such as a FINRA Broker-Dealer, legal counsel, and technology platforms to streamline the process.

But even with the best partners in place, one common mistake companies make is focusing too much on the financial details and neglecting the story behind their project. Investors, particularly in the private capital markets, invest in people as much as they invest in numbers. They want to know the sponsor’s vision, the social and environmental impact of the project, and why this specific opportunity is worth their capital.

Here’s where a well-rounded team of professionals, including a tax advisor, becomes even more critical. A tax advisor helps ensure that the project is structured in a way that maximizes investor returns by minimizing tax exposure, which in turn makes the investment more attractive. Investors want to know that their potential returns will not be impacted by unnecessary taxes, and having a tax expert on board shows that you’ve thought through all the details.

Raising capital for real estate: 7 Steps you need to know

To ensure that tax efficiency is part of the capital-raising process, here are 7 steps real estate sponsors can follow:

1. Assemble Your Team Early: Include a tax advisor alongside your legal, financial, and broker-dealer partners to ensure all angles are covered.
2. Evaluate the Tax Impact of Each Financing Option: Whether you’re raising capital through equity, debt, or a combination, understanding the tax implications of each structure is crucial.
3. Choose the Right Exemption: Consult with legal and tax advisors to determine whether Reg CF, Reg A+, or Reg D is the most suitable option for your raise.
4. Leverage Technology: By utilizing dedicated technology platform providers, such as Kore, you can streamline the capital-raising process and ensure compliance with securities laws. Follow through with cap table management and shareholder communication tools after the raise. Kore offers an end-to-end solution, from pre-raise preparation to post-raise shareholder communications and management, all within the same environment, minimizing multi-vendor friction.
5. Structure Investments with Taxes in Mind: Work with your tax advisor to structure the deal in a way that benefits both the company and investors from a tax perspective. This includes considerations such as pass-through entities, depreciation, and capital gains treatment.
6. Monitor Regulatory Changes: The tax landscape is constantly evolving. Ensure your tax advisor is proactive in staying updated on new laws and regulations that could impact your capital raise or ongoing operations.
7. Prepare for Tax Filings Early: Don’t wait until the last minute to consider tax implications. By working with a tax advisor from the start, you can avoid scrambling when tax season rolls around.

No Shortcuts to Raising Capital

Raising capital in real estate goes beyond finding investors. It involves planning, collaboration, and strategic moves, especially when it comes to managing taxes. Yes, technology makes this smoother—automating parts of the process, making sure you follow regulations—but the expertise of a tax advisor is invaluable. These professionals help you structure deals that minimize tax burdens and maximize returns

Whether you’re a startup or a seasoned company, educating yourself on the regulatory landscape and working with trusted partners—legal, financial, and tax advisors—is essential.?

This way, you’ll be more prepared to handle the capital-raising process, attract the right investors, and avoid expensive mistakes.

Attract IRA Investors: 3 Simple Steps

Individual Retirement Accounts (IRAs) are a popular way for investors to save for retirement with tax benefits. As an issuer, offering investments that are IRA-eligible can attract a broader audience. This article outlines 3 simple steps to help issuers enable IRA investments in their offerings, making the process easy for both you and your investors.

Understanding IRA Types

Let’s start with the basics. Not all IRAs are created equal. Each type comes with its own set of tax perks, so understanding them is key to figuring out which investors you want to attract.?

Traditional IRA - Contributions are tax-deductible, but withdrawals during retirement are taxed as regular income.

Roth IRA - Contributions are made with after-tax dollars, allowing for tax-free withdrawals at retirement.

SEP IRA - Commonly used by self-employed individuals and small businesses, where only the employer can contribute to the plan.

SIMPLE IRA - For small businesses, with both the employer and employee contributing to the plan.

Tip: Identify which IRA types are most relevant to your target investors. Understanding their preferences helps tailor your offering to attract the right participants.

Knowing What IRA Custodians Can and Cannot Do

IRA custodians play a vital role in approving your offering for their clients’ IRA accounts. However, their involvement is governed by strict regulations, which can limit what they can do to support your fundraising efforts.

What they can do:

• Custodians can review and approve your offering to ensure it meets their standards.
• They can allow you to promote your IRA-approved offering to their clients.

What they cannot do:

• Custodians are not allowed to actively market your offering to IRA holders due to regulatory restrictions.

To ease the approval process, make sure your offering aligns with custodian requirements early on. This preparation can minimize delays and help get your offering in front of IRA account holders faster.

Now that we have a clear understanding of IRA types and the role of custodians. Let’s check the 3 steps to make your offering IRA-friendly.?

Step 1: Prepare the IRA Package for Investors

Simplifying the process for investors is critical. When investors use their IRA to invest, the process can be more complex than with traditional accounts. Your goal is to provide a streamlined experience that encourages participation.

Here’s what you’ll need to include:

• Contact information for IRA custodians who are familiar with your offering.
• Legal and regulatory details to assure investors that their retirement accounts are in compliance with IRS rules.
• Clear instructions on how to make the investment through their IRA.

Remember to provide a well-prepared package to reduce the steps required for investors. By making the setup easy, you reduce friction and increase the likelihood of IRA participation.

Step 2: Contact Your Broker-Dealer (BD)

Before moving forward with your offering, you need to ensure that your broker-dealer is informed and involved. Depending on the type of offering, different rules will apply.

• Reg CF: You must obtain approval from a broker-dealer before allowing IRA investors.
• Reg A+ and Reg D: Notify your broker-dealer of your target IRA custodians and ensure all compliance requirements are met.

Keep your broker-dealer informed and maintain open communication. This helps avoid delays, ensures compliance, and accelerates the process of getting your offering approved.

Step 3: Reach Out to the IRA Custodians

Once you’ve aligned with your broker-dealer and prepared your investor package, the next step is to connect with IRA custodians directly. Provide them with all necessary details to get your offering approved.

Click here to get a list of all of them.?

Key information to provide:

• Legal and contact details of your offering.
• Links to your offering and any required filings.
• Clear instructions for custodians to review and approve your offering for IRA investment.

Thorough documentation can lead to a quicker approval process. This step ensures custodians have everything they need to help you get your investment offering to their clients.

Final Thoughts: Start Promoting Your IRA-Approved Offering

Once you’ve secured approval from IRA custodians, it’s time to start promoting that your offering is IRA-compatible. This can set your offering apart and appeal to a broader range of investors looking to diversify their retirement savings.

Consider using a mix of marketing strategies to spread the word:

• Email campaigns informing potential investors about the IRA-eligible nature of your offering.
• Ads targeting investors who are specifically looking for IRA investment opportunities.
• Webinars to provide detailed information and answer investor questions in real time.

Ready to Accept IRA Investments in Your Offering?

By following these five steps, you’ll make it easier for your investors to invest through their IRAs. To simplify things further, consider compiling a list of trusted IRA custodians who can assist your investors. This ensures the process is as seamless as possible for both you and your investors.

KoreSummit - The Rise - October 15th to 18th

We are excited to host KoreSummit The Rise 2024, an insightful online summit focused on the evolving landscape of Private Capital Markets. ??

Discover how the JOBS Act has revolutionized these markets, growing from $0 in 2012 to an astonishing $150 billion in 2023. But how much of this growth have you, as a broker-dealer, capitalized on?

Are you fully making the most of the opportunities within the JOBS Act regulations?

Now is the time to explore and seize these chances.

Join us as we dive into the world of Private Capital Markets, offering sessions tailored to help broker-dealers navigate the regulatory framework and secure their positions in this booming market.

Get the knowledge you need to thrive in this dynamic environment!

KoreSummit will be brought to you by Kore, KoreChain, Nuvei, RaiseX and Nvatomate, LLC

--

--

We hope you have enjoyed to be Inside The Kore!

Follow Kore right now and stay informed on the private capital markets.