Why we chose to organize a Fund & what Reg. D, 506(b) designation means

We are a direct lender. Our mission is to help achieve our clients’ unique goals in a world of commoditized capital partners and capital sources. From our deal-sourcing to our due diligence and underwriting process to our ongoing servicing and client management, we seek to set ourselves apart at every point and raise the bar at every level.

Part of our competitive advantage is our flexibility, speed, and reliability for our borrowers. We are not for every borrower. We seek prime borrowers whose situational needs are not met by the current banking system. So for the ones that fit our investment criteria, we like to move mountains – or try to at least.

Our borrowers have come to rely on us as a community-based partner – much like the traditional banking system, before all the red-tape regulation and bureaucracy, when the borrower spoke with the decision-maker and the decision-maker really knew his or her client.

In pursuit of this mission and method, we organize ourselves like a traditional bank – through our PACT Capital Income Fund (“PCIF”). We pool investors capital and originate loans secured by real property, collecting interest payments over the life of the loans that we use to provide regular distributions to our investors.

Our investors receive greater than market returns with a fraction of the risk and volatility by our sourcing and vetting the highest-quality real estate loans in the market. Meanwhile, it’s a truly passive, fixed-income investment – similar to a bank savings account or CD, just with far greater returns.

We are structured this way, allowing us to align our capital source with our strengths in sourcing and vetting the highest-quality real estate investments. This allows us to remove much of the friction and transaction costs from every loan, which makes us stickier and more attractive to those borrowers who have the best deals. Ultimately, providing our investors with even greater security and better returns.

Why we chose 506(b) registration

As fund, we are selling or offering an investment security. As such, we are required to file our offering with the Securities and Exchange Commission (“SEC”) and comply with its regulations.

The SEC was established in the wake of the stock market crash of 1929, during the Great Depression. Its mandate is to enforce federal securities laws, propose securities rules, and regulate securities industries – and thus all tradable investments in the United States. It is under this mission, which all securities offered or sold to the public must either be registered with the SEC or qualify for an exemption from registration.

Under the labyrinth of regulations and registration options the SEC provides, we chose to file our security under Regulation D, Rule 506(b) exemption. It is this filing option that fits our fund’s goals and needs while also minimizing costs to our fund and our investors.

To qualify under 506(b), we still are required to meet many compliance measures. Additionally, we provide every prospective investor with a Private Placement Memorandum (“PPM”), explaining our fund’s structure, risks, and other information that far exceeds the compliance requirements and standards for disclosures for Rule 506(b) filings.

We chose 506(b) because under this filing, we are allowed to raise unlimited amount of money from an unlimited number of accredited investors and a select number of non-accredited investors.

Accredited investors are an individual who:

• earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonable expects the same for the current year; OR
• has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence and any loans secured by the residence (up to the value of the residence)).

Other filing types allow for non-accredited investors, but restrict the amount of money to be raised or require greater amounts of filing documentation (read: greater costs). Since we only plan to accept accredited investors, these other filing types are not applicable to us.

Alternatively, other filing types, like 506(c), allow for “general advertising” of an investment, while 506(b) does not. Because under 506(c), issuers are allowed to broadly advertise its offering to attract investors, the issuers under 506(c) must take “reasonable steps” to confirm each investor who participates is accredited, which typically means involving a third-party, like an accountant, lawyer, or investment advisor, to vouch for the investor’s “accredited” status. Additionally, 506(c) issuers are required to regularly and routinely require third-party verification from existing investors of their continued “accredited” status.

On the other hand, because 506(b) requires that the issuer have a “pre-existing relationship” with prospective investors before presenting them with any material details of an offered security, the investor must only complete a detailed questionnaire once, and need not involve any third-parties to substantiate his or her “accredited” status.

We find that given all these different options, 506(b) filing makes the most sense for us. It fits our investment and capital sourcing strategy the best, as we intend to only raise money from accredited investors who we have established a “pre-existing relationship” with. This is because we want investors who we know and know us, and who can invest their money without a worry or regret. As a result, we are able to minimize the cost for compliance and eliminate the amount of hoops our investors are required to jump through in order to be allowed to invest.

All of this in pursuit of creating the ideal, passive, fixed-income investment for our investors. So they can invest their money, receive a their regular, fixed-income distributions, and focus on those things that only they can do, knowing their principal is protected.