What If You Fall Short of Your Equity Raise Before Closing?
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A closing date is coming, the purchase contract has deadlines and the committed equity is short. It happens to experienced sponsors too. What you do in the next few days affects the earnest money, your reputation and your legal position with the investors who already signed. This post lays out the realistic options, what each costs and what you must tell investors.
How do you measure the gap?
| Bucket | Amount | Status |
|---|---|---|
| Equity needed at closing | From the sources and uses | |
| Funded in escrow | Money in place | |
| Signed, not funded | Wire deadline pending | |
| Soft interest | Not a commitment | |
| Gap | Needed minus funded and likely to fund |
See sources and uses for the need, and soft commitments vs signed subscriptions for what to count.
What are your options?
- Ask the seller for more time. An extension of the closing date may cost more earnest money or a price change. See earnest money and the letter of intent and contract contingencies and deadlines.
- Renegotiate. A credit or price reduction lowers the equity needed. See repair credit vs price reduction.
- Resize the loan or structure. A larger loan or seller financing reduces equity but raises risk and may need new lender approval. See seller financing and preferred equity vs mezzanine debt.
- Bring in a co-sponsor or a larger investor. Add a partner with capital. See co-sponsors and family offices.
- Cut scope. Trim the renovation budget to reduce the cash needed, if the business plan still works. See renovation budget per unit.
- Walk away. If the gap cannot be closed on honest terms, losing earnest money may be better than closing an under-funded deal. See dead deal costs.
What must you tell investors?
Disclose the gap, the option you plan, any change in the amount of debt or the budget, and what happens to their money. If your offering has a minimum raise and escrow, funds are returned if it is not met. See minimum raise and partial closing and money in escrow before closing. Statements to investors are covered by antifraud rules (17 CFR 240.10b-5). Do not hint that the deal is "basically full."
Can you keep selling after a change?
You can usually keep the offering open under the same exemption, but material changes to terms need updated disclosure, and a long-open raise may need a new Form D amendment. See Form D amendments and offering period.
Our take
The best time to plan for a shortfall is before the contract. Build a buffer in the schedule, line up a backup source of equity, and know your walk-away point. The worst plan is to hope the gap closes on its own.
Trade-offs and who this is not for
- Not a way to cover a gap with unplanned risk. Adding debt or cutting reserves can hurt investors.
- Common mistake: counting interest as commitment.
- Not a substitute for counsel. Changes to the offering need a securities attorney.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5+ units from friends and followers who already trust them, under Rule 506(b) or 506(c). We are software, legal document preparation, escrow coordination and verification services. We are not a law firm, broker-dealer, investment adviser, funding portal, bank or escrow agent, and we do not hold investor money: investors wire their money to escrow at Enterprise Bank & Trust, in the deal's name.
DoorRaise keeps the deal in its own company with its own documents and a deal page, and runs an accreditation check on every investor, in 506(b) and 506(c) raises. Flat fees, never a percentage of the raise (see pricing). Create your free sponsor page.
FAQ
What happens to investor money if the raise is short?
It depends on your documents. If there is a minimum raise condition that was not met, funds in escrow should be returned.
Can I fill the gap myself?
You can add your own capital, but it changes the sponsor's stake and should be disclosed.
Can I extend the closing without telling investors?
Tell them. A delay affects their money and expected timeline.
Should I raise the price to investors?
Changing terms mid-raise is a material change that requires updated disclosure and possibly new consent from those who signed.
Sources
This article is general information, not legal, tax or investment advice. Talk to a securities attorney before changing the terms of an offering. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.