Browse Tag: rule 506

Crowdfunding And The SEC: Deregulation Continues

It’s not especially well known that the retail / e-commerce juggernaut Groupon started life not as a provider of retail savings to consumers but as a nonprofit crowdfunding platform for communities called The Point.  Groupon founder and former CEO Andrew Mason’s original software project let communities pool their money online to, for example, get a park built in their neighborhood or to solve some other community problem together.  It was only later, after a nudge and a million-dollar check from a venture capital latecomer that Mason applied the same crowdfunding idea and software to coupons. The rest, as they say, is retail history.

The crowdfunding mechanism that Mason conceived and built took off in many different directions – his design has been copied by endless Groupon clones, and by enormously successful arts and cultural funding platforms such as Kickstarter. Crowdfunding in retail and the arts are fine, but the commercial property industry has to wonder: what about using crowdsourcing to raise private equity for, say, a commercial real estate investment?

As I’ve written in this blog before, the barrier to using online crowds to raise investment capital has traditionally been SEC regulation.  There is a long-standing regulatory concept that protects investors from handing over money under terms they can’t be expected to understand fully, which has meant that the kind of generalized advertising of certain investment offerings that any crowdfunding site must traffic in are not allowed.

Or, were not allowed.  Was a long-standing regulatory concept. Used to protect unsophisticated investors.

Continuing a long string of deregulation to rule 506 under SEC Reg D, on July 10, 2013, the SEC ended the prohibition of General Solicitation and General Advertising in certain offerings. 

Rule 506

The final rule approved today makes changes to Rule 506 to permit issuers to use general solicitation and general advertising to offer their securities provided that:

  • The issuer takes reasonable steps to verify that the investors are accredited investors.
  • All purchasers of the securities fall within one of the categories of persons who are accredited investors under an existing rule (Rule 501 of Regulation D) or the issuer reasonably believes that the investors fall within one of the categories at the time of the sale of the securities.

To my non-attorney* eye, this seems to clear the major barrier to crowdfunding of real estate investment.  What was once a hard requirement to limit solicitation to  investors meeting certain criteria of “sophistication” and “wealth” and “accreditation” has now been replaced with a far less rigorous standard: issuers of securities now must only take “reasonable steps” to verify that investors aren’t completely misunderstanding the terms of the investment…or aren’t precocious twelve year olds playing with the family Visa card online.

“Big Government”: Hardly Getting Bigger

People who make hay with constant rhetorical complaining about government getting in the way of business get awfully quiet when deregulation like this comes along: by consigning to the scrap heap the heart of the SEC Reg D rules that once absolutely required potential investors in certain issues to have “sophistication” and thereby have eyes wide open in the deal, the connection of crowd-funded capital with commercial real estate portfolios is very likely to charge forward on crowdfunding investment sites such as EarlyShares or Realty Mogul and others.  Was the investor protection unnecessary?  Time will tell.

We’ll be watching the results with hope that the commercial property industry does great things with its new, government-approved crowdfunded capital source.

It’s up to issuers now.

* NEVER EVER take anything you read here at The Source as legal or fiduciary advice.  Always retain qualified counsel.

(Photo credit: Anirudh Koul)

Apartments, Capital And Performance

English: Victory Hill - one of many blocks Sma...

As reported here in The Source roughly a year ago,  in 2012 the multifamily sector did just about exactly what Dr. Mike Eppli of NAIOP predicted it would: lead the charge into recovery. Rising rents and lowering vacancy rates, Eppli said, were in the cards, driven by the fallout from the housing crisis.  Eppli saw a national demographic that broke with its traditional history and headed not into home ownership, but rental.


The result in the national apartment sector is clear: 4% vacancy rates — a landlord’s market — and rising rents are moving to meet the needs of hundreds of thousands of would-be homebuyers displaced by the downturn. And the trend isn’t over, as NAR Chief Economist Lawrence Yun in the most recent Commercial Real Estate Outlook wrote


Areas with the lowest multifamily vacancy rates currently are New Haven, Conn., at 2.0 percent; New York City, 2.1 percent; and Minneapolis and Syracuse, N.Y., each at 2.5 percent.

Average apartment rents are expected to increase 4.6 percent this year and 4.7 percent in 2014, after rising 4.1 percent in 2012. Multifamily net absorption is projected at 270,600 units in 2013 and 253,200 next year.


Capital Challenges Persist


Independent of the sunny apartment market numbers are the persistent constrictions on capital to make deals happen.  The recovery has been uneven, and our experts in capital allocation in the banking sector seem to have only two settings on their risk tolerance control panels: too much (2007) and not enough (today).

We’ve written about a variety of approaches to take to find elusive capital sources.  Credit unions, tax deferments such as 1031 exchanges.  1031 isn’t the only governmental help for finding capital in the apartment sector.  Private placement of investment funds went through a game-changing transformation last year.

Rule 506 Changes

November’s Source post on SEC’s changes to Rule 506 in conjunction with the JOBS (Jumpstart Our Business Startups) Act generated plenty of discussion.  For the first time in 80 years, the federal regulations defining what kinds of investor can be categorized as “sophisticated” thereby allowing deal principals in certain circumstances to skip the preparation and delivery of disclosure documents.  These simplifications and streamlining of the process brings more capital to the table for apartment building deals because it allows the small investor a chance at the cap rates and cash flows apartments offer.

Of course, nothing has been simplified to the point that good counsel is not needed: small investors can fit nicely in your private placement just as easily as they can present serious problems.   Always consult qualified counsel in any private placement.

But be aware that the small investor has been set up as a change agent and a new source of badly needed capital in the apartment market.  There’s work to do — as always — but the additional options can fuel the apartment recovery trend even farther in 2013.


Changes In Using SEC Rule 506 For Commercial Property Investment


With lender credit to commercial property remaining shy and sluggish years after the housing bubble, it’s more important than ever to be aware of investment capital options for commercial property transaction finance.  The act of raising capital by the offering of securities for such transactions or projects is highly regulated and rightly so, but changes are afoot in key regulations and might provide ways forward for property deals that would otherwise be held up for lack of access to capital markets.

[DISCLAIMER: Remember: nothing you read at The Source is to be construed as legal advice!  Obtain experienced securities counsel before using any technique regulated hereunder.]

What is Rule 506?

Under the Securities Act of 1933, any offer to sell securities in the US must either be registered with the United States Securities and Exchange Commission (SEC) or meet certain qualifications to exempt them from such registration.  These exemptions for registration requirements are described in SEC Regulation D, or “Reg D”.  Some companies are allowed under Reg D to sell securities without having to register the offering with the SEC, which can make access to capital markets a possibility for companies not able to bear the costs of SEC registration.

A reading of the Reg D text spells out what the purpose behind the regulations are – to ensure, among other things, that offers to sell securities are limited to investors meeting certain criteria of “sophistication” and “wealth” and “accreditation”.   These and other key terms have specific meanings in the regulations and need to be very well-understood before offers of securities are made.  Further, such offerings have been historically prohibited from being “general solicitations” announced with “general advertising”.  It’s these prohibitions concerning communications and solicitations that are changing.

The JOBS Act Relaxes Regulations For The First Time In 80 Years

On April 5th, 2012, President Obama signed into law the Jumpstart Our Business Startups (JOBS) Act, which is the first relaxation in Reg D in its over eighty years as a law. In response, SEC has proposed amendments to offerings under Rule 506  that include:

To implement Section 201(a) of the JOBS Act, we are proposing to amend Rule  506 to provide that the prohibition against general solicitation contained in Rule 502(c)  shall not apply to offers and sales of securities made pursuant to Rule 506, as amended,  provided that all purchasers of the securities are accredited investors and the issuer takes  reasonable steps to verify that the purchasers are accredited investors. In addition, we are  proposing to amend Form D, which is a notice required to be filed with the Commission  by each issuer claiming a Regulation D exemption, to add a check box to indicate  whether an offering is being conducted pursuant to the proposed amendment to Rule 506 that would permit general solicitation.

Broadly speaking, private placement just got easier.  Could this relaxation of regulation open up capital markets in significant amounts? A study of SEC’s own data and that of Thompson New Issues says that in 2011, the estimated amount of capital (including both equity and debt) raised in Rule 506 offerings was $895 billion, compared to $984 billion raised in registered offerings.  The answer appears to be a qualified yes.

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