Minimum investment requirements
Why do investment opportunities have minimum subscription requirements?
Perhaps you have been introduced to a new opportunity and find out that there is a minimum subscription amount that exceeds what you have on hand or wish to put into the deal.
Well, it turns out that minimums for passive investments really comes down to how much paperwork the sponsor has to deal with.
First, let’s consider what needs to take place behind the scenes for every deal.
For every new subscription, the sponsor needs to handle a multitude of tasks such as:
- Confirm each subscriber meets the SEC rules for being allowed to subscribe. This may involve confirming that the subscriber is an “accredited” investor for deals that are being syndicated under one of several different rules.
- Track and send out a PPM to each interested subscriber – this may involve unique identification numbers for each subscriber in some cases – it depends on the SEC attorney’s call on this.
- Collecting each subscription and keeping everything separated per investor. This includes ensuring the subscription is filled out correctly, collecting a signed W9 from the investor(s), collecting sensitive bank account information from the investor, perhaps sending out documents to the investor for electronic signature, establishing mailing lists unique to each investment, setting up ACH information at the sponsor’s bank for future distributions, and much more.
Next, for each distribution (monthly or quarterly):
- Entering a proper amount into their ACH system for each investor based upon each investor’s percentage of ownership.
- Entering information in the accounting system per investor.
Sending out financial updates, newsletters, and other reports as may be prudent or needed.
Then, every year:
- Paying an attorney to create the annual K-1 statements for each and every investor.
- Updating the accounting system again.
Finally, upon every refinance or sale of the property:
- Determine each investor’s share.
- Setting up an electronic wire transfer for every investor – which may include test wire transfers.
- Sending the wires and confirming everyone received their funds.
- Paying an attorney to make a final K-1 statement.
Now doing the math:
If a deal is to raise 3 million, then a minimum investment of 100k still means 30 sets of all the paperwork mentioned above. A 50k minimum means there could be 60 sets of paperwork.
Now if the deal is to raise 10 million, … well, you see the issue.
So if you can’t meet the minimum, just let the sponsor know you are standing by in case they open up for lower amounts. This usually happens when raising the funds take a little longer than expected or the list of passives doesn’t have the current means to fill up all the requested funding slots. Each passive investor may have already maxed out their ability to invest via other investments that have come up before the current one. Thus, the sponsor may lower the minimum so that the rest of the raise can be met.
Also, don’t be surprised if a sponsor gives preference to larger subscription amounts. For the same reasons as above (fewer investors greatly reduces the workload), a sponsor may even turn down investors that do meet the minimum. But that’s another blog post.
Written by Jay Personius
Jay is an accomplished Systems and Software Engineer, Agile Coach, and Real Estate Investor with over 40 years of experience in both the Defense and Private sectors of business.
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