Tapping Investment Capital
The federal Jobs Act of 2013 opened up new funding sources for
real estate investment by allowing companies greater access to capital.
But the new law poses hurdles for commercial practitioners,
says attorney Dominic Lloyd, a Denver-based partner in
the law firm of BakerHostetler LLP.
How has Regulation D, Rule 506(c) changed the way real estate practitioners can market securitized
properties to potential investors? Historically under Regulation D, unless you registered the offering with
the Securities and Exchange Commission, you had to have an existing relationship with investors before
you could market your securities to them. These private placement investments still exist, but the new rule
gives you the option to make general solicitations to investors. There are no limits on the number or
form of solicitations. You can use social media, your website, the radio, newspaper ads, or
an encounter at a conference. You can also add solicitation respondents to your client
database and then contact them later for future private placement deals.
This sounds like a great opportunity for commercial real estate developers.
What are the downsides? The biggest challenge is the new verification rules.
Now you can market to the world at large, but you can sell investments only to
accredited investors. The difference is that with private placements, which
don’t allow for general solicitation, investors self-certify that they meet the
income or net worth requirements. Under the new rule, the person making
the offering has to take “reasonable steps” to verify that investors are
accredited. This means you will have to obtain information that independently confirms an investor’s status as an accredited investor.
Steps could include obtaining copies of financials such as tax returns
and brokerage statements or getting a letter from a bank or attorney.
(An accredited investor is an individual with a net worth of $1 million, excluding primary residence, or an income of $200,000 in the two most recent years and expected for the current year. It’s $300,000 for a couple.)
Are there other issues that should concern commercial practitioners?
Using general solicitations takes you out of the statutory exemption for private
placements. Rule 506(c) offers a safe harbor under the statute if you comply with
all requirements and don’t use a general solicitation. Another hurdle is the filing
requirements. Under the regulations, you will have to file a notice of your offering
with the SEC 15 days before the first offer of sale by general solicitation. It might
be hard to determine exactly when the general solicitation begins to meet that 15-
day deadline. The rules also require filing all the materials you use in the solicitation
with the SEC. Finally, offerings are limited to U.S. residents, so you will have to require Internet
prospects to self-certify as residents before they can view an offering.
By Mariwyn Evans