As we mentioned a couple of posts back in this series, using 506(c) involves substantial trade offs.
For us, it was fun to be able to advertise the fund, expand our relationships, and generate some buzz and interest in the fund; articles in the local press like this one definitely helped provide momentum to a first-time fund.
But…it was not fun collecting brokerage account statements and credit reports to verify net worth, or reviewing historical tax returns and W2s to verify net income.
It was not just the administrative labor involved in seeking and analyzing the documents. Several of the people who wanted to invest passed once they understood the invasive (from their perspective) disclosures needed to prove their accreditation. Potential investors were, and are, reluctant to provide this information, and do not necessarily understand that this process is set by the SEC and not the person fundraising.
These trade offs apply equally to companies raising money: you have to do all this work. It’s hard enough to convince someone to invest $25,000 in your company. It’s certainly not easier to ask them also to share enough documents for you to verify their net worth.
Another trade off is that using 506(c) might limit, potentially dramatically, your ability to raise capital from the more traditional sources. It might be helpful to get an investment from an Angellist rolling fund manager. But a traditional angel group, like VentureSouth, is going to pass immediately once we realize you are raising under 506(c).