Offering a Deal in a Paid Skool, Discord or Patreon Group

You can, but a paid membership does not make the group private for securities purposes. Rule 506(b) forbids general solicitation, and the SEC's way of showing there was none is a pre-existing, substantive relationship: you had enough information to evaluate each person's finances and sophistication, and you did evaluate it, before the offering began. Posting a deal to hundreds of paying members you have not evaluated is generally general solicitation, so most sponsors either use Rule 506(c) and verify every buyer, or offer under 506(b) only to members they evaluated beforehand.

Many sponsors who teach real estate run a paid group on Skool, Discord, Patreon or a similar platform. This post explains how the deal rules apply there and how to keep the group's business separate from the offering.

Is a paid community private under securities law?

Not by itself. The SEC staff's interpretations say that an offer to a person with whom the issuer has a pre-existing, substantive relationship is not a general solicitation (Question 256.26). They also say that whether there was a general solicitation depends on the facts, and that the more people without financial experience, sophistication or a prior relationship with the issuer who are contacted through impersonal, non-selective means, the more likely it is a general solicitation (Question 256.27).

A paid community changes who can see a post. It does not, by itself, tell you anything about each member's finances or experience. A group of 3,000 people who each paid $49 a month is closer to a public list than to a group of people you know.

What makes a relationship "pre-existing" and "substantive"?

The SEC staff has defined both words.

Substantive. You, or someone acting for you, have sufficient information to evaluate, and do in fact evaluate, the person's financial circumstances and sophistication in deciding whether they are an accredited or sophisticated investor. "Self-certification alone (by checking a box) without any other knowledge of a person's financial circumstances or sophistication is not sufficient" (Question 256.31).
Pre-existing. The relationship was formed before the offering began (Question 256.29). There is no minimum waiting period, but it must come before the offering (Question 256.30).

In the 2015 Citizen VC letter, the staff agreed that an online platform's process of evaluating new members before showing them any investment could create such relationships. It said the quality of the relationship is the most important factor, and that no set waiting period or short questionnaire alone is enough. That letter applied to its own facts. See can followers invest under 506(b)? for the same test applied to followers.

How do Rule 506(b) and 506(c) compare inside a paid group?

What you do in the group	Rule 506(b)	Rule 506(c)
Post the deal to every member	Generally general solicitation, so 506(b) is not available	Allowed, if every buyer is verified accredited
Share the deal only with members you evaluated before the deal	Can work, if the evaluation was real and documented	Allowed
Teach general real estate lessons with no deal named	Usually not an offer	Not an offer
Hint at "a deal coming soon for members"	Can be treated as part of the offer and condition the market	Fine if you then verify every buyer
Let non-accredited members invest	Up to 35 sophisticated non-accredited buyers, with extra disclosure under Rule 502(b)	Not allowed

For the full comparison, see 506(b) vs. 506(c) and what general solicitation is.

How can you use Rule 506(b) with community members?

Build the relationships before you have a deal. A common approach:

Invite members to an investor list, separate from the community. Joining is free and does not come with a deal.
Evaluate each person. Collect an accredited investor questionnaire and talk with them about their finances and investing experience. Write down what you learned.
Wait until the evaluation is done before the person sees any deal. There is no set waiting period, but the relationship must come first.
Offer the deal only to people on that list. Do not post it to the whole group, and do not let members forward it.

If that sounds like a lot of work for a large group, that is the point of Rule 506(c). See build an investor waitlist before you have a deal.

How do you use Rule 506(c) with community members?

You can post the deal openly, in the group or anywhere else, because 506(c) allows general solicitation. In exchange, every buyer must be an accredited investor and you must take reasonable steps to verify it before the sale. Members who are not accredited cannot invest, however well you know them. Your antifraud duties stay the same, so describe the risks along with the plan.

Pick the exemption before you start promoting. If you start talking about a deal publicly under 506(c) and later want to switch to 506(b), the integration rules decide whether you can. See integration of offerings under Rule 152.

How do you keep the community and the deal separate?

Do not sell deal access. If the paid membership includes "first access to my deals," members are paying, in part, to be offered securities. That can raise broker-dealer and adviser questions. Ask counsel before tying any fee to deals.
Do not require membership to invest. Anyone who qualifies under the exemption should be able to invest without buying anything else from you.
Keep the money apart. Membership fees go to your business. Investor money goes to the deal's escrow and then the deal's own accounts.
Say who you are. Tell members plainly that you sponsor the deal and earn fees and a promote from it, as the offering documents disclose.
Do not reward investing inside the community. Badges, refunds or discounts for investing look like pay tied to the raise.

For more on running both businesses, see selling a course and sponsoring a deal.

A made-up example

This example is made up. A sponsor runs a paid group with 2,400 members. Over the past year, 60 members joined her free investor list, and she held a call with each and kept notes on their finances and experience. Now she has a $1,800,000 apartment deal.

Option 1, 506(b). She shares the deal privately with the 60 people she evaluated before the deal, and not with the other 2,340 members. Some of the 60 may be sophisticated but not accredited; if she admits any, she must give them the Rule 502(b) disclosure.
Option 2, 506(c). She posts the deal to the whole group. Anyone can read it, but only buyers she verifies as accredited can invest.

Either path can work. What does not work is posting to all 2,400 members and calling it 506(b).

How DoorRaise fits in

DoorRaise helps sponsors raise equity for apartment buildings with 5+ units from their friends and followers under Rule 506(b) or 506(c). DoorRaise prepares the standard offering documents, forms the LLC, files Form D and state notices, and verifies accredited investors for 506(c) deals. Escrow is at Enterprise Bank & Trust, an FDIC-insured bank, investors fund by wire only and distributions are quarterly by default. Fees are $1,500 at setup (non-refundable), $5,000 at closing (only if the deal closes) and $3,500 a year, with no percentage of the raise and no part of the promote. DoorRaise is not a law firm, broker-dealer, investment adviser, funding portal or bank, and the sponsor decides which exemption fits its relationships.

Raise your apartment deal from the people who already follow you.

DoorRaise is built for apartment buildings with 5 or more units: one link for the deal, escrow until closing and a standard fee card.

Launch a deal See the fee card

Ready to raise? Create your free sponsor page or see pricing.

FAQ

Does a private Discord server count as private for Rule 506(b)?

Not automatically. What counts is your relationship with each person who receives the offer, formed before the offering. A private server only limits who can see a post.

Can I mention my deal during a members-only live call?

Under 506(c), yes, with verification of every buyer. Under 506(b), only if everyone on the call is someone you evaluated before the offering, which is hard to control in a large group.

Anyone acting for you counts as you, and paying someone to bring in investors raises broker-dealer and bad actor issues. See paying capital raisers.

Can members who are not accredited invest?

Under 506(c), no. Under 506(b), up to 35 sophisticated non-accredited buyers can, but only if you have a pre-existing, substantive relationship with them and give them the required disclosure.

Next step: read can your followers invest under 506(b)? for the substantive relationship test in more detail.

Sources

This article is general information, not legal, tax or investment advice. Talk to a securities attorney about your deal. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.